Two brothers owned a building supply company in St. Louis. Like many business partners, they signed an agreement saying that if one of them died, the company would buy back his shares. To make sure the money would be there, the company bought a $3.5 million life insurance policy on each brother.

When Michael Connelly died in 2013, the plan worked, up to a point. The company collected the insurance and bought his shares from his estate for $3 million, and the estate reported $3 million as the value of his stake.

The IRS disagreed. It argued that the insurance money made the company worth more on the day Michael died, so his shares were worth more than $3 million too. The case went to the Supreme Court, and in June 2024 the justices sided with the IRS unanimously. Michael’s estate owed an additional $889,914 in estate tax.¹

What the court decided

The question before the court was this: if a company must use life insurance money to buy back a deceased owner’s shares, does that money still count toward the company’s value? The court said it does. The company’s obligation to buy the shares didn’t cancel out the insurance money for estate tax purposes.

With the proceeds counted, the company was valued at about $6.86 million. Michael owned about 77% of it, so his shares were worth roughly $5.3 million for estate tax purposes, well above the $3 million his estate received.¹

Two details from the case stand out:

1. The brothers didn’t follow their own agreement’s pricing rules. It called for an annually updated value or outside appraisals, and they settled on a price informally. That didn’t decide the case, but it’s exactly the kind of gap a review can catch.
2. The court noted that a cross-purchase arrangement, in which the owners buy policies on each other and buy the shares directly, would have been treated differently.

Why this matters to your clients

A lot of small and midsize businesses use the same setup the Connelly brothers did: the company agrees to buy back a deceased owner’s shares and owns life insurance to pay for it. Many of those agreements were written years before this ruling and haven’t been reviewed since.

That makes the buy-sell agreement a natural place to start a conversation. A few questions to bring to a business-owner client:

• Does the company buy the shares, or do the owners buy them from each other?
• When was the business last valued, and does the agreement spell out how the price is set?
• Does the life insurance still match what the business is worth today?
• Has the client’s attorney or CPA reviewed the agreement since the 2024 ruling?

Keeping coverage in step with the business

Connelly was about tax, but buy-sell plans have another common weak spot: businesses grow, and the insurance funding the agreement often doesn’t. In Connelly’s case, the coverage was close to the agreed price. If a business has doubled in value since its policies were bought, the surviving owners may not have enough cash to buy out a partner’s family at a fair price.

A practical approach is to value the business when the policy is put in place, match the coverage to that value, and revisit both on a regular schedule. Some carriers, including Principal and North American, offer informal business valuations that can help keep the numbers current.

Where you come in

Drafting the agreement and settling the tax question are jobs for the client’s attorney and CPA. Your part is asking whether the plan still fits the business, and whether the insurance behind it is still the right size and structure. That conversation can lead to new coverage and a stronger plan. It can also put you in front of the client’s business partners.