Lessons Learned After Connelly Reflections from the October 2025 BVResources Webinar
In January 2025, our firm published a blog on the impact of the Connelly v. United States case and how the court’s ruling has influenced business valuations. In October 2025, I had the opportunity to present at a Business Valuation Resources (BVR) webinar titled “Lessons Learned After Connelly: Valuation, Insurance, and Planning in Practice.” The session brought together valuation analysts, estate planners, attorneys, and advisors to examine how the Supreme Court’s 2024 decision in this case is reshaping the valuation and planning landscape. Although the ruling appears straightforward at first glance, its implications for buy-sell agreement design, estate tax exposure, and valuation methodology are significant.
As our prior blog detailed, the Supreme Court unanimously held that corporate-owned life insurance must be included in the value of a business for estate tax purposes. This sounds simple, but as we discussed during the webinar, the decision created new urgency around understanding how life insurance appears on the balance sheet, how redemption arrangements function, and how valuation professionals approach buy-sell structures. Many practitioners are now discovering issues that had gone unnoticed for years.
Clarity Around a Complex Decision
During the webinar, we reviewed the facts of the Connelly case, which involved two brothers who owned all shares of their company. Their buy-sell agreement (BSA) was funded with $3.5 million of corporate-owned life insurance. Although the agreement required regular updates to a Certificate of Agreed Value, none were ever executed, and no appraisal was performed during either brother’s lifetime.
When Michael passed away, the corporation received $3.5 million of insurance and was required to redeem his interest. The estate’s valuation excluded the insurance proceeds and relied on the position taken in Estate of Blount (11th Cir.). The IRS disagreed, asserting that the insurance proceeds were corporate assets and must be included in the company’s value. The Supreme Court ultimately affirmed the IRS position, noting that the redemption obligation was not a liability that reduced corporate value.
The decision surprised many. However, as we noted in the webinar, Connelly did not create new law. It simply reaffirmed existing valuation principles that require non-operating assets, including life insurance, to be included in corporate equity value unless already accounted for elsewhere. This is consistent with the valuation concepts outlined in Rev. Rul. 59-60 and Treasury regulations.
Valuation Takeaways for Practitioners
My portion of the webinar focused on valuation implications that closely mirror the guidance we share with clients when reviewing or valuing buy-sell agreements. Several themes stood out:
- Life insurance is a non-operating asset that must be included in value. Whether the proceeds are allocated for redemption does not change their status as corporate assets. Practitioners should treat entity-owned life insurance consistently with other non-operating assets.
- Many buy-sell agreements no longer reflect their intended purpose. We regularly encounter agreements that contain outdated formulas, vague valuation requirements, unclear pricing language, or poorly designed redemption arrangements. Connelly did not create these problems, but it magnified them.
- Benchmark valuations are an effective planning tool. As in our previous discussions with clients, establishing an initial valuation and periodically updating it can reduce disputes and increase certainty. This approach is consistent with the guidance we provide in our broader writing on valuation and buy-sell planning.
- Use secondary-market indications to benchmark fair value. Policy’s fair value often differs from cash surrender value (CSV) or Form 712. Health status and market demand, in most cases, make CSV an unreliable proxy. Obtain life-settlement bids or an opinion supported by longevity analytics.
- Collaboration among advisors is essential. Because buy-sell agreements involve legal, tax, insurance, and valuation considerations, coordinated review is necessary. Connelly demonstrated what can happen when these areas are addressed independently.
Why This Matters for Private Companies and Advisors
For closely held businesses, the Connelly decision serves as a reminder that buy-sell agreements require regular maintenance. They are not static documents. If an agreement is not reviewed periodically, it can lose its relevance and fail to hold up under scrutiny. For valuation professionals, the decision reinforces the importance of understanding how insurance-funded redemption structures affect equity value, estate tax exposure, and appraisal methodology.
As noted in our earlier writing, effective buy-sell agreements provide an orderly transfer mechanism, restrict ownership appropriately, create liquidity for departing shareholders, and include a clear and supportable valuation process. These principles remain unchanged, but the need for careful drafting and regular review has increased.
Looking Ahead
The strong engagement during the webinar reinforced that advisors are actively adjusting their planning approaches in a post-Connelly environment. As clients revisit their agreements or consider new valuation benchmarks, it is important to ensure that insurance structures, valuation methods, and legal provisions are aligned.
Built on our firm’s many years of institutional experience and knowledge in helping clients structure and update BSAs, we utilize a proprietary database of the terms associated with BSAs to present the topic of “Avoiding Landmines in Buy-Sell Agreements: A Business Valuation Expert’s Perspective” to attorneys and CPAs for CPE credit.
If you are interested in having us present this topic to your professional staff for CPE credit, please get in touch with Joe Orlando at 503-925-5510 or jorlando@exitstrategiesgroup.com for more information.
