Connelly’s quiet effect on trust-owned business interests

For decades, closely-held business owners with two or three shareholders relied on a single estate-tax move: the corporate-owned redemption agreement. The company buys a life insurance policy on each owner. The insurance pays out at death. The company uses the proceeds to redeem the deceased owner’s shares from the estate. The structure was tax-clean as long as the redemption obligation offset the insurance proceeds for valuation purposes. In June 2024, the Supreme Court closed that escape route. Connelly v. United States, 602 U.S. 257 (2024), held unanimously that life insurance proceeds payable to a closely-held corporation to fund a stock redemption increase the corporation’s value for federal estate tax purposes. The redemption obligation does not offset, because the obligation extinguishes when the shares are bought back. The number that gets valued is now larger. This piece is the trust-funding read on Connelly: what the holding does to existing plans, the three structural alternatives the case pushes households toward, and what advisors should ask of any household with closely-held stock in a revocable trust.

What Connelly actually held

Connelly v. United States arose from a small business in St. Louis. Brothers Michael and Thomas Connelly co-owned Crown C Supply Co., a building-materials company. They signed a stock-redemption agreement that obligated the corporation to buy back the deceased brother’s shares from his estate at death. The company purchased life insurance on each brother to fund the buyback. Michael Connelly died in 2013 owning roughly 77 percent of the company. The corporation collected $3.5 million in life insurance proceeds and redeemed Michael’s shares from his estate.

The IRS valued the corporation including the life insurance proceeds. Michael’s estate reported a much smaller value, arguing that the redemption obligation offset the insurance proceeds dollar for dollar. The Eighth Circuit ruled for the IRS in 70 F.4th 412 (8th Cir. 2023). The Supreme Court took the case to resolve a split with the Eleventh Circuit’s 2005 decision in Estate of Blount, which had reached the opposite result. Justice Thomas wrote the unanimous opinion, decided June 6, 2024.

The Court held that a contractual obligation to redeem shares is not a true liability that reduces a corporation’s value, because the obligation is satisfied by paying out for an asset of equal value (the redeemed shares). The corporation pays the cash to the estate. The estate hands back the shares. The corporation’s aggregate value is unchanged by the redemption. Insurance proceeds the corporation collects to fund the redemption, however, do increase the corporation’s value for the brief window before the redemption settles, because the proceeds sit on the corporate balance sheet alongside the obligation that extinguishes itself. For estate-tax valuation under IRC § 2031, the snapshot is taken at death. At death, the corporation holds the insurance proceeds and owes a redemption that has not yet happened. The proceeds count.

The number that gets valued is now larger.

Why corporate-owned redemption was the default

Closely-held businesses with two to four owners often need a buy-sell agreement to keep ownership inside the original group at death. Three structural choices have always existed: corporate-owned redemption, cross-purchase among shareholders, or third-party-owned insurance. The corporate-owned redemption was the most common because it was operationally the simplest. One policy per owner, owned by the company, premiums paid out of company cash flow. When an owner died, the company collected and redeemed.

Cross-purchase is operationally heavier. With four shareholders, a cross-purchase requires twelve policies (each shareholder owns a policy on each of the other three) just to handle the death of any one owner. Premium tracking, beneficiary designations, and policy ownership coordination get unwieldy. Cross-purchase also creates the basis-step-up advantage that redemption does not, but for households with two-shareholder buy-sells, the operational simplicity of redemption usually won.

Third-party ownership through an insurance LLC or an irrevocable life insurance trust solves both problems by moving the policies out of the corporation entirely. The structure was always available. It was less common because it added a separate entity to the planning, with its own tax filings, its own management, and its own coordination overhead. Pre-Connelly, the marginal complexity rarely justified the marginal benefit for two-shareholder closely-held companies. Post-Connelly, the math runs the other way.

The three structural alternatives after Connelly

Connelly did not invalidate any single structure. It changed the relative attractiveness of three structures that already existed. The decision tree for any closely-held household after June 2024 looks like this.

The cross-purchase and insurance-LLC structures are now the default recommendations from the closely-held estate planning bar for new agreements. Existing corporate-owned redemption agreements are not automatically broken. They produce a higher estate-tax bill than they would have if structured differently. For any household where the higher bill is material, a restructure is the move.

When the question surfaces during trust funding

Trust funding is the operational moment when an estate plan touches every asset class the household owns, including closely-held business interests. The funding step on a closely-held interest involves three documents: an assignment of the interest into the trust, a certificate of trust delivered to the corporation, and any consents required by the buy-sell agreement or the operating documents. The buy-sell agreement is in the file because every funding letter for a closely-held interest references it.

When the buy-sell agreement is a corporate-owned redemption agreement drafted before June 2024, the funding moment is the right time to ask the post-Connelly question. The agreement still works, in the sense that it still redeems the shares. The estate-tax consequence at the grantor’s death is now larger than the household and the original drafting attorney expected. A household that funds a closely-held interest into a revocable trust without examining the buy-sell post-Connelly is funding the wrong number into the trust’s eventual valuation.

The trust-funding moment is also the natural restructure trigger. The household is already coordinating documents, signatures, and counsel time. Adding the buy-sell review and any restructure to the same engagement is operationally cheaper than running it as a separate project later. Households that handled funding before June 2024 should expect the buy-sell review to come up during the next annual review or amendment.

The advisor’s job at the funding moment is to surface the question and route it. The legal analysis runs through counsel; the advisor coordinates the household’s tax preparer, the buy-sell drafting attorney, and the funding letter delivery so that whatever restructure happens lands in a single coherent document set rather than three uncoordinated revisions.

Five advisor diligence questions for any household with closely-held stock

If you have a household with closely-held stock either already in a revocable trust or scheduled to fund into one, these five questions surface the post-Connelly exposure.

• What is the buy-sell agreement structure on the household’s closely-held interest? Corporate-owned redemption, cross-purchase, insurance-LLC, or third-party-trust-owned?
• When was the agreement drafted, and has it been reviewed by the drafting attorney since June 6, 2024?
• Is there life insurance funding the buyout, and if so, who owns the policies and who is the named beneficiary?
• What is the rough estate-tax exposure if the closely-held interest were valued under the Connelly framework today, including any insurance proceeds that would be on the corporate balance sheet at death?
• Has the household’s tax preparer been brought into the buy-sell conversation, or is the agreement sitting in a file the tax preparer has not seen?

The five questions are not legal advice. They are the diligence prompts that get the legal advice ordered from counsel, with enough context that the counsel engagement is short. Households that answer "we have a corporate-owned redemption drafted in 2017, the company owns the policies, we have not reviewed it since" need a referral to the drafting attorney with a copy of the Connelly opinion attached.

What Connelly does not change

Connelly is narrow. The case leaves several things unchanged, and they are worth naming because they tend to come up in the household conversation.

The closely-held discount framework under Revenue Ruling 59-60 still applies. Lack-of-control and lack-of-marketability discounts on closely-held interests remain available, and the appraisal methodology that supports them is unchanged. Connelly bears on the gross value before discounts; the discounts run on top of whatever number the Connelly framework produces.

The deferred-payment election under IRC § 6166, which lets the estate pay closely-held-business estate tax in installments over up to 14 years, is unaffected. Households that face a larger estate-tax bill post-Connelly may rely more heavily on the deferral.

The basic mechanics of trust funding for business interests are unchanged. The assignment-into-trust workflow, the certificate of trust delivery to the corporation, and the consent requirements under the operating agreement are all the same documents the funding letter system has always handled.

And the federal estate tax exemption itself is unchanged. The 2017 Tax Cuts and Jobs Act exemption ($13.99 million per individual for deaths in 2025, indexed) still applies. Households below the exemption threshold do not face estate tax even after Connelly. The case affects households at or above the exemption threshold and households with closely-held interests large enough to drive their gross estate over the threshold.

How Bancroft handles closely-held business interests in the funding workflow

The Asset Inventory captures every household closely-held interest along with the ownership entity, the percentage of ownership, and any associated buy-sell agreement information the household provides. When the advisor sets the funding strategy on the asset to RETITLE_TO_TRUST, the funding letter system generates a BUSINESS_INTEREST_ASSIGNMENT funding letter. The letter handles the assignment of the interest into the trust, identifies the buy-sell agreement on file, and lists the consents typically required by the operating documents. The advisor batches the letter with the rest of the funding packet and approves it on the Trust Funding tab. The household downloads the packet from the client portal, signs and records the assignment, and uploads proof of completion to the encrypted Digital Safe vault.

The buy-sell language analysis is human work. A household with a corporate-owned redemption agreement that was drafted before June 2024 should expect the file to route for attorney review at $299. Counsel examines the buy-sell against the post-Connelly framework and recommends whether to retain the redemption structure, restructure into a cross-purchase, or move the insurance to a separate LLC. Restructures that change the buy-sell agreement run through counsel and the household’s tax preparer. The trust-side updates that follow from the restructure (amended assignments, updated certificates of trust, refreshed funding letters) are handled through Bancroft’s amendment and restatement system at no fee.

The funding-letter mechanics are covered in our essay on what banks actually want. The legal-tech background for how attorney review interacts with template-driven document preparation is in the attorney-reviewed vs attorney-prepared piece.

The bottom line

Connelly v. United States is one of the quieter SCOTUS estate-tax decisions of the decade because the holding only touches a narrow technical question. The advisor consequence is broader than the holding suggests. Every household with closely-held stock and a corporate-owned redemption buy-sell now has a different estate-tax math at death than the one their original drafting attorney calculated. The trust-funding moment is the operational point where the post-Connelly question gets surfaced and routed. If you run the five diligence questions at the next annual review or funding event, your households will not be surprised by an estate-tax bill this case made larger.