Buy/Sell Agreements

The contract that decides who your next partner is.

A buy/sell agreement controls what happens to an owner’s share of the business at death, disability, divorce, retirement, or voluntary exit. Without one, the answer is usually a probate court, a surviving spouse who doesn’t want to be in the business, and a co-owner who doesn’t want a new partner. With an unfunded one, the contract exists but the cash to execute it doesn’t.

A well-drafted, fully funded buy/sell is one of the few documents that determines whether the business survives its founders.

The three structures

• Cross-purchase. The remaining owners personally buy the departing owner’s interest. Generally produces a step-up in basis for the buyers, which can be significant at a future sale. Gets cumbersome quickly when there are more than two or three owners (each owner needs a policy on every other owner).
• Entity purchase (stock redemption). The company itself redeems the departing owner’s shares. Simpler to administer, only one set of policies (company-owned), but the remaining owners generally don’t get a basis step-up, and corporate-owned life insurance now carries the Connelly issue below.
• Wait-and-see. The agreement gives the company a first option, then the remaining owners, then back to the company, with the choice made at the triggering event. Preserves flexibility, useful when you’re not sure which structure will fit best when the time comes.

Funding the agreement

A buy/sell without funding is a promise the surviving owners may not be able to keep. The standard funding tools:

• Life insurance for death triggers. Term insurance is cheaper but expires; permanent insurance funds death at any age and builds cash value that can help fund a lifetime buyout. Survivorship and individual policies both have a place depending on the partner structure.
• Disability buyout insurance for disability triggers. Often overlooked. Statistically, an owner is more likely to be disabled long-term than to die during their working years, and a disabled partner is harder to buy out than a deceased one (they’re still alive and may still expect income).
• Sinking fund or installment note for retirement and voluntary exit triggers, sometimes combined with insurance cash value.

A 2026 trend worth noting: in partnerships of three or more owners, advisors are increasingly using survivorship and shared-ownership structures to reduce the number of policies cross-purchase requires, often through an LLC funding vehicle or a partnership arrangement that holds the policies.

Connelly v. United States, 2024

In June 2024, the Supreme Court decided Connelly v. United States unanimously. The case involved two brothers who owned a closely-held company. The company held a life insurance policy on each brother and was obligated, under the buy/sell, to use the proceeds to redeem the deceased brother’s shares.

When the older brother died, the estate argued (and the lower courts initially accepted, following the Eleventh Circuit’s earlier Blount decision) that the company’s obligation to spend the insurance proceeds on the redemption offset the proceeds, so the insurance shouldn’t increase the company’s value for estate tax purposes.

The Supreme Court disagreed. The Court held that life insurance proceeds received by a corporation to fund a stock redemption are an asset of the corporation that increases the company’s value, and the corresponding redemption obligation does not offset that value. The result: the deceased shareholder’s stock was worth more, and the estate owed roughly $889,000 in additional federal estate tax.

What this means in practice:

• Existing entity-purchase agreements funded with corporate-owned life insurance should be revisited, especially where the estate would be near the federal estate tax exemption.
• Cross-purchase and partnership-owned funding structures can avoid the Connelly result, but bring their own administrative complexity.
• This is a recent ruling that intersects with estate tax law, drafting choice, and entity structure. It’s a conversation to have with your attorney and CPA, with the financial picture in front of you.

When to put one in place

At formation. Or right now if it hasn’t been done yet. The hardest time to negotiate a buy/sell is after a disagreement has started, after a health diagnosis, or after one partner has decided they’re done. At formation, every owner has roughly equal information and roughly aligned incentives, which is the only time the negotiation is clean.

Pitfalls

• Stale valuation formula. A book-value formula written ten years ago may bear no relationship to what the company is actually worth today.
• Inadequate funding. Insurance face amounts that haven’t been updated as the business grew. Disability triggers with no disability insurance behind them.
• No coordination with personal estate plans. Each owner’s estate plan needs to be drafted with the buy/sell in mind, including any marital deduction or trust planning.
• Ignoring Connelly. Entity-purchase structures with corporate-owned life insurance need a fresh look post-2024.