Buy-Sell Agreement Calculator

Michael and Thomas Connelly owned a Missouri building-supply company, Crown C Supply, worth about $3.86 million. Like thousands of closely held businesses, they had a buy-sell agreement funded with corporate-owned life insurance: Crown held $3 million on each brother, so that when one died the company could redeem his shares. Michael died, Crown collected the $3 million and redeemed his 77.18% stake, and the estate valued his shares off the $3.86 million operating value — reasoning that the insurance was spoken for by the redemption obligation, so it added nothing.

The IRS valued the company at $6.86 million — operating value plus the insurance — and assessed $889,914 of additional estate tax. In June 2024 a unanimous Supreme Court agreed. The holding is compact: life-insurance proceeds payable to a corporation are an asset that increases its fair market value, and a contractual obligation to redeem shares at fair market value is not a liability that offsets them, because a fair-value redemption leaves every shareholder’s economic position unchanged. No hypothetical buyer of Michael’s shares would have discounted them for it.

The Court was explicit that this was a consequence of how the brothers chose to structure the agreement, and named the alternative in the opinion: a cross-purchase, in which the owners hold policies on each other personally and buy the deceased’s shares themselves. The proceeds then never touch the company’s balance sheet — and because the policies on the deceased belong to the other owners, they are not in the deceased’s estate either.

At the 2026 exclusion of $15 million per person, most owners of closely held businesses will owe no federal estate tax under either structure, and it is tempting to file Connelly under problems for bigger companies. That misses the second difference between the structures, which has nothing to do with the estate tax.

In a cross-purchase, the surviving owners BUY the deceased’s shares, and money spent buying shares becomes basis. When the company is eventually sold, their taxable gain is smaller by exactly what they paid. In a redemption, the company buys the shares back and cancels them; the survivors end up owning a larger percentage of the company without having bought anything, so their original basis — often nominal, for founders — is unchanged. The eventual sale realises extra gain equal to the entire redemption price, taxed at capital gains rates plus the net investment income tax.

On a $5 million buyout that deferred difference is over a million dollars, and it exists whether the estate is $2 million or $50 million. The exclusion protects against Connelly; nothing protects against the missing basis except choosing the structure that creates it.

Because the cross-purchase’s tax result is bought with operational friction. Two owners need two policies and life is simple; five owners need twenty, since each must hold a policy on each of the others. Premiums fall unevenly — the young healthy owner pays the large premium on the old unhealthy one — and every policy must be kept in force by someone with an incentive to stop paying. Corporate redemption plans have one payer, one policy per owner, and no equalisation politics.

The middle path many advisers now reach for is a special-purpose insurance LLC: a separate entity, owned by the owners, that holds one policy per owner and allocates proceeds to the buyers. Done correctly it delivers cross-purchase tax treatment — proceeds outside the operating company, basis for the buyers — with redemption-style logistics. Done casually it can fail either test, which is why it is a document for counsel rather than a template.

What nobody should do is panic-fix an existing redemption plan by distributing the corporate policies out to the shareholders. A transfer of a life policy for valuable consideration can void the death benefit’s income-tax exemption under section 101(a)(2), converting tax-free proceeds into ordinary income. The statutory exceptions — transfers to the insured, to a partner of the insured, or to a partnership including the insured — are the reason restructurings route through partnerships, and the reason this particular move belongs to professionals.

A buy-sell agreement is supposed to answer two questions: who buys, and at what price. The second answer binds the IRS only within limits. Under section 2703, a price fixed by agreement controls estate tax value only if the arrangement is bona fide, is not a device to pass the business to family for less than full value, and carries terms comparable to what strangers would sign. Family businesses fail these tests more often than they pass them, which is why appraisal-based pricing has largely replaced fixed prices.

The Connellys had a pricing mechanism in their agreement and simply did not follow it — no outside appraisal was obtained at Michael’s death, and the price was set by agreement between the brother and the widow. That procedural failure is part of why the case existed at all, and it carries its own lesson: the best-drafted agreement is worth little if the valuation machinery is ignored at the moment it matters.

One more Connelly-specific nuance is worth knowing. The Court reserved the question of whether insurance proceeds that must be used to pay a company’s ORDINARY liabilities — debts, payroll — might be treated differently; the holding is about redemption obligations specifically. And where the insurance exceeds the redemption price, the excess is a company asset on anyone’s reading. The calculator treats all earmarked proceeds the Connelly way, which is the position the IRS will take.