Michael and Thomas Connelly were brothers running Crown C Supply, a family-owned building supply company in St. Louis. Michael was the President and CEO, holding 77% of the company. Thomas owned the rest.
In 2001, they did what good advisors told them to do: signed a formal Stock Purchase Agreement to keep the business in the family if either brother died. To fund it, Crown C took out $3.5 million in life insurance on each of them.
The company owned the policies, paid the premiums, and the plan was simple: if one brother died and the other didn’t want to buy the shares, the company would redeem them using the insurance proceeds. Clean, common, and widely used.
When Michael died in October 2013, Thomas declined to buy the shares, triggering Crown C’s obligation to redeem them. Michael’s son and Thomas agreed the shares were worth $3 million.
Crown paid that out of the insurance proceeds. The estate filed a tax return reporting Michael’s shares at $3 million and assumed the buy-sell had done its job.
Then the IRS audited.
The IRS looked at Crown C’s value on the date Michael died: $3.86 million in operating assets plus $3 million in life insurance proceeds sitting on the balance sheet equaled $6.86 million. Michael owned 77% of that company. 77% of $6.86 million is $5.3 million, not $3 million.
The IRS issued a deficiency notice for an additional $889,914 in estate taxes. Thomas paid it under protest and sued for a refund. The case went through the District Court, the Eighth Circuit, and all the way to the Supreme Court, where on June 6, 2024, all nine justices agreed with the IRS.
The insurance that was meant to fund the transition had inflated the taxable estate by $3 million the moment Michael died.
The Court’s reasoning was straightforward: estate taxes are assessed at the moment of death, not after the transaction closes. At the moment Michael died, Crown C held $3 million in real assets in the form of insurance proceeds. The company’s obligation to use those proceeds to redeem the shares didn’t cancel them out, because a fair-market redemption doesn’t destroy value, it just moves it.
Crucially, Justice Clarence Thomas didn’t just rule against the estate. He spelled out exactly how the brothers could have avoided this: a cross-purchase agreement, where each owner personally holds a policy on the other. The proceeds would have gone directly to Thomas, never touched the company’s balance sheet, and never inflated Michael’s estate.
That’s the advisor opportunity here.
Any client with a stock redemption agreement funded by company-owned life insurance needs a review. In a cross-purchase structure, the surviving owner receives the death benefit personally and uses it to buy the deceased’s shares from the estate.
The proceeds stay off the company’s books. A variation using Irrevocable Life Insurance Trusts adds another layer of estate tax protection and creditor protection on top. For three or more business partners, a policy-holding LLC or partnership achieves the same result without the administrative headache of cross-ownership.
The Connellys spent a decade fighting a $889,914 tax bill that a different policy structure would have prevented.
That’s the conversation worth having. Quote&Apply makes it easy to illustrate and apply for the right structure on the spot, and for more complex cases, BackNine’s advanced case design team through BOSS is there to model it before anything goes to underwriting.