The U.S. Supreme Court’s 2024 decision in Connelly v. Internal Revenue Service is one of the most consequential estate tax valuation cases for closely held business owners in recent decades.
Although the Court addressed a relatively narrow issue, the ruling has broad implications for buy–sell agreements, life insurance funding, and estate planning strategy.
At a minimum, Connelly should prompt business owners—and their advisory teams—to revisit existing buy–sell agreements with fresh eyes.
The Case at a Glance
Connelly involved two brothers who owned a closely held operating company subject to a “wait-and-see” buy–sell agreement.
Upon the death of the first brother, the company was required to redeem his shares. To fund that obligation, the company owned life insurance policies on each brother’s life.
When one brother died, the company received approximately $3.5 million in life insurance proceeds and redeemed the decedent’s shares for $3.0 million.
The estate reported the redemption price as the value of the ownership interest for estate tax purposes. The IRS disagreed—and ultimately prevailed.
What the Decision Really Means
The Supreme Court held that life insurance proceeds payable to the company were corporate assets that increased the company’s fair market value.
The Court rejected the argument that the company’s obligation to redeem the shares automatically offset those proceeds dollar-for-dollar.
Importantly, the Court did not rule that redemption obligations can never reduce value. It acknowledged that a redemption obligation could reduce enterprise value if it impaired the company’s future earning capacity—for example, by forcing asset sales or burdensome borrowing.
The key takeaway is that valuation follows economic reality. Because the redemption in Connelly did not burden the business, the insurance proceeds increased value.
Why This Matters for Business Owners
Buy–sell agreements are typically designed to provide liquidity, ensure continuity, and avoid disputes.
When paired with entity-owned life insurance, owners may reasonably—but incorrectly—assume that the insurance both funds the buyout and neutralizes valuation risk.
Connelly makes clear that this is not always the case.
If insurance proceeds increase corporate assets without creating a corresponding economic burden, those proceeds will likely increase enterprise value—and estate tax exposure.
The Valuation Perspective
Under the fair market value standard, a hypothetical willing buyer is assumed to have reasonable knowledge of relevant facts and to act rationally.
Such a buyer would not ignore real cash on the balance sheet simply because it is earmarked for a transaction that does not weaken the business economically.
Whether a redemption obligation reduces value depends on how it is funded and whether it imposes a continuing financial drag on the business.
Advisor Perspective: Key Planning Takeaways
For attorneys and CPAs advising business owners, Connelly offers several important reminders:
- Funding mechanics matter. Entity-owned life insurance is not valuation-neutral by default.
- Mandatory redemptions differ from options. Obligations that are certain to occur can affect value differently than discretionary buyouts.
- Avoid stale valuation mechanisms. Fixed or outdated pricing can create significant tax mismatches.
- Process is critical. Courts are unlikely to respect agreements that are not followed precisely.
- Valuation input should come early. Involving a qualified business appraiser during planning—not after a triggering event—can help align legal intent with economic reality.
Final Thought
Connelly v. IRS is less about life insurance and more about discipline.
For business owners whose net worth is largely tied to a closely held company, it reinforces the importance of well-drafted, properly funded, and regularly reviewed buy–sell agreements.