Succession & Estate

Life-insurance-funded Redemptions After Connelly

Understand exactly what the Supreme Court held in 2024 about company-owned life insurance and redemption obligations, why the arithmetic produces a tax on money the estate never receives, and what the available fixes actually cost.

  • Expert
  • 9 min total
  • 13 chapters

What decision this helps you make: Whether to keep funding your buy-sell through a corporate redemption, and if not, which alternative structure — cross-purchase, insurance partnership, or a value-fixing agreement — fits your ownership.

What this topic is

In June 2024 the Supreme Court decided, unanimously, that a corporation's obligation to redeem a deceased shareholder's stock at fair market value is not a liability that reduces the corporation's value for estate tax purposes. Life insurance proceeds the company receives to fund that redemption therefore increase the company's value, and so increase the value of the decedent's shares in the gross estate.

Why it matters

Corporate redemption funded by company-owned insurance has been the default buy-sell structure for decades because it is administratively simple: one policy per owner, one payer, one beneficiary. That structure now produces an estate tax value higher than the amount the estate is paid, and in a controlling-interest case the difference is large. Every closely held company using a redemption structure needs the arithmetic re-run against its own numbers, and many need to restructure.

Who should learn it

Owners and shareholders in closely held corporations with redemption-funded buy-sells, estate planners and business attorneys reviewing existing arrangements, appraisers valuing companies holding insurance proceeds, and executors filing returns for such estates.

What you will understand

  • The actual facts and holding of the 2024 case, and why the Court rejected the liability-offset argument
  • The arithmetic that produces tax on value the estate does not receive, worked through on the real numbers
  • The three structural responses — cross-purchase, insurance partnership, and a value-fixing agreement — with their costs and their own traps
  • What the decision does not change, and where the planning consensus is still genuinely unsettled

Prerequisites

Common misconception

"The company has to pay the money out, so it cannot also be worth the money." That is the argument the Court rejected, and its reasoning is worth understanding rather than resenting. A redemption at fair market value does not make any remaining shareholder poorer — each survivor holds a larger percentage of a smaller company, and their economic position is unchanged. A hypothetical willing buyer standing in the decedent's shoes on the date of death would acquire shares in a corporation holding the insurance proceeds, and would pay for them accordingly. On that logic the obligation is not a value-reducing liability at all.