How a buy-sell agreement is structured matters as much as whether it’s funded. The Supreme Court’s 2024 decision in Connelly v. United States made the choice between cross-purchase and entity redemption more important for many business owners. Here’s how the two compare, and why informal shortcuts cause trouble.
Key takeaways
- In a cross-purchase, owners buy policies on each other; in an entity redemption, the business owns the policies and buys back the shares.
- After Connelly (2024), life insurance proceeds held by a corporation to redeem shares can increase the company’s value for estate tax purposes.
- Joint policy ownership without a written agreement gets money to the survivors but leaves price, obligation and tax questions unresolved.
Buy-sell plans built only on joint policy ownership assure one thing: the money gets to the buyers. After that, it’s all up for grabs.
Cross-purchase vs. entity redemption
Cross-purchase: Each owner owns and is beneficiary of a policy on the other owners. At a death, the survivors receive the proceeds and buy the deceased owner’s interest. Survivors generally get a step-up in basis on the purchased shares. The downside is complexity as the number of owners grows. Our article on cross-purchase agreements goes deeper.
Entity redemption: The business owns one policy on each owner and uses the proceeds to redeem the deceased owner’s shares. It’s simpler to administer, but surviving owners don’t get the same basis increase, and after Connelly the estate tax picture changed.
What Connelly v. United States changed
In Connelly v. United States (2024), the Supreme Court held that a corporation’s obligation to redeem a deceased shareholder’s stock does not offset the life insurance proceeds it receives to fund that redemption. As a result, the proceeds increased the value of the company, and of the deceased owner’s shares, for estate tax purposes.
For owners with larger estates, corporate-owned redemption plans may now create more estate tax exposure than expected. Many advisors are reviewing existing entity plans and considering cross-purchase or other structures. With the federal exemption now $15 million per person, this matters most for larger businesses, but clients should review it with their tax and legal advisors.
The trouble with jointly owned policies
Because drafting a formal agreement takes time and legal fees, some owners skip it and simply own policies jointly. With owners A, B and C, A and B jointly own the policy on C, and so on. When C dies, A and B have funds to buy C’s interest.
But without a written agreement:
- Surviving owners have no legal obligation to buy, leaving the deceased owner’s family in limbo.
- The estate has no obligation to sell, so heirs may become new business partners.
- There’s no fixed price for estate or income tax purposes.
- Rearranging interests in the remaining policies could trigger transfer-for-value problems.
What advisors should do
If clients refuse to put a written plan in place, at least get coverage issued with the most suitable ownership arrangement, since the worst outcome is a death with no coverage in force. Then document your advice with a letter recommending they review the plan with their tax and legal advisors. Our buy-sell and business transition article offers more ideas.
Contact us for help structuring buy-sell funding or drafting that client letter.
Frequently asked questions
What is the main difference between cross-purchase and entity redemption?
In a cross-purchase, the owners buy policies on each other and purchase the shares themselves. In an entity redemption, the business owns the policies and buys back the shares.
What did Connelly v. United States decide?
The Supreme Court held in 2024 that life insurance proceeds a corporation receives to redeem a deceased owner’s shares are not offset by the redemption obligation, which can increase the company’s value for estate tax purposes.
Is joint ownership of life insurance a valid buy-sell plan?
It gets money to the surviving owners, but without a written agreement there’s no obligation to buy or sell and no set price. A formal agreement drafted by an attorney is strongly recommended.
Reviewed by Tim Fuller on 2026-09-26
Tim Fuller
President, SRS Inc.
Tim leads SRS Inc., a full-service IMO (Independent Marketing Organization) and BGA (Brokerage General Agency), connecting independent financial professionals with life, annuity, disability income, and long-term care solutions from 60+ carrier partners.
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