After Connelly v. United States: What Every Business Owner with a Stock Redemption Buy-Sell Agreement Needs to Know
In June 2024, the U.S. Supreme Court issued a unanimous 9-0 ruling in Connelly v. United States — and if you have business owner clients with a stock redemption buy-sell agreement funded by company-owned life insurance, the implications are significant. For most advisors and their clients, this case represents a complete reversal of long-held assumptions about how life insurance and buy-sell agreements interact for estate tax purposes.
At Simplicit Financial, we work alongside advisors, estate attorneys, and CPAs every day to help business owners structure their succession funding properly. Here is what you need to know about Connelly — and what steps to take now.
What Was Connelly v. United States?
Two brothers, Michael and Thomas Connelly, co-owned Crown C Supply, a privately held corporation. As part of their business succession plan, they entered into a buy-sell agreement. The company owned a life insurance policy on each brother. The agreement stipulated that if the surviving brother chose not to purchase the deceased brother's shares, the corporation was required to redeem them using the life insurance proceeds.
When Michael died, Thomas declined to purchase his brother's shares. The corporation used $3 million in life insurance proceeds to redeem Michael's shares. Thomas, acting as executor of Michael's estate, treated the transaction as tax-neutral — the standard approach at the time.
The IRS disagreed. And the Supreme Court agreed with the IRS.
What the Court Actually Decided
The Supreme Court held that the life insurance proceeds paid into the corporation increased the value of the business at the time of Michael's death — and that the corporation's obligation to redeem Michael's shares did not reduce or offset that increased value for estate tax purposes.
The practical impact was dramatic:
• Total initial business valuation: $3.86 million
• Life insurance proceeds paid to the business: $3.5 million
• IRS and Supreme Court business valuation at death: $6.86 million
• Michael's share of that value (77.18%): approximately $5.3 million
• What the estate actually received through the buyout: $3 million
• Additional estate tax assessed: $889,914
The estate paid tax on approximately $2.3 million more than it received. That is not a planning oversight — that is the direct result of how the agreement was structured and how it was treated under the Court's ruling.
Who Is Affected?
This decision primarily impacts business owners who have both of the following:
• An estate tax exposure at the federal or state level
• A stock redemption (entity-purchase) buy-sell agreement funded with company-owned life insurance
If your clients fall into this category — particularly those with estates at or near the current federal exemption threshold — their buy-sell agreement warrants an immediate review.
What Should Business Owners Do Now?
Based on guidance from the Connelly decision and subsequent analysis, here are the key action steps for affected business owners:
1. Check the estate tax exposure. For business owners well below the estate tax threshold, a stock redemption may still be appropriate, though several unresolved questions remain. For those at or above the threshold, an estate tax projection is essential to quantify the new risk.
2. Consult a legal advisor. Now is an ideal time to review the buy-sell agreement in light of Connelly. The agreement's valuation provisions, how they are followed in practice, and the overall structure all matter.
3. Consider changing the buy-sell design. A cross-purchase agreement — in which the individual owners, rather than the corporation, own the life insurance policies on each other — avoids the Connelly problem entirely. The Supreme Court itself noted this in its opinion. However, moving existing policies raises transfer-for-value rule concerns, so any restructuring must involve qualified tax and legal counsel.
4. Consider additional life insurance coverage. One practical solution is to purchase additional coverage to fund the anticipated estate tax liability, rather than restructuring the existing agreement.
5. Explore endorsement split-dollar arrangements. In some cases where unwinding an existing stock redemption is not feasible due to accumulated cash value in a gain position, an endorsement split-dollar arrangement may offer a compliant alternative.
The Broader Lesson: Structure and Execution Both Matter
One detail worth noting: the Connelly brothers' buy-sell agreement was improperly maintained. They never executed the required annual Certificates of Agreed Value. They did not obtain the required independent appraisals. These procedural failures may have made their situation worse than it needed to be.
Even so, the Supreme Court's ruling establishes that a properly structured and maintained stock redemption agreement — without the valuation carelessness of the Connelly case — can still result in increased estate tax exposure. The structure itself is the issue, not just the execution.
This is exactly why business succession planning requires coordination across legal, tax, and insurance expertise — not siloed advice from advisors who are not talking to each other.
How Simplicit Financial Can Help
At Simplicit Financial, we specialize in life insurance strategy at the intersection of estate planning and business succession. We work alongside your existing advisors — your estate attorney, your CPA, your financial planner — without carrier bias and without AUM participation.
We can help your team evaluate the impact of Connelly on your client's current buy-sell structure, model alternatives, and identify the most appropriate funding strategy for their specific situation.
If you have business owner clients with entity-redemption buy-sell agreements, now is the time to bring this conversation forward.