A buy-sell agreement decides who buys a departing owner's stake, at what price, and with what money. Without one, a surviving owner negotiates with an estate. In Connelly v. United States, decided June 6, 2024, an agreement that skipped its own appraisal step left the estate owing an additional $889,914 in federal estate tax.
The asset nobody has a plan for
For a lot of privately held business owners, the company is the single largest thing they own. It outweighs the house, the retirement accounts, and the taxable portfolio combined. And unlike every one of those, it has no ticker, no monthly statement, and often no written answer to a simple question: if one of the owners stops being an owner, what happens next?
That question has three common triggers, and they arrive in a specific emotional order. Death is the one everyone thinks of. Disability is the one that's statistically more likely and structurally messier, because the disabled owner is still alive, still a shareholder, and often still drawing a salary. Voluntary departure, the co-owner who wants out at 58 to do something else, is the one that ends the most partnerships badly, because there's no sympathy budget to smooth it over.
What a buy-sell agreement actually does
Strip away the legal drafting and a buy-sell agreement answers four questions in advance, while everyone is healthy and on good terms.
Who is obligated or permitted to buy. What triggers that obligation. How the price gets determined. Where the money comes from. That's it. The value of settling those four things early isn't legal elegance. It's that they get settled by people who are still negotiating in good faith with each other, rather than by a widow, a surviving partner, and two sets of attorneys who have never met.
The absence of an agreement doesn't mean nothing happens. It means the default happens. Under most state law and most operating agreements, an ownership interest passes to the deceased owner's estate and then to the heirs. The surviving owner wakes up in business with a co-owner who has no operating experience, no interest in the industry, and an entirely reasonable desire to be paid.
The valuation problem, which is the real problem
Owners tend to think of the funding as the hard part. In practice, price is where deals actually break.
Absent an agreed method, the two sides have opposite incentives and both can argue in good faith. The estate wants a high number, because it's the family's outcome. The buying owner wants a low number, because it's the buying owner's cash. Neither has an obligation to accept the other's appraiser. There's no referee.
Worse, a valuation method written into an agreement and then ignored is nearly as bad as no method at all. The Connelly facts illustrate this precisely. Two brothers, sole shareholders of a building supply corporation, had an agreement contemplating an outside appraisal of the company's fair market value. When one brother died, the surviving brother and the deceased brother's son instead agreed, in what the record described as an "amicable and expeditious manner," that the shares were worth $3 million. The IRS disagreed with the resulting estate tax return, and the case went to the Supreme Court.
How value gets determined is a large enough subject on its own that it deserves separate treatment, which is why we've written a companion piece on what actually determines what a business is worth. A buy-sell agreement is only as good as the valuation method sitting underneath it.
What Connelly changed in 2024
The corporation in Connelly had obtained $3.5 million in life insurance on each brother so it would have the funds to redeem shares. After the death, the company used $3 million of the proceeds to redeem the shares. The estate's position was that those proceeds shouldn't increase the company's value, because they were offset by the obligation to spend them on the redemption.
A unanimous Supreme Court disagreed. From the syllabus of Connelly v. United States, No. 23-146, decided June 6, 2024: "A corporation's contractual obligation to redeem shares is not necessarily a liability that reduces a corporation's value for purposes of the federal estate tax."
The arithmetic followed from there. The IRS assessed the company's total value at $6.86 million rather than $3.86 million, valued the 77.18% interest at $5.3 million rather than roughly $3 million, and determined the estate owed an additional $889,914 in tax. The Court also noted, in a footnote, that it was not holding that a redemption obligation can never decrease a corporation's value.
The practical takeaway for owners is not that entity redemption arrangements are defective. It's that company-owned life insurance funding a redemption may be counted as a corporate asset for estate tax purposes, which is a structural fact that any existing agreement drafted before June 2024 is worth re-reading with an attorney and a CPA in light of. The Court itself pointed out that a cross-purchase arrangement, where the owners buy policies on each other and the proceeds go to the surviving owner directly rather than to the company, was among the alternatives available.
Funding mechanisms, compared
| Mechanism | Who purchases the interest | How the purchase is typically funded | Points to evaluate with your attorney and CPA |
|---|---|---|---|
| Cross-purchase | The surviving owner or owners, individually | Policies each owner holds on the others, or personal funds | Number of policies grows quickly with more owners; each owner must be able to keep paying premiums |
| Entity redemption | The company itself | Company-owned insurance, corporate cash, or borrowing | Post-Connelly treatment of proceeds in the company's estate tax value; effect on remaining owners' basis |
| Hybrid or "wait and see" | Owners first, with the company as backstop | Either or both of the above, decided at the trigger event | Added drafting complexity; the choice needs to be made under a defined process, not improvised |
| Installment note from operating cash flow | Surviving owner or company | Payments to the estate over a defined term, usually with interest | Leaves the family as an unsecured creditor of a business they no longer control; needs security terms and a default remedy |
| Sinking fund or reserve account | Company | Cash set aside over time against the eventual obligation | Timing risk if the trigger arrives early; capital sitting idle instead of funding growth |
Why the estate tax exposure keeps moving
Owners sometimes conclude the whole subject is moot because the federal estate tax exemption is large. It is large, and it also moves. Under IRS Rev. Proc. 2025-32, and following the amendment to § 2010(c)(3) enacted as Public Law 119-21 on July 4, 2025, the basic exclusion amount is $15,000,000 per person for 2026, up from $13,990,000 for 2025.
That number is worth holding loosely for two reasons. First, a business that grows over a decade can cross a threshold that seemed comfortably distant. Second, and more to the point of this article, the estate tax is only one of the problems a missing buy-sell agreement creates. The others show up regardless of exemption levels: an heir who now owns part of a company and can't be bought out, a bank that calls a loan when the guarantor dies, key employees who leave because nobody can tell them who's in charge, and a surviving spouse whose largest asset is illiquid, unmarketable, and controlled by someone else.
A composite illustration
Consider a hypothetical composite. Two partners, roughly equal owners of a specialty contracting firm, together about twenty years. There's an operating agreement from formation that references a buy-sell "to be agreed upon." It never was. One partner is 61, the other 54.
If the older partner dies tomorrow, the younger one is in business with a spouse who has never worked in construction and needs income. The company's line of credit is personally guaranteed by both. The bonding company will want to know who's running the business by the end of the week. Nobody has ever had an independent valuation done, so the first conversation about price will also be the first conversation about method. And every one of those problems was solvable in a conference room three years ago, at a cost the business would not have noticed.
This composite is illustrative, constructed for this article, and does not describe any actual client.
What owners can reasonably do next
Nothing here is a recommendation to adopt any particular structure. Structure depends on entity type, number of owners, tax posture, insurability, and family circumstances, and it's a conversation for an attorney and a CPA alongside a financial professional.
What's generally worth confirming: whether a buy-sell agreement exists at all and where the signed copy is; whether it specifies a valuation method rather than a stale fixed price; whether it addresses disability and voluntary exit, not just death; whether any funding is actually in place and whether the amount still matches the company's current size; and whether the structure was drafted before June 2024, in which case the Connelly holding is worth a fresh look with counsel.
BAS Financial works with San Diego business owners on exactly this kind of coordination through the San Diego Business Owner Blueprint. Any fees are discussed during a complimentary review.
Frequently asked questions
What happens to a co-owner's shares if there's no buy-sell agreement?
In most cases the interest passes through the deceased owner's estate to the heirs under the will or state intestacy law, subject to whatever transfer restrictions the operating agreement contains. The surviving owner generally has no automatic right to purchase it and no agreed price if the heirs are willing to sell.
Does a buy-sell agreement set the value for estate tax purposes?
Not automatically. The Supreme Court noted in Connelly that while an agreement may specify how to set a price, it is ordinarily not dispositive for valuing the decedent's shares for the estate tax, and referenced 26 U.S.C. § 2703. Whether a specific agreement will be respected is a question for a tax attorney.
Does a buy-sell agreement need to cover disability?
Many do not, which is a common gap. Disability raises questions death does not: how long a disability must last before the trigger applies, who determines that, whether compensation continues in the meantime, and whether the interest is bought all at once or over time. Those definitions are worth reviewing with an attorney.
What did Connelly v. United States actually decide?
A unanimous Supreme Court held on June 6, 2024 that a corporation's contractual obligation to redeem shares is not necessarily a liability that reduces the corporation's value for federal estate tax purposes. In that case, life insurance proceeds held by the company and earmarked for the redemption were counted as a corporate asset, and the estate owed an additional $889,914.
How often should an existing agreement be revisited?
There's no universal interval. Common prompts for a review include a significant change in company revenue or profitability, a change in ownership percentages, a new entity election, a change in tax law, and the addition or departure of an owner. Confirming the cadence with your attorney and CPA is the usual approach.
This material is provided for educational and informational purposes only and should not be construed as legal, tax, accounting, investment, or business planning advice. The examples discussed are illustrative and are not intended to predict or guarantee any outcome. Buy-sell agreements, business valuations, succession planning strategies, and related tax considerations involve complex legal and financial issues that vary based on individual circumstances. Readers should consult with qualified legal, tax, and financial professionals before implementing any strategy. Tax laws and regulations are subject to change, and their application may vary based on individual circumstances.