The Million Dollar Easter Egg Hiding in Your Clients’ Buy-Sell Agreements

The Supreme Court Just Turned a Technical Detail Into a Tax Time Bomb—Here’s What You Must Do Now

In the world of business succession planning, there’s now a legal Easter egg you absolutely cannot afford to miss.

We’re not talking about a pleasant surprise.

This one comes wrapped in a Supreme Court ruling—and it blew a $1 million hole in a business owner’s estate.

What’s the “Easter Egg”?

In tech and pop culture, an Easter egg is a hidden message. In this case, it’s a buried clause in your client’s buy-sell agreement or ownership structure of a life insurance policy—one that, if not handled correctly, could:

• Inflate the value of the business for estate tax purposes
• Nullify the intended tax-neutral treatment of insurance proceeds
• Trigger an unexpected — and massive — estate tax liability

This isn’t theory. This is Connelly v. United States and its Supreme Court precedent.

The Connelly Case, Unpacked

Connelly involved two brothers, a business, and a buy-sell agreement funded by life insurance. Simple enough, right?

But when one brother died, the business redeemed his shares using the life insurance death benefit. The IRS argued that the life insurance proceeds—owned by the business—increased the company’s value. The company tried to offset that value with the redemption liability.

The Court said: ‘Nope.’ The redemption obligation doesn’t count.

Result? The deceased owner’s estate owed $1 million more in taxes.

And here’s the twist: The problem wasn’t the idea—it was the execution. The business didn’t follow the valuation method laid out in its own agreement.

How Many of Your Clients Are Sitting on This Easter Egg?

If they have:

• An entity redemption buy-sell agreement, and
• The business owns the policy, and
• They haven’t had a recent formal valuation,

…then they are one audit away from a very expensive surprise.

The Fix: Strategies That Work Post-Connelly

Smart advisors are shifting to:

• Cross-purchase agreements to avoid entity inclusion
• Manager-managed LLCs (MMLLCs) to own policies outside the business
• Documented valuations that stand up to IRS scrutiny

This isn’t optional anymore—it’s urgent.

📅 Don’t Get Caught Unprepared. Join the Roundtable.

On April 15th at noon ET, we’re diving into Connelly, advanced buy-sell strategies, policy ownership pitfalls, and how to audit your clients’ planning before the IRS does it for you.

👉 Register now for the Advanced Planning Business Roundtable

No fluff. No theory. Just proven strategies and real-time solutions for financial pros working with business owners.

💡 Your Takeaway?

The Connelly case isn’t just a headline—it’s a check-engine light flashing on every life-insurance-funded buy-sell agreement in the country.

Don’t assume it’s handled. Don’t assume it’s correct.

Be the one who finds the Easter egg before it hatches into an IRS audit.

🎯 Join us April 15th. 🔗 Register today and turn this tax trap into a growth opportunity.

By: Joshua Rhem DMI Vice President – Life Sales

781.919.2325 or jrhem@dmi.com

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Joshua Rhem has over 15 years of experience in Insurance and Investment services, with experience as an IAR, an insurance producer, and wholesaler. Throughout his career, Josh has always been especially interested in making sure that insurance is viewed as a vital component of a well-constructed comprehensive financial plan. Learn more about Josh here.

FOR FINANCIAL PROFESSIONAL USE ONLY. Click for disclosures.