The recent Connelly decision by the U.S. Supreme Court offers an important opportunity for business owners and their advisors to revisit the structure and intent of buy-sell agreements funded with life insurance. 

We’re not here to interpret case law—we’re here to help you navigate what it means for your insurance structure and estate planning strategy. 

This piece is centered around what insurance professionals, attorneys, and business owners need to understand—and act on—now. 

The Big Question Post-Connelly 

Is life insurance in your buy-sell agreement a funding tool—or a corporate asset inflating your estate tax? The answer depends entirely on how the policy is owned, who benefits, and whether your agreement reflects current intent. 

Let’s Look at the Math: What Happened in the Connelly Case?  

  • A corporation took out a $3.5 million policy to fund a buy-sell agreement. 
  • One shareholder died. 
  • Instead of the insurance being treated as a pass-through to fund the buyout, the IRS included it in the company’s valuation. 
  • The business value was increased by $3.5 million—and the estate owed significantly more in taxes than expected. 

Because the policy was owned by the entity, the proceeds were treated as a business asset—not a liability offset. That simple ownership detail changed the estate’s tax bill—and set a precedent with major implications for other business owners. 

Structural Alternatives That Preserve Intent. This ruling underscores why intent must match structure. Here’s how insurance can continue to support buy-sell planning—if structured properly: 

  • Cross-Purchase Agreements: Owners hold policies on each other which keeps proceeds out of the business, avoiding valuation inflation. This works best for businesses with fewer owners.    
  • Insurance LLCs: A separate LLC owns the policies, meaning the policies stay off the operating entity’s balance sheet. This approach offers greater flexibility for control and taxation.  
  • Split-Dollar Arrangements: A shared structure—often between a business and a trust—that can address estate planning, liquidity, and ownership complexity all in one design.

Each structure has implications—and tradeoffs. Our job is to help clients and their advisors evaluate the options clearly and execute with precision. 

Key Questions to Ask Now 

  • Who owns the insurance? 
  • Is the agreement cross-purchase, entity, or hybrid? 
  • How would insurance proceeds affect a valuation today? 
  • Does the current structure reflect each owner’s estate planning goals? 

Let’s Review Your Plan—Before It’s Tested 

If your buy-sell agreement hasn’t been revisited post-Connelly—or if your clients aren’t clear on who truly benefits from the life insurance in place—it’s time to act. 

Collaborative Insurance Solutions is ready to help you: 

  • Review your insurance structures 
  • Model estate tax impacts 
  • Recommend aligned funding alternatives 

Want to explore what this could look like? Contact CIS today.

Register Today: CE on Strategic Solutions for Business Owner Clients After Connelly  

Join us for a deep dive into the Connelly case and its implications for business succession planning. Save the date for June 12 at 2 PM to gain expert insights and actionable strategies. 

 

About the Author: Eryka Morehead is the dynamic Founder and CEO of Collaborative Insurance Solutions. With nearly two decades of experience in the financial services industry, Eryka has established herself as a leading insurance strategist, known for her ability to simplify complex information and deliver impactful solutions for her clients.

 

 

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Collaborative Insurance Solutions does not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only and should not be relied on for tax, legal, or accounting guidance. Please consult your own tax, legal, and accounting advisors before engaging in any transaction.