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Resources · For Business Owners & Their Advisors

Connelly, the 2026 exemption, and your buy-sell agreement

A 2024 Supreme Court ruling changed how company-owned life insurance counts toward a business's value for estate tax. A 2026 law changed the numbers every conclusion was based on. Most agreements haven't been looked at since either one.

Part of our guide: Buy-sell agreements that actually hold up →

$3.86M → $6.86M
what one company became, for estate tax
≈ $890,000
additional estate tax the family owed
$15M / person
the 2026 exemption re-running the math
1

The case — Connelly v. United States (2024, unanimous)

The setup
Brothers Michael and Thomas Connelly owned Crown C Supply, with a redemption buy-sell funded by $3.5 million of company-owned life insurance on each brother — so the business could buy out a deceased brother’s family cleanly. For decades, textbook practice.
The holding
The insurance proceeds count toward the company’s value for estate tax — and the obligation to redeem the shares does not offset them. A redemption at fair market value doesn’t reduce any shareholder’s economic interest. Nine to zero.
The bill
Reported company value: $3,860,000. Value as the Court held it: $6,860,000. Michael’s shares re-valued to $5.3 million — and the estate owed roughly $890,000 in additional estate tax, from the policy meant to protect the family.
The quiet lesson
The brothers set the buyout price by informal agreement, not a qualified appraisal — the door the IRS walked through to re-value the company at all. A buy-sell is only as good as the valuation mechanism written into it.
Operating business (fair market value)$3,860,000
Life insurance proceeds — company-owned policy$3,000,000
Less: obligation to redeem the deceased owner’s shares($3,000,000)
disallowed — the obligation doesn’t offset the proceeds
Company value as the estate reported it$3,860,000
Company value after Connelly (2024)$6,860,000
2

Then 2026 moved the line — in both directions

Worried after Connelly in 2024?

As of January 1, 2026, the federal estate exemption is $15 million per person (roughly $30 million for a married couple, indexed). You may have been fine all along.

Ignored it — “we’re not estate-tax people”?

The business has kept growing, and under Connelly the company-owned death benefit itself pushes the valuation up. You may be closer to the line than you think.

Nobody knows which case a given owner is until someone re-runs the numbers: business value today, plus company-owned death benefit, plus the rest of the estate, measured against the current exemption. You can run a first pass on the redemption side in the buy-sell funding calculator — set the structure to entity redemption and it estimates the exposure from your figures.

3

The ten-second screen

“Who owns the policies in your buy-sell?”
“the owners”Cross-purchaseOwners hold policies on each other personally — the proceeds never enter the company’s value. Generally no Connelly exposure.
“the company”RedemptionThe entity owns the policies — the structure the Court examined. The agreement deserves a review against the 2026 numbers. Not a redo. A look.
company value + company-owned death benefit  vs.  the $15M-per-person exemption
RestructureAdd coverage“You’re fine” — in writing

That review belongs with your CPA and attorney first — the structure (cross-purchase vs. redemption, and how a transition is executed) is a legal and tax decision before it is ever an insurance decision. Restructuring has real traps, including transfer-for-value rules that can make a death benefit income-taxable if a policy is moved carelessly, which is precisely why the sequence matters.

What the review can conclude

  • Restructure: convert to a cross-purchase arrangement (sometimes through a dedicated LLC when there are several owners), with policy ownership moved or new coverage placed correctly from the start.
  • Add coverage: where the numbers show genuine estate-tax exposure, estate-liquidity coverage owned outside the company may be warranted. The estate-tax liquidity calculator gives a first sense of whether the estate could pay the tax in cash, or would be forced to sell.
  • You’re fine: under the $15 million exemption, many reviews will end exactly here — documented, in writing, so the question is settled rather than lingering. We consider that a good outcome, not a failed one.

This page is educational and general. It is not legal or tax advice, and no outcome can be assessed without the specific agreement, valuation, and estate picture — which is work we do alongside your CPA and attorney, not instead of them. Primary source: the Court’s slip opinion in Connelly v. United States, No. 23-146.

Related: Business continuation planning · Buy-sell funding calculator · For CPAs, attorneys, and advisors

Have a redemption-style agreement in the file?

Send the question, not the whole file: who owns the policies, roughly what the business is worth, and when the agreement was last reviewed. We'll tell you plainly whether a full review is warranted.

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