Buy-sell agreement funding that works when it is needed
A buy-sell agreement says who buys an owner's share and at what price when that owner dies, becomes disabled or leaves. Insurance is often what turns that promise into cash. We help owners and their attorneys choose a structure and fund it properly.
Coordinated with your attorney, CPA and valuation professional
An unfunded agreement is only a promise
Many agreements set a price but leave the buyer to find the money. That is often when deals stall.
Buyers rarely have the cash
Surviving owners may not have the savings or borrowing capacity to buy a large share on short notice, especially right after losing a partner.
Families need liquidity
Heirs often want a fair price paid promptly rather than a minority stake in a company they do not run.
The business needs stability
Lenders, bonding companies and customers watch closely during an ownership change. A funded plan shows the transition is handled.
Cross-purchase vs. entity redemption
The two most common structures. Your attorney drafts the agreement; we fund the one you choose.
Cross-purchase
- Each owner owns a policy on the other owners and buys their share directly
- Buyers generally receive a stepped-up basis in the shares they purchase
- Policy proceeds are not an asset of the company
- The number of policies grows quickly: each owner insures every other owner, so four owners need twelve policies unless a trust or LLC holds them
- Premiums fall unevenly when owners differ in age or ownership share
Entity redemption (stock redemption)
- The company owns one policy per owner and buys back the departing owner's share
- Simple to administer, with one policy per owner
- Proceeds are paid to the company and can increase its value for estate tax purposes (see Connelly below)
- Remaining owners generally do not get a basis increase
- Policies are exposed to the company's creditors
What the Connelly decision changed
In Connelly v. United States, decided June 6, 2024, the U.S. Supreme Court held that a corporation's obligation to redeem a deceased owner's shares does not offset the life insurance proceeds the corporation receives to fund that redemption when valuing the shares for federal estate tax.
In that case, two brothers owned a company and the company held $3 million of life insurance to fund a redemption. Because the proceeds were counted in the company's value without an offsetting liability, the deceased brother's estate was valued higher and owed more estate tax.
What that means in practice:
- Owners with entity-redemption agreements funded by company-owned life insurance should have their attorney and CPA review the structure, especially if an owner's estate could be large enough to owe estate tax.
- The Court itself pointed to a cross-purchase arrangement as an alternative structure that avoids this result.
- Moving existing policies from the company to the owners can trigger the transfer-for-value rule, which can make part of a death benefit taxable. Some transfers fall within exceptions (for example, to a partner of the insured or a partnership in which the insured is a partner), but a transfer from a corporation to a co-shareholder is not one of them. Get tax advice before changing ownership.
What can fund a buy-sell agreement
Life insurance
The most common funding source for a death buyout. Term coverage fits a defined horizon; permanent coverage can last as long as the agreement and builds cash value that may help fund a lifetime buyout.
- Amount tied to the agreement's valuation
- Ownership matches the structure (owners, company, trust or LLC)
- Beneficiary designations reviewed with the agreement
Disability buyout insurance
Pays a lump sum or installments to fund the purchase of a disabled owner's interest after a defined elimination period, which is usually long because buyouts are meant for lasting disabilities. Definitions of disability and buyout triggers must match the agreement.
- Elimination period aligned with the agreement
- Lump-sum or installment payout
- Often paired with key person or overhead expense coverage
Installment notes and sinking funds
Some agreements rely on payments over time or savings. These work for retirement and voluntary exits but can strain cash flow after a sudden death or disability.
Bank financing
Lenders may finance a buyout, but credit is often tighter right after a key owner's loss. Insurance can work alongside financing rather than replace it.
Funding a buy-sell agreement, step by step
Review the agreement and valuation
We start with the current agreement or term sheet: triggering events, price or formula, payment terms and when the value was last updated.
Choose the structure with your attorney
Cross-purchase, entity redemption, a hybrid ('wait and see') or a trusteed or LLC-held cross-purchase. Your attorney and CPA weigh the tax and estate effects.
Match coverage to the price
Life and disability amounts are tied to each owner's share of the agreed value, with a plan to keep them current as the business grows.
Underwrite and place
We compare carriers for each owner's age and health and coordinate applications, ownership and beneficiaries to match the agreement.
Keep it current
Most problems appear when values grow and coverage does not, or when an owner leaves and policies are not reassigned. We review the funding when the valuation is updated.
Buy-sell funding FAQ
How much insurance do we need?
Is cross-purchase always better after Connelly?
We have more than two owners. Do we really need a policy on everyone for everyone?
Does the IRC 101(j) notice and consent rule apply?
What about disability or retirement?
What happens to the policies when an owner leaves?
Can you draft the agreement?
Make sure your buy-sell agreement is funded
Send us your current agreement, or tell us where you are in drafting one. We will review how it is funded and where coverage falls short.
Content on this page is a general summary for education. It is not tax, legal or investment advice, a statement of coverage, an offer or a binder. Scenarios and dollar figures are illustrative examples, not representations about any person or business. Tax figures reflect 2026 federal and Washington rules as we understand them and can change. Consult your tax advisor and attorney before acting. Policy features, conversion rights and guarantees vary by carrier and contract, are subject to underwriting and the terms of the policy issued, and are backed by the claims-paying ability of the issuing insurer.