# Understanding Business Buy-Sell Agreements and Estate Tax Implications

Buy-sell agreements are a crucial part of succession planning for business owners. These agreements give surviving owners the option or obligation to purchase the shares of a deceased owner in the event of certain triggering events like death. Traditionally, these agreements are structured as either cross-purchase agreements or entity-purchase agreements, with the latter being more common for businesses with multiple owners.

Recently, a ruling by the U.S. Supreme Court in the case *Connelly v. Internal Revenue Service* has brought to light some potential estate tax implications for business owners with entity-purchase agreements funded by life insurance policies. The court ruled that life insurance proceeds paid to an entity-purchase agreement increase the business’s value for estate tax purposes, potentially subjecting owners to higher estate tax liabilities.

To address this issue, business owners may consider creating a special-purpose buy-sell insurance LLC to transfer ownership of the insurance policies. While this strategy can help mitigate estate tax exposure, there are potential risks involved, including IRS scrutiny and challenges to the legitimacy of the LLC.

## Frequently Asked Questions

**Q: What is a buy-sell agreement?**
A: A buy-sell agreement is a legal contract that outlines what happens to a business if an owner wants to sell their interest, becomes disabled, or passes away.

**Q: How are buy-sell agreements funded?**
A: Buy-sell agreements are often funded by life insurance policies on each owner, with entity-purchase agreements typically requiring fewer policies than cross-purchase agreements.

**Q: What is the impact of the *Connelly* ruling on business owners?**
A: The *Connelly* ruling can result in higher estate tax liabilities for business owners with entity-purchase agreements funded by life insurance policies.

## Conclusion

Business owners with entity-purchase agreements funded by life insurance policies may face increased estate tax exposure following the *Connelly* ruling. While creating a special-purpose buy-sell insurance LLC can help mitigate this risk, it is essential to understand the potential challenges and risks involved. Ultimately, business owners must carefully consider their succession planning strategies and consult with legal and financial advisors to ensure they are making informed decisions that align with their long-term goals.