By Craig S. Cody, CPA, Certified Tax Coach. Published July 26, 2026.

Here's the answer up front. If you own your agency with a partner, you probably have a buy-sell agreement, and it's probably funded with life insurance the company owns. That setup is everywhere, and after a 2024 Supreme Court decision it carries a trap most owners have never heard of. When an owner dies, the insurance payout can raise the estate-tax value of the business, and the company's promise to buy out the shares doesn't cancel that out. Two things fall out of it. The deceased owner's estate can get taxed on more value than it actually received, and the policy you thought was plenty big can leave the company short of cash to finish the buyout. The fix isn't complicated. Stop asking only whether your buy-sell has insurance, and start asking whether that insurance still covers the price after the payout itself pushes the value up. Then get your attorney and your CPA in the same room to check it before anyone needs it.

I've been a CPA firm owner for more than 23 years, and when you work with a lot of agencies over a lot of years, you see the same pattern. The partners who pull this document out every couple of years and read it sleep fine. The ones who signed it once, filed it, and never looked again are the ones whose humans end up short, or in a fight nobody wanted, over money a two-hour review could have protected. This is a review-it-now piece, not a panic piece. Let me show you the trap and the three ways to check yourself against it.

What Is a Buy-Sell Agreement, and Why Does It Matter for Agency Partners?

A buy-sell agreement is the document that decides what happens to your ownership when life happens. A partner dies. Gets disabled. Retires. Divorces. Or just wants out. It answers three questions: who's allowed to buy the departing owner's share, how you put a value on that share, and where the money comes from to actually pay for it.

That third question is where this whole story lives. Most agency owners don't have a spare seven figures sitting in a checking account to buy out a partner's family overnight. So the agreement gets funded with life insurance. The partner dies, the policy pays out, that money buys the shares. Clean, on paper.

There are two common ways to structure it, and the difference is the whole ballgame. In a redemption (sometimes called an entity purchase), the agency itself owns the policies. A partner dies, the company collects the money, the company buys back the shares. In a cross-purchase, the partners personally own policies on each other, so the surviving owner collects and buys the shares directly and the company never touches the money.

Most agencies I see are set up the first way, the redemption, because it's simpler to run. One set of policies, owned by the business. That simplicity is exactly what tripped up the taxpayer in the case that changed this conversation.

What Did the Supreme Court Actually Decide in Connelly v. United States?

On June 6, 2024, the Supreme Court ruled unanimously, nine to nothing, in a case called Connelly v. United States. Here it is in plain English, with the real numbers, because the numbers are the lesson.

Two brothers owned a building supply company. They set up a redemption-style buy-sell, and the company bought $3.5 million of life insurance on each brother to fund it. One brother, who owned about 77% of the company, died. The company collected the insurance and used $3 million of it to redeem his shares from his estate. Done, right?

Not done. Because then the IRS valued the company. Once you count that insurance as a company asset, the whole business was worth about $6.86 million, which made the deceased brother's stake worth roughly $5.3 million for estate-tax purposes. Look at that gap. The estate got paid $3 million. It got taxed as if the shares were worth $5.3 million. That mismatch drove an extra $889,914 of estate tax.

The family fought it with an argument that sounds reasonable: sure, the company got the insurance, but it owed that same money right back out to buy the shares, so it's a wash. The Court said no, unanimously. And the reasoning matters, because the shorthand version gets it wrong. The Court did not say the company loses nothing. The company is worth less after it pays out the redemption. But it also has fewer shares outstanding. In a fair-market-value redemption, the assets leaving the company and the shares being canceled are supposed to have equal value, so the obligation to redeem, by itself, doesn't offset the insurance proceeds when you value the shares in the moment right before the buyout.

One more thing the Court was careful about, and you should be too. It did not hold that a redemption obligation can never reduce a company's value. It left the door open for other situations, like an obligation that forces a company to liquidate operating assets and damages future earnings. The narrow holding is this: in a fair-market-value redemption funded with company-owned insurance, like this one, the redemption obligation generally doesn't cancel out the death proceeds just because the money is earmarked for the buyout.

And to be precise about what changed: company-owned proceeds didn't suddenly start counting after Connelly. The tax regulations already required insurance payable to a corporation to be considered when valuing its stock. What the Court settled was the offset question, and it settled it against the estate.

Why This Leaves Your Company Underinsured (The Real Trap)

Here's the takeaway I want you to carry out of those numbers, and it's not the scary-headline version. Notice who bought the shares in Connelly. The company did. In an entity redemption, the surviving owner isn't writing the check, so this isn't a story about a partner overpaying. It's a story about two quieter problems.

The first is the one the Connelly family lived: the estate got taxed on more value than it actually received. The second is the one that can hit any agency, and it's the one to burn into memory. The $3.5 million policy looked plenty big the day they signed. Then the payout pushed the company's value up, and the shares were suddenly worth more than the money set aside to buy them. The Court itself basically acknowledged the company would have needed a lot more insurance to redeem those shares at fair value.

That's the underinsurance trap in one line. The policy that looks right on the day you sign can be short on the day it's needed, because the payout that's supposed to solve the problem is the same event that makes the problem bigger. So don't ask only whether your buy-sell is funded. Ask whether the funding will still cover the buyout price after the proceeds themselves get counted in the value.

Does This Only Matter If You Owe Estate Tax?

Fair question, and I want to be straight with you rather than scare you into something. The estate-tax part of this only bites if the estate is big enough to owe estate tax at all. In 2026, the federal basic exclusion is about $15 million per person. A married couple can potentially shelter around $30 million by using both spouses' exclusions, but that result is not automatic. It can take planning and a timely portability election to preserve the first spouse's unused amount.

You'll also hear people call that exclusion "permanent." The honest version is there's no scheduled sunset under current law, and Congress can always change the law. So plan on the number you've got, not the number you're promised.

If your total estate sits comfortably under that line, the estate-tax headline may not hit you directly. But don't tune out, for two reasons. First, a growing agency plus a big life insurance policy plus a building plus your home plus your retirement accounts adds up faster than owners think, and the proceeds payable to the company can push the value of your shares higher than you'd guess. Second, and this one is size-blind: the underinsurance problem doesn't care whether you owe a dime of estate tax. If the buyout price can climb above the money set aside to fund it, someone comes up short. The estate. The surviving owner. The family. That happens at every size, which is why this is a succession and sellability issue as much as a tax one.

How Do You Fix a Buy-Sell Before It Becomes a Problem?

Three moves. None of them require a law degree from you. They require the right conversation.

• Look hard at cross-purchase versus redemption. The Supreme Court itself pointed to a cross-purchase as the structure that would have kept the proceeds out of the company and sidestepped this exact valuation problem. Because the partners own the policies personally, the company's value doesn't get inflated by insurance it holds. The Court also warned that cross-purchases carry their own drawbacks and tax wrinkles, so this is a real decision with tradeoffs, not a default.
• If a straight cross-purchase gets messy with several partners, ask counsel about a separate structure, and treat it as counsel-only. With three or four owners, attorneys sometimes look at a trusteed cross-purchase, a partnership, or a specially designed insurance entity that holds the policies outside the operating company. These can simplify policy ownership. They can also create transfer-for-value problems, employer-owned-life-insurance notice and consent requirements, estate-inclusion issues, and real administrative work. So hear me on this: don't move an existing policy or spin up an entity without qualified tax and legal counsel reviewing the whole arrangement. This is the opposite of a do-it-yourself move.
• Put a defensible valuation process in the agreement, and actually follow it. A formula, independent appraisals, regular updates. But writing a number down isn't enough. There's a section of the tax code, Section 2703, that can cause a below-market price in a buy-sell to be ignored unless the agreement meets specific tests. In Connelly, the agreement actually called for an outside appraisal, and the brothers skipped it and agreed on a number between themselves. A stale price, or even a current price that doesn't meet the rules, may not control what the IRS says your shares are worth.

Why Is a Tax Guy Writing About Your Partnership Agreement?

Because a buy-sell is one of the most important documents agency partners will ever sign, and it's the one people treat as set-it-and-forget-it. Sign it, file it, never look again.

Let me be precise, because I don't want to overstate this. Connelly didn't rewrite the law overnight, and it didn't blow up every agreement ever signed. The rules already said company-owned proceeds count toward a company's value. What the Court settled was whether the buyout obligation cancels them out, and in a case like this, it doesn't. So if your agreement predates Connelly, and especially if it uses company-owned insurance to fund a redemption, it deserves a fresh review. It may still work fine. Its funding and its valuation language may just no longer produce the result you and your partner thought you were buying.

This is the same drum I beat on everything. Filing a return isn't a tax strategy, and signing a buy-sell isn't a succession plan. Both are a snapshot of one moment, and your agency, your partners, your value, and the tax law all keep moving. The plan has to move with them. That's how you build something worth keeping and hand it off cleanly, so the humans who inherit it flourish instead of fighting.

Who This Is For, and Who It Isn't

This is for you if you own your agency with one or more partners and there's a buy-sell in a drawer somewhere, especially if it's funded with life insurance the company owns and you couldn't tell me off the top of your head how it values the business or whether the coverage still fits. The size of your agency isn't the point. The mismatch between funding and value is.

This isn't a fix you should try to draft yourself off a blog post, and it isn't a call to rip up a working agreement out of fear. If you're a solo owner with no partner, your succession questions are real but they're different ones, and this particular trap isn't yours. And if you were hoping I'd hand you a one-size template, I'm not your guy. The answer is a structure and a valuation that fit your facts, checked by an attorney and a tax advisor together, because this sits right where legal structure and tax bump into each other, and one without the other is how it goes wrong.

Frequently Asked Questions

What is a buy-sell agreement for a business with partners?
It's a written agreement among co-owners that sets what happens to an owner's share when they die, become disabled, retire, divorce, or leave. It names who can buy the departing owner's interest, how that interest is valued, and how the purchase is funded, which is usually with life insurance because most owners don't have the cash on hand to buy a partner out overnight.

What did the Supreme Court decide in Connelly v. United States?
On June 6, 2024, the Court ruled unanimously that in a fair-market-value redemption funded with company-owned life insurance, the company's obligation to buy back a deceased owner's shares does not offset the insurance proceeds when valuing those shares for estate tax. In the case, the company paid the estate $3 million while the shares were valued at about $5.3 million, which drove an additional $889,914 of estate tax. The Court did not hold that a redemption obligation can never reduce a company's value.

Does company-owned life insurance increase the estate-tax value of a business?
It can. At the insured owner's death, proceeds payable to the company can increase the value of the company and therefore the value of that owner's shares. This isn't new after Connelly; the tax regulations already required corporate-owned proceeds to be considered in valuing the stock. Connelly settled the separate question of whether the buyout obligation cancels those proceeds out, and held it generally doesn't in a fair-market-value redemption.

Is a cross-purchase better than a redemption for a buy-sell?
It depends on your facts, but a cross-purchase keeps the insurance out of the company, which sidesteps the specific valuation problem in Connelly. The Supreme Court pointed to a cross-purchase as the structure that would have avoided the issue, while noting it carries its own drawbacks and tax consequences. With several owners it can get administratively complex, so the choice between structures is a decision to make with your attorney and tax advisor, not a default.

Does the high estate-tax exemption make this irrelevant for my agency?
Not entirely. In 2026 the federal basic exclusion is about $15 million per person, and a married couple may shelter around $30 million only by using both exclusions, which can require a timely portability election. Even if you never owe estate tax, the underinsurance problem still applies: if the insurance payout raises the company's value above the money set aside to fund the buyout, someone still comes up short.

How often should I review my buy-sell agreement?
Treat it like a living document and review it every couple of years, and any time ownership, value, or the tax law shifts meaningfully. If your agreement predates the 2024 Connelly decision and is funded with company-owned insurance, it's worth a fresh look now, with your attorney and CPA in the same conversation, to confirm the funding and valuation still produce the result you intended.

Let's Talk

Here's a 30-minute exercise for this week. Pull your buy-sell out of the drawer and answer three questions in writing: how does it value the agency, how is the buyout funded, and would that funding still cover the price if the payout itself pushed the value up? If you can't answer all three cleanly, that's not a failure, that's the whole point. Most owners can't.

Then put your attorney and your tax advisor in the same conversation, because this lives right on the seam between legal structure and tax, and one without the other is how good intentions turn into a surprise.

If you'd like a second set of eyes on the tax and structure side, a free tax and profit analysis is where we look at your real numbers and your real structure together and tell you the truth about what we find. Let's talk.

Craig S. Cody is a CPA, Certified Tax Coach, and former NYPD Lieutenant who helps agency owners keep more of what they make through proactive, year-round tax planning and fractional CFO work. This article is general tax and business education, not individualized legal or tax advice. Buy-sell agreements are fact-specific and sit at the intersection of legal and tax planning, so consult a qualified attorney and tax professional about your own situation before acting. The Connelly framing was prompted by Kelly Phillips Erb's July 25, 2026 Forbes "Tax Breaks" newsletter; the case facts come from the Supreme Court's opinion; the agency application is my own.