A buy-sell agreement is a promise. If one owner dies, becomes disabled, retires, or leaves, the others will buy that owner's share at a price the agreement sets. A promise to pay is worth exactly as much as the money behind it.
That is the part that gets skipped. The document says the surviving partners will buy out the family at fair value. It does not say where the money comes from. Then the day arrives, the business has a few months of operating cash, and the family is waiting on a check nobody can write.
We covered what a buy-sell agreement does and why co-owners need one in what happens to your Tulsa business if a partner leaves or dies. This article is about the next question: how you actually pay for it.
Start with what triggers the buyout
Funding has to match the event. Most agreements name some version of these triggers:
Death of an owner
Long-term disability
Retirement
Voluntary departure or termination
Divorce, where an ex-spouse could otherwise end up holding an ownership interest
Bankruptcy of an owner
Each one needs money from a different place. Life insurance pays on death and nothing else. A retiring partner gives you years of notice. A partner who quits on bad terms gives you none. A funding plan that only covers death leaves the rest of the list to luck.
Life insurance: the usual answer for death
For the death trigger, life insurance is the most common funding tool because it pays a known amount at the exact moment the buyout comes due.
There are two basic ways to set it up, and the difference matters more than it did a few years ago.
Cross-purchase
Each owner buys a policy on the other owners. When one dies, the survivors collect the death benefit and use it to buy the deceased owner's share from the family.
With two owners, that is two policies. It gets heavier as the group grows: three owners need six policies, four owners need twelve. Premiums can also be lopsided. If one partner is 62 and the other is 41, the younger owner pays a lot more to insure the older one, and the agreement should account for that.
The surviving owners also get a higher tax basis in the shares they buy, which can matter when they sell later.
Entity purchase, also called redemption
The company owns one policy on each owner. When an owner dies, the company collects the proceeds and buys back the share. Fewer policies, simpler administration, and premiums come out of the business.
Plenty of closely held companies chose this structure for exactly those reasons. Then the Supreme Court decided Connelly.
What the Connelly decision changed
In Connelly v. United States (June 2024), two brothers owned a building-supply company. The company held life insurance on each of them to fund a redemption. When one brother died, the company collected the proceeds and bought back his shares.
The Court held that the insurance proceeds counted toward the company's value for estate tax purposes, and that the company's obligation to use that money to buy the shares did not reduce the value. The deceased brother's shares were valued higher, and his estate owed more tax.
What that means in practice:
Company-owned policies used to fund a redemption can push up the value of the deceased owner's interest.
For owners whose estates are near the federal exemption, that can create a tax bill the family did not plan for.
Cross-purchase structures, or arrangements where the policies are held outside the company, avoid the specific problem Connelly created.
Some context so this does not cause panic. The federal estate tax exemption is $15 million per person in 2026 under the One Big Beautiful Bill Act, indexed for inflation going forward, and Oklahoma has no estate tax of its own. Most Oklahoma business owners will not owe federal estate tax either way. Connelly matters most for owners with larger businesses, or businesses plus real estate plus retirement savings that add up fast.
It also matters for a reason that has nothing to do with tax: it is a good prompt to pull your agreement out of the drawer. If your company owns the policies and the agreement was signed before 2024, it deserves a look. If you want a second set of eyes on how yours is structured, schedule a complimentary 90-minute consultation and bring the agreement and the policy statements.
Disability: the trigger nobody funds
Owners are more likely to become disabled during their working years than to die during them, and disability is the trigger agreements handle worst. Life insurance pays nothing while your partner is alive and unable to work.
Disability buyout insurance exists for this. It pays a lump sum or installments after a defined waiting period, often a year or more, so the remaining owners can buy out the disabled owner's share. The agreement and the policy need to use the same definition of disability and the same waiting period. If the agreement says the buyout triggers at six months and the policy waits eighteen, you have a year where the obligation exists and the money does not.
Installment notes and cash reserves
Not every trigger can be insured. Retirement, departures, and divorce are usually funded some other way.
Installment notes
The remaining owners or the company pay the departing owner over time, often several years, with interest. This is the most common way to handle a retirement or a voluntary exit. The risk sits with the seller: they are now a creditor of a business they no longer control. A well-drafted note includes security, limits on what the business can do while the note is outstanding, and what happens if payments stop.
Cash reserves
Some businesses set money aside each year for a future buyout. It works for planned events, but the cash sits on the balance sheet where creditors can reach it, and it is hard to resist spending in a lean year.
Most solid plans combine methods: insurance for death and disability, a note for retirement and departure, and some flexibility in the agreement for the event nobody predicted.
The price is part of the funding
Funding and valuation are the same problem from two directions. If the agreement sets a price nobody can pay, the funding fails. If the funding is sized to a number from years ago, the family gets underpaid.
Agreements usually set the price one of three ways:
A fixed price the owners agree to and update. Simple, and it goes stale the first year nobody remembers to update it.
A formula, such as a multiple of earnings or book value. Predictable, though a formula picked at founding may not fit the business ten years later.
An appraisal at the time of the trigger. Usually the most accurate, slower, and harder to insure against in advance because nobody knows the number yet.
Whatever method you use, set a schedule to revisit it. An annual review of the price and the policy amounts together keeps them from drifting apart.
Questions to answer before you sign
Use this list with your partners, your CPA, and your insurance advisor:
Which triggers does our agreement cover, and what funds each one?
Who owns the policies, and does that structure create a Connelly problem for us?
Do the policy amounts match the current price in the agreement?
If we use a disability trigger, do the agreement and the policy define disability the same way?
If a buyout is paid in installments, how is the seller protected?
What happens to the policies when an owner leaves for a reason other than death?
Does each owner's estate plan know this agreement exists?
That last one gets missed. When the buyout pays, your family receives cash instead of a business interest. Your trust should be ready to receive it, and your business succession planning should line up with your personal plan. If your ownership interest is still in your individual name, read how to put your LLC in a trust in Oklahoma before you finalize anything.
If your agreement started as a template or a draft from an online tool, have it reviewed. A contract review will catch the gaps between what the agreement promises and what the funding can deliver.
Frequently asked questions
What is the most common way to fund a buy-sell agreement?
Life insurance for the death trigger, usually combined with installment payments for retirement and departure. Many businesses also add disability buyout coverage.
Is a cross-purchase better than an entity redemption after Connelly?
For many closely held businesses, cross-purchase avoids the estate tax valuation problem Connelly created. It also adds policies as the owner group grows. The right structure depends on the number of owners, their ages, and the size of their estates.
Does Connelly apply to LLCs?
The case involved a corporation. The same valuation logic is a real concern for an LLC that owns policies to fund a redemption of a member's interest, and you should plan with that in mind.
How often should we update the buy-sell price and insurance?
At least once a year, and any time the business changes significantly, such as a new owner, a large contract, or an acquisition.
What if one partner cannot qualify for life insurance?
That owner's share can be funded through a sinking fund, an installment note, or a larger installment component in the agreement. The agreement should say so directly.
Do we need an attorney if our CPA already set this up?
Your CPA handles the tax side. The agreement itself is a legal contract tied to your operating agreement, your ownership structure, and each owner's estate plan. Both should be at the table.
Make sure the promise can be kept
The day a buy-sell agreement matters is usually one of the worst days a business and a family will have. The agreement should make that day simpler: the money is there, the price is clear, and the family gets paid without a fight.
We listen first, then help you match the funding to the promise. Schedule your complimentary 90-minute consultation and bring your current agreement and policy statements, or call us at 918-918-9479.