A buy-sell agreement can fund a buyout perfectly and still hand an estate a tax bill nobody planned for. In Connelly v. United States, 602 U.S. 257 (2024), a unanimous Supreme Court held that life insurance proceeds owned by a company increase the value of a deceased owner’s shares, even though the company was contractually bound to use that money to redeem them.
For estate attorneys, CPAs and wealth advisers, the case turns a familiar planning tool into a question worth asking again: does your client’s buy-sell agreement produce the result everyone assumes it does?
What happened
Crown C Supply, a building supply company in St. Louis, was owned by two brothers: Michael (77.18%) and Thomas (22.82%). Their agreement gave the survivor the option to buy the deceased brother’s shares. If he declined, Crown C had to redeem them at a price based on an outside appraisal of fair market value. To make sure the company could pay, it held $3.5 million of life insurance on each brother.
Michael died in 2013. Thomas chose not to buy, so the company redeemed the shares. Rather than obtain the appraisal the agreement called for, Michael’s son and Thomas agreed on a price of $3 million, paid from the insurance proceeds. The estate reported Michael’s shares at that figure.
The numbers behind the dispute
During the IRS audit, Thomas, as executor, obtained a valuation from an outside accounting firm. It valued Crown C at $3.86 million, excluding the $3 million of proceeds on the theory that the redemption obligation offset them. The IRS counted the proceeds instead and valued the company at $6.86 million.
Estate's valuation | IRS valuation (upheld) | |
Company value before proceeds | $3,860,000 | $3,860,000 |
Insurance proceeds counted | $0 (treated as offset) | $3,000,000 |
Company value used | $3,860,000 | $6,860,000 |
Michael's 77.18% interest | about $3.0 million | about $5.3 million |
The valuation gap was roughly $2.3 million, and the IRS assessed $889,914 in additional estate tax. Those are two different numbers: one measures value, the other measures tax. The entire swing came down to one question: does a promise to pay out insurance proceeds cancel them for valuation purposes?
Why the Court sided with the IRS
The Court answered no, for two reasons.
A fair-market-value redemption changes no one’s economic position. The Court’s example: a company holds $10 million in cash and has two shareholders, A with 80 shares and B with 20. Redeeming B for $2 million leaves A with 80 shares still worth $100,000 each, and B with $2 million in cash. Nothing was gained or lost, so the obligation to redeem does not reduce what the shares are worth. A buyer of Michael’s shares would have valued them as 77.18% of a $6.86 million company.
Estate tax values the shares at death. The measure is what the shares were worth when Michael died, before Crown C spent $3 million on the redemption. The estate’s position also could not be squared with how redemptions work: it valued Crown C at $3.86 million both before and after paying out $3 million.
What the Court left open
Three points matter for planning.
- The holding is narrow. In a footnote, the Court said a redemption obligation could reduce a company’s value, for example if paying for the shares forces the sale of operating assets and impairs future earning capacity. It rejected only the claim that every redemption obligation does so.
- An agreement’s price is not controlling. The Court noted that a buy-sell price is ordinarily not dispositive for estate tax valuation (see 26 U.S.C. § 2703).
- Alternatives exist, with tradeoffs. Answering the argument that its ruling complicates succession planning, the Court pointed to cross-purchase agreements, where shareholders insure each other and the proceeds go to the survivor rather than the company. It also noted the drawbacks: each owner must keep paying premiums on the other’s policy, and there are tax consequences of its own.
Where valuation comes in
The case is a legal decision, but its practical effects land on the valuation side.
- Valuation date and process. The estate tax question is value at death. The brothers’ agreement called for an outside appraisal. The estate’s valuation was prepared only during an audit, and the agreed price was not tied to one.
- Stale prices. A fixed price or formula set years ago rarely reflects fair market value at death, and a price in an agreement does not by itself fix the estate tax value.
- Insurance as an asset. Company-owned proceeds are treated as part of the company’s value. How they are valued alongside operating assets is a question for a qualified appraiser, not an assumption.
- Funding effects. If a redemption would require selling operating assets or taking on debt, its impact on earning capacity becomes a fact-specific valuation question. This is the exception the Court preserved.
Questions to ask at your next buy-sell review
- Who owns each policy: the company, an owner or a trust?
- Does the agreement provide for a corporate redemption, a cross-purchase or something else?
- Does it set a fixed price, a formula or an appraisal process? When was it last updated, and has the process actually been followed?
- If the company owns the insurance, has the effect of the proceeds on the estate tax value been modeled?
- Could funding a redemption force the sale of operating assets or affect future earnings?
- Would a cross-purchase or trust-owned arrangement suit this ownership group? What would it cost in premiums, administration and tax terms?
Cross-purchase and trust-owned structures are not automatic fix. As the Court noted, each has its own drawbacks, and suitability depends on the owners, tax objectives and funding capacity.
The takeaway
Funding a succession plan and valuing a deceased owner’s interest are related but separate tasks. The same policy that supplies the cash for a buyout can also raise the value the IRS attributes to the shares. The practical answer is to review the insurance, the buy-sell agreement and the valuation terms together, before a claim is made and not after.
If you are reviewing a buy-sell agreement or preparing for an estate or gift valuation, we would welcome the conversation.
Sources
- Connelly v. United States, No. 23-146, 602 U.S. 257 (2024).
- Connelly v. Department of Treasury, IRS, 70 F.4th 412 (8th Cir. 2023); Estate of Blount v. Commissioner, 428 F.3d 1338 (11th Cir. 2005).
- 26 U.S.C. § 2703; 26 C.F.R. §§ 20.2031-1(b), 20.2031-2(f)(2).
General information, not legal or tax advice. Consult qualified counsel about a specific arrangement.
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