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A buy-sell agreement only works if the money is there when an owner dies, becomes disabled, or leaves. Life and disability insurance make sure it is.
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A buy-sell agreement is a contract between business owners that spells out what happens to an owner’s share if they die, become disabled, retire, or leave: who buys it, at what price, and how it gets paid for.
Without funding, surviving owners may not have the cash, and the deceased owner’s family may be stuck with an interest they can’t sell. Life insurance provides the money at death, and disability buy-out insurance provides it if an owner can no longer work.
Each owner buys a policy on the other owners. When one dies, the others use the proceeds to buy the shares. Buyers get a higher tax basis in the shares they buy, which can lower taxes on a future sale. With many owners, the number of policies adds up quickly.
The business owns one policy on each owner and buys back the shares itself. It’s simpler to administer, but surviving owners don’t get the basis increase, and the 2024 Connelly decision can raise estate taxes (see below).
A trust or separate LLC holds one policy per owner and carries out the purchase. This keeps the benefits of a cross-purchase without everyone owning policies on everyone.
Worried about losing someone who isn’t an owner? A buy-sell agreement only covers owners. To protect the business against losing a top producer, manager, or other key employee, key person insurance is usually the better fit.
| Cross-purchase | Entity redemption | |
|---|---|---|
| Who owns the policies | The owners | The business |
| Number of policies | Grows with each owner | One per owner |
| Basis increase for buyers | Yes | No |
| Proceeds counted in company value for estate tax | No | Yes, after Connelly (2024) |
| Premiums deductible | No | No |
From first call to final paperwork, we handle the design, the underwriting, and the coordination.
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We look at your income, age, staff census, and current plan to see what’s possible.
We match the right policy type and amount to your business, your plans, and your budget.
You get a clear illustration of the cost, the coverage, and the tax treatment before you commit.
We coordinate underwriting, ownership, beneficiaries, and reviews with your CPA and attorney.
In June 2024, the U.S. Supreme Court ruled in Connelly v. United States that life insurance proceeds a corporation receives to redeem a deceased owner’s shares count toward the company’s value for estate tax purposes, without an offset for the obligation to buy the shares.
For owners with an entity redemption agreement, that can mean a larger taxable estate. If your agreement was written before 2024, it’s worth reviewing whether a cross-purchase, trusteed, or LLC structure fits better.
Life and disability insurance require medical and financial underwriting. Policy guarantees depend on the claims-paying ability of the issuing insurance company. Illustrations are hypothetical and not guaranteed. Tax treatment depends on your facts, so review any strategy with your tax professional.
Learn more: Key Person Insurance | Planning a Sale | Tax Strategies for Business Owners | The Retirement Plan Stack | About Us
It is a contract among business owners that sets who can buy an owner’s share, at what price, and how it’s paid for if that owner dies, becomes disabled, retires, or leaves.
Most are funded with life insurance for death and disability buy-out insurance for disability. Some businesses also use cash reserves or installment payments, which can strain cash flow.
It depends on the number of owners, ages, entity type, and estate tax exposure. Cross-purchase gives buyers a basis increase and avoids the Connelly issue, while entity redemption is simpler with many owners. Trusteed or LLC structures can combine the benefits.
No. Premiums for buy-sell funding are generally not deductible, whether the owners or the business pay them. In exchange, the death benefit is generally received income tax free.
In 2024, the Supreme Court held that life insurance proceeds a corporation receives to redeem a deceased owner’s shares increase the company’s value for estate tax, with no offset for the redemption obligation. This can raise estate taxes under entity redemption agreements.
Review the valuation and coverage amounts at least every few years, and after any major change such as a new owner, a large jump in value, or a change in entity type.
Buy-sell insurance funds the purchase of an owner’s share when that owner dies or becomes disabled. Key person insurance protects the business itself against losing someone important, including employees who aren’t owners. Many businesses need both.
A sole owner can use a one-way buy-sell with a key employee or successor who agrees to buy the business. Funding it with insurance gives your family a buyer and a price instead of a forced sale.
Life, Inc. Retirement Services does not offer tax advice. Please always consult your tax professional about your eligibility for tax credits.
Life, Inc. Retirement Services is a Registered Investment Advisory Firm of the state of Ohio and licensed in Florida and Maryland. All emails and communication are meant to be informative and educational and should not be considered a sale of security until proper notification and disclosures are given.