Tax Legal Services · Primary-source case analysis

Connelly: Life-Insurance Proceeds Funding a Redemption Increased the Company’s Estate-Tax Value

By Aneeta Mishra and Timothy Chan

Published September 13, 2026

Two brothers owned a closely held corporation and arranged for the company to redeem a deceased brother’s shares using corporate-owned life insurance. The estate and IRS disputed the fair market value of the decedent’s stock.

The insurance proceeds were a corporate asset

At the shareholder’s death, the company received life-insurance proceeds. A willing buyer valuing the company would account for those assets when determining the value of all outstanding shares.

The redemption obligation did not reduce net value

The company’s promise to redeem shares was not an ordinary liability that diminished shareholder value dollar for dollar. Paying fair value for the redeemed shares reduced both corporate assets and the number of outstanding shares, leaving the surviving owner’s per-share interest correspondingly larger.

The estate’s valuation was too low

The estate valued the shares using only the negotiated redemption payment and excluded most of the insurance proceeds from company value. The Court unanimously rejected that approach and affirmed the higher estate-tax valuation.

Agreement design still matters

The decision did not invalidate buy-sell agreements or insurance-funded redemptions. It explains that a redemption structured at fair value does not itself offset the insurance asset for federal estate-tax valuation, so planners must model ownership and funding consequences before death.

Key takeaways

• Include corporate-owned life-insurance proceeds in company value when applicable.
• Do not treat a fair-value redemption obligation as an automatic dollar-for-dollar liability.
• Model the post-redemption share count and ownership percentages.
• Coordinate buy-sell drafting, insurance ownership, and estate-tax valuation.