Your buy-sell has a price. Will the IRS accept it?
Most buy-sell agreements have a price written into them. Fewer have a price the IRS would actually accept. After Connelly, the valuation mechanism inside the agreement is what makes that price hold up — or lets the IRS set its own.
Part of our guide: Buy-sell agreements that actually hold up →
A buy-sell agreement does two things at once: it says who buys a departing owner's interest, and it says at what price. The first part is a matter of structure. The second part — the price — is where agreements quietly fail, because a number that looked fine when the ink dried may not bind the IRS years later when it matters.
This became concrete in Connelly v. United States (2024). The headline of that case was about company-owned insurance inflating the estate. But underneath was a quieter lesson: the Connelly brothers had set their buyout price by informal agreement rather than a qualified appraisal — and that was part of why the IRS was free to re-value the company at all. The price mechanism failed before the insurance question was ever reached.
The §2703 test — what makes a price bind the IRS
For a buy-sell price to be respected for estate-tax purposes — that is, for the IRS to accept the agreement's number rather than substitute a higher fair-market value — Internal Revenue Code §2703 requires the arrangement to satisfy three conditions:
A note on scope: §2703 also contains a safe harbor and applies differently to family-controlled versus unrelated-party arrangements. Whether a specific agreement satisfies it is a legal and valuation question — see the demarcation at the end of this page.
Three ways a price gets set — weakest to strongest
The condition most agreements struggle with is "comparable terms," and the reason is almost always the same: how the price is determined. There are three common mechanisms, and they are not equally defensible.
None of these is automatically right for every business — cost, size, and how often ownership changes all matter. But the direction is clear: the closer the price is to a current, independent, arm's-length valuation, the harder it is for the IRS to set the number aside.
The ten-second screen
You don't need a full review to know whether an agreement deserves one. One question does most of the work:
If the price is set by a qualified appraisal that's refreshed on a schedule, the mechanism is likely defensible. Worth confirming the cadence has actually been followed.
If the price is a fixed number nobody has revisited, or a formula whose inputs haven't been updated in years, the agreement deserves a fresh look — before it's tested at the worst possible moment.
As with the Connelly review, the outcome of a look can go three ways: the price mechanism gets updated, the agreement gets restructured, or it turns out to be fine — confirmed in writing. All three are good outcomes. A documented "it holds up" is worth the hour.
A second trap: transfer for value
Defending the price is one exposure. Moving a policy is another — and it is easy to trip without noticing. A life insurance death benefit is income-tax-free by statute, and that exemption can disappear when a policy is transferred to certain parties for value. That is the transfer-for-value rule, and tripping it turns a death benefit that should have arrived tax-free into ordinary income to whoever receives it.
Where it bites is ordinary housekeeping: reshuffling who owns which policy in a cross-purchase, a trusteed arrangement that reallocates the death benefit after the first death, or a cleanup after an ownership change. Well-meaning simplification is exactly where it hides.
The transfer stays tax-free only if it lands in one of these: to the insured, to a partner of the insured, to a partnership the insured is in, or to a corporation where the insured is a shareholder or officer.
Land anywhere else, and the simplification quietly converts tax-free dollars into taxable ones — discovered, if no one checked, at the worst possible moment: the claim.
The screen is three questions: has any existing policy changed owners, was it tied to a buy-sell, and did the transfer land inside one of the exceptions? Most of the time the answer is that it is fine — and confirming that in writing is a real result. It is a cheap question to ask before a claim, and an expensive one to skip. The drafting and the tax treatment stay with the attorney and the CPA; our part is only to read the funding structure and flag the exposure for them to confirm.
Whose work this is — and where ours ends
This is a question of tax law and valuation, and the demarcation matters. The valuation of a closely held business — the number, the method, and keeping it current — is the work of a CPA or a qualified appraiser. The price clause and whether it satisfies §2703 live in the drafting attorney's domain. Both are scrutinized by the IRS; neither is an insurance question.
We do not value businesses, draft or interpret buy-sell agreements, or opine on whether a specific price clause satisfies §2703. Those are your CPA's, appraiser's, and attorney's work.
Once the number is set and defended, we make sure the funding matches it: whether the coverage in place actually covers the buyout obligation, and how to close any gap cleanly.
This page is educational and general. It is not legal or tax advice, and no agreement can be assessed without the specific document, valuation, and facts — which is work we do alongside your CPA and attorney, not instead of them. Primary source on the estate-inclusion question: the Court's opinion in Connelly v. United States, No. 23-146 (2024). The valuation-defensibility conditions are set by IRC §2703.
Related: Connelly, the 2026 exemption, and your buy-sell · Business continuation planning · Buy-sell funding calculator · For CPAs, attorneys, and advisors
Not sure the price in the agreement still holds?
Send the question, not the whole file: how the price is set (fixed, formula, or appraisal), when it was last updated, and roughly what the business is worth today. We'll tell you plainly whether the funding matches — and flag anything worth taking back to your CPA and attorney.
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