On June 6, 2024, the Supreme Court unanimously ruled in Connelly v. United States that when a corporation owns life insurance to redeem a deceased owner's shares, the proceeds count as a company asset and the redemption obligation does not offset them when valuing the shares for estate tax. In the case, that raised the company's value from about $3.86 million to $6.86 million and added roughly $889,000 of estate tax. Owners with corporate-owned buy-sell policies and estates near the $15 million exemption are reviewing whether a cross-purchase or insurance LLC fits better.
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What happened in the case
Brothers Michael and Thomas Connelly owned Crown C Supply, a building supply company. Michael owned about 77% and Thomas about 23%. Their agreement required the corporation to buy back a deceased brother's shares, and the corporation bought about $3.5 million of life insurance on each brother to fund it.
Michael died in 2013. The corporation collected the insurance and paid his estate $3 million for his shares, and the estate reported the shares at $3 million. The IRS disagreed. It said the company was worth $3.86 million plus the $3 million of insurance used for the redemption, about $6.86 million, so Michael's 77% stake was worth about $5.3 million. The IRS assessed about $889,914 more in estate tax. The estate paid, sued for a refund, and lost at every level.
What the Court held
Justice Thomas wrote for a unanimous Court that a corporation's contractual obligation to redeem shares at fair market value is not a liability that reduces the value of those shares. A willing buyer of Michael's stake, the Court reasoned, would pay for a company that included the insurance money, because the redemption itself does not change any shareholder's economic interest.
The Court added a footnote that matters for planners: the decision does not mean a redemption obligation can never reduce value, for example where a redemption would force the company to sell operating assets. But for insurance-funded redemptions, the rule is now clear nationwide. It resolved a split with the Eleventh Circuit, which had gone the other way in an earlier case.
Who is affected
- Any business that owns life insurance to redeem an owner's interest, not just C corporations. The reasoning applies to valuing S corporation stock and LLC interests too.
- Owners whose estates are near or above the exemption. For 2026 the federal exemption is $15 million per person. An owner with a $9 million business stake and a $4 million other estate could cross the line once the company's insurance proceeds are counted.
- Agreements priced by formula or appraisal. If the buy-sell price ignores the insurance but the IRS counts it, the family receives less than the value it is taxed on, as the Connelly estate did.
- Key person policies on owners raise the same question, since those proceeds also land in the company.
An operating company is worth $8 million before insurance and owns $4 million on each owner for an entity redemption. When Owner A dies, the company collects $4 million. Under Connelly, the company is worth $12 million at that moment, so A's half is valued at $6 million for estate tax, while the agreement pays A's family $4 million. With a cross-purchase, Owner B collects the $4 million personally, the company stays at $8 million, and A's half is valued at $4 million, matching what the family receives.
What owners are doing about it
- Switch to a cross-purchase. Owners own policies on each other, so proceeds are paid to the owners, not the company. See cross-purchase vs entity redemption.
- Use an insurance LLC. A separate partnership owns one policy per owner and distributes proceeds to the surviving owners, who buy the shares. See the insurance LLC buy-sell.
- Keep the redemption but fix the price. Some agreements now price shares including the insurance, so the family is paid what it is taxed on. That changes the economics for surviving owners.
- Do nothing, deliberately. For owners comfortably under the exemption with no plan to sell, the estate tax effect may be zero. Document that decision.
Moving existing corporate-owned policies to co-owners can trigger the transfer-for-value rule, so the route matters. Your attorney and CPA should pick it.
Frequently asked questions
Does Connelly apply to S corporations and LLCs?
The case involved a C corporation, but the reasoning is about how a company's value is measured when it owns insurance and owes a redemption. Valuation experts generally expect it to apply to S corporations and LLCs as well.
Do I owe estate tax because of Connelly?
Only if your total taxable estate, including the higher share value, exceeds your available exemption ($15 million per person for 2026, more for a married couple using portability). Many owners will not, but larger estates and some agreements priced without the insurance can.
Can the company just transfer its policies to the other owners?
Transferring a policy to a co-shareholder is generally a transfer for value with no exception, which can make the death benefit taxable income. Transfers to the insured, to a partner of the insured, or to a partnership the insured belongs to are exceptions. Plan the route with your advisors.
Does key person insurance on an owner have the same issue?
Yes. Proceeds the company receives on an owner's life increase the company's value at that owner's death. That is usually intended for key person coverage, but it should be considered in the owner's estate plan.
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Written by Erik Moran
Erik co-owns Moran Insurance Group with Amanda Moran and handles the agency's life insurance cases, from key person and buy-sell coverage to trust-owned policies. He works alongside clients' CPAs and attorneys, who make the tax and legal calls. More about Erik.
Sources
Moran Insurance Group is a licensed insurance agency. Our brokers are not CPAs, attorneys or tax advisors, and nothing on this page is tax, legal or investment advice. Tax figures and rules reflect our understanding as of October 2026 and can change. Coverage is subject to carrier underwriting and state availability. Confirm anything tax or legal with a licensed CPA or attorney before you act on it.