BLOG

May 12, 2026
By Isabella J. White

Many closely held corporations use shareholder’s agreements (also known as buy-sell agreements) to, among other things, restrict ownership transfers to third parties. For example, small, family-run businesses often rely on these agreements to ensure that ownership of the corporation stays within the family. In the past, a popular way to mechanize such transfer restrictions was to require the corporation to repurchase a deceased shareholder’s equity upon their death, rather than leaving those shares to pass to the shareholder’s heirs. This process of a corporation repurchasing all or a portion of a shareholder’s equity is known as redemption. To fund such a mandatory redemption, corporations often will take out life insurance policies known as “key man” policies on their shareholders. When a shareholder dies, the corporation can use the life insurance proceeds to redeem the shareholder’s equity. However, in June 2024, the Supreme Court of the United States gave a ruling that causes this arrangement to have certain detrimental tax implications.

In Connelly v. United States, 602 U.S. 257 (2024), the Court held that the value of a corporate-
owned life insurance policy increases the value of the corporation, rather than being set-off by the corporation’s contractual obligation to redeem the shares according to the shareholder’s agreement. In other words, life insurance proceeds payable to the corporation are considered an asset of the corporation, which in turn increases the corporation’s fair market value for purposes of a redemption of equity and increases the estate taxes of the deceased shareholder. The Court rejected the argument that redemption obligations are liabilities that reduce a corporation’s value. As a result, a deceased shareholder’s estate may owe significantly more in federal estate taxes. In Connelly, this unexpected tax liability resulted in owing an additional $889,914 to the IRS. It can also result in a higher purchase price payable in connection with a redemption of a deceased shareholder’s equity.

Many people and corporations don’t know that there is a simple alternative that can avoid these unintended consequences: a cross-purchase structure. In this arrangement, shareholders in a closely held corporation take out life insurance policies on each other, such that each shareholder is a life insurance beneficiary, rather than the corporation itself. Instead of a mandatory redemption upon a shareholder’s death, the shareholder’s agreement would require the remaining shareholder(s), rather than the corporation, to purchase the deceased shareholder’s interest. This process of remaining shareholder(s) purchasing the shares of a deceased or departing shareholder is known as a cross-purchase. In a life-insurance funded cross-purchase, the corporation does not receive the “asset” of the insurance proceeds since the surviving shareholders are life insurance beneficiaries, so the fair market value of the corporation is not affected.

For business owners who want to maintain control over ownership after a shareholder’s death, and where the shareholders intend to obtain life insurance policies, the applicable shareholder’s agreement or buy-sell agreement should contemplate a cross-purchase structure to achieve the same goal as redemption-style arrangements, but without the unfavorable tax consequences that occurred in Connelly; this article is not intended to render tax advice—please consult a tax professional to assess specific tax implications for you or your business.

Isabella J. White is an associate who represents businesses across various industries in a broad range of corporate and transactional matters, including mergers and acquisitions, entity formation, and corporate governance, working with companies at all growth levels, from early-stage startups to established corporations.