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Buy-sell agreement & key-person insurance
· Legal document or tool
Standard practiceWhat most planners, CPAs and attorneys recommend.
A contract among co-owners on who buys a departing owner's share and at what price, often funded by life insurance.
See it on the Personal Finance & Estate map →How it works
A buy-sell agreement covers death, disability, divorce, retirement or a falling-out: who may or must buy, a price or valuation formula, and payment terms. In a cross-purchase, owners insure and buy out each other; in a redemption, the company does. Key-person insurance is company-owned coverage on someone whose loss would hurt the business. Main trap: since Connolly v. United States (2024), company-owned policies used for redemptions can raise the estate-tax value of the deceased owner's share.
Why it matters for you
Standard practice for any shared business or family LLC: it avoids forced sales, family fights and partners nobody chose. Have an attorney and CPA review the structure and valuation.
Think of it like
Like a right of first refusal in a partnership agreement, with the cash to exercise it set aside in advance.
Rules, limits and sources (2026)
Connolly v. United States (Supreme Court, 2024); IRC Sec. 101(j) requires employee notice and consent for company-owned policies; operating agreements and California LLC law.
Watch out for
After Connolly, which structure best balances tax, cost and simplicity for small family companies is still being worked out by planners.
Connections (2)
▸Buy-sell agreement & key-person insurance is a business use of Life insuranceStandard practice
How they connect
Business owners use life insurance to fund buy-sell agreements: when an owner dies, the policy pays the cash the company or surviving partners need to buy the deceased owner's share at a set price. Key-person coverage instead pays the company to absorb the loss of someone critical. Either way, a death doesn't force a sale or a fight.
When it applies
Standard in closely held businesses, partnerships and real estate entities; usually set up by the company's attorney with an insurance advisor.
How sure?
Connelly v. United States (Supreme Court, 2024) held company-owned policy proceeds raise the company's estate-tax value, reshaping how buy-sells are structured.
Watch out for
After Connelly, whether cross-purchase or company-owned policies work better depends on the number of owners and estate size; ask your attorney.
▸Buy-sell agreement & key-person insurance sets exit rules for Family LLC / family limited partnershipStandard practice
How they connect
A family LLC's operating agreement typically includes buy-sell terms: who can buy a member's interest at death, divorce, disability or departure, at what price and on what terms. Life insurance often funds the purchase. These rules keep ownership in the family and give appraisers a basis for valuing interests.
When it applies
Written into family LLC and partnership agreements at formation, typically by the family's business or estate attorney.
How sure?
IRC Sec. 2703 limits when a buy-sell price binds the IRS for estate-tax value; family agreements get extra scrutiny.
Watch out for
Whether a family price formula holds up for tax depends on its terms and arm's-length comparisons; Connelly (2024) raised new questions.