When a closely held corporation needs a clean path for a departing owner's shares to leave the company - rather than pass to heirs or outside buyers - owners often turn to a stock redemption buy-sell agreement. In that structure, the company is the buyer. The broader label for the same idea across entity types is an entity-purchase arrangement: the business itself purchases the departing owner's interest under rules the owners already agreed to in writing.
This page is about that structure - not a general buy-sell overview. For definitions that cover cross-purchase, hybrid, and other designs, start with the hub on buy-sell agreements for business. Here the focus stays on how entity-purchase and stock-redemption work, how death-triggered company-owned life insurance can fund a redemption the agreement already requires, and how the professional sequence should run before any policy is placed.
Key Takeaways
- A stock redemption buy-sell agreement is an entity-purchase design: the company redeems (buys back) a departing owner's corporate shares under agreed triggers and price rules.
- "Stock redemption" is the corporate label; "entity-purchase" is the broader term that also covers LLC and partnership interest buybacks. Do not call LLC or partnership interests "stock."
- Life insurance owned by the company is typically used only for death-triggered redemptions. Disability, retirement, divorce, and other lifetime exits need separate funding plans.
- A life insurance policy does not create a redemption obligation. The attorney-drafted agreement does. Insurance only supplies cash if and when a covered death occurs and the agreement already requires a purchase.
- Build the plan in order: attorney agreement first, then valuation professional, then CPA on tax questions, then company-owned life insurance for death funding if appropriate - with Gary Cosby limited to the insurance funding conversation.
- Tax outcomes (basis, dividend vs capital-gain character, employer-owned life insurance rules) are fact-specific. A CPA evaluates differences; this guide does not claim universal tax-free treatment or one-size-fits-all basis results.
- The Supreme Court's Connelly decision is a narrow holding about how corporate-owned life insurance can interact with estate valuation of closely held stock. It is not a ban on redemption structures and does not mean cross-purchase is always better.
Stock Redemption vs Entity-Purchase: Precise Terms
Stock redemption describes a corporation redeeming its own shares from a shareholder (or the shareholder's estate) under a buy-sell or shareholders' agreement. After redemption, those shares are no longer outstanding ownership of that departing person. What happens next to the redeemed shares - for example, whether counsel treats them as held by the company or canceled under state law and the governing documents - is a legal detail counsel confirms. There is no single "always treasury stock / always cancel" rule that fits every corporation.
Entity-purchase is the wider structure name. In an LLC or partnership, the company (or partnership) may purchase a member's or partner's interest, not "stock." The economics rhyme with corporate redemption - the entity is the buyer - but the documents, tax analysis, and vocabulary differ. Using precise terms keeps owners, counsel, and the CPA aligned.
Both sit under the larger family of buy-sell agreements. A buy-sell plan is the operational package: triggers, price method, payment terms, and funding - often discussed alongside broader buy-sell planning. Entity-purchase is one way to assign the buyer role to the business itself.
How an Entity-Purchase / Stock-Redemption Structure Works
At a high level, an entity-purchase or stock-redemption design usually does the following:
- Owners and counsel define triggering events in a written agreement - death is often mandatory; disability, retirement, divorce, bankruptcy, or voluntary exit may be mandatory or optional depending on how the agreement is drafted.
- The agreement names the company as the buyer (or gives the company a primary purchase right) for the covered interest when a trigger fires.
- Price and payment terms are fixed in advance - formula, periodic agreed value, appraisal process, or another method counsel and a valuation professional support - so the estate and remaining owners are not negotiating from scratch in a crisis.
- On a covered death (or other funded trigger the agreement requires), the company pays the purchase price and the departing owner's interest leaves that person's estate or control under the contract.
- Remaining owners' percentage interests typically rise because fewer interests remain outstanding. That is an ownership-math outcome, not a promise about tax basis or character of the payment.
Funding is separate from obligation. If the company owns life insurance on an owner, the death benefit may give the company liquidity to complete a death-triggered redemption the agreement already requires. The policy alone does not force a buyback for retirement, disability, or other lifetime exits.
Entity-purchase can simplify administration when there are several owners: one buyer (the company) and, for death funding, policies the company owns rather than a web of owner-to-owner policies. Whether that design fits a given corporation, LLC, or partnership still depends on cash flow, ownership count, insurability, and tax advice - not on a marketing checklist.
Brief Comparison to Cross-Purchase
In a cross-purchase design, co-owners (not the company) buy the departing owner's interest. Each surviving buyer typically needs a path to cash at death, often through life insurance each owner holds on the others. Cross-purchase can change how purchased interests are treated for the buyers' tax basis, but outcomes are not automatic and belong with a CPA.
Entity-purchase keeps the buyer role at the company level. Cross-purchase keeps it at the owner level. Hybrids and "wait-and-see" designs exist as well; they are outside the depth of this page.
For a dedicated walkthrough of the other structure, see cross-purchase buy-sell agreements. Neither structure is universally "better." Choice follows entity type, owner count, funding practicality, and tax analysis - not a blanket rule that redemption is obsolete after Connelly or that cross-purchase always wins.
Death-Triggered Funding With Company-Owned Life Insurance
A stock redemption or entity-purchase agreement is only as workable as the cash behind a required purchase. When the trigger is death, many closely held companies consider company-owned life insurance on each covered owner so the business can receive a death benefit and use proceeds toward the redemption price the agreement already sets. Structuring that coverage is insurance planning that sits alongside the legal and tax work.
Important boundaries:
- Death-triggered only in this funding conversation. Disability, retirement, divorce, and similar lifetime events require separate legal and funding analysis. Disability-related buyout obligations, where applicable, should be reviewed separately with appropriately licensed professionals rather than treated as something the life policy funds.
- Policy ≠ obligation. If the agreement does not require a redemption, insurance proceeds do not create one. Counsel drafts the duty to buy and sell; insurance is liquidity.
- Employer-owned / company-owned life insurance raises notice, consent, and tax-reporting questions that a CPA and attorney should review for the specific facts. This page does not walk through deep statutory tutorials. Premium deductibility for key-person-style or entity-owned arrangements is also a CPA question - keep funding design distinct from tax conclusions.
- Business life insurance in a succession context is one tool among several. Related reading: business life insurance and business continuation insurance when funding sits beside legal and tax work. Broader exit design lives with counsel and, where relevant, business succession and exit planning.
Connelly: Narrow Holding, Not a Ban on Redemption
In Connelly v. United States, the Supreme Court addressed how corporate-owned life insurance proceeds can figure into the estate-tax valuation of closely held stock when a redemption is in view. Read the opinion itself for the holding: https://www.supremecourt.gov/opinions/23pdf/23-146_i42j.pdf.
What that means for planning conversations at a high level:
- The decision is narrow. It does not outlaw stock-redemption buy-sell agreements.
- It does not mean every business must switch to cross-purchase.
- It does mean valuation, agreement language, and insurance ownership need coordinated legal and tax review - especially when company-owned life insurance and redemption obligations interact in an estate context.
Owners should not treat blog summaries as a substitute for counsel reading the case against their documents. No dollar figures from the dispute are needed to take the practical point: structure carefully; do not assume insurance value and redemption price "net out" without professional analysis.
Valuation and Tax Roles (Not the Insurance Agent)
Price mechanics belong with a valuation professional and the drafting attorney: agreed value with updates, formula, appraisal at trigger, or another method that fits the business and the IRS's fair-market-value concepts for closely held interests. Stale prices and informal handshake numbers create disputes and audit risk - the same discipline owners need when they develop a succession plan or exit strategy or prepare for business exit planning.
Tax roles belong with the CPA (and tax counsel where needed):
- Character of redemption payments in the facts at hand
- Basis consequences for remaining owners - do not assume a universal step-up or universal "no basis change"
- Dividend vs other treatment questions where corporate law and tax law meet
- Employer-owned life insurance compliance and reporting
- How estate inclusion and buy-sell price definitions interact after developments such as Connelly
Gary Cosby does not set value, draft the agreement, or give tax opinions. Those lanes stay with the valuation pro, attorney, and CPA.
Professional Team + Gary
A durable entity-purchase or stock-redemption design usually follows this sequence:
- Attorney - drafts or updates the buy-sell / shareholders' / operating agreement: triggers, mandatory vs optional purchases, price process, payment terms, and what happens to redeemed shares or purchased interests under governing law.
- Valuation professional - supports a defensible price method and update discipline.
- CPA - models tax differences for the entity and owners, including insurance-related tax questions at a planning level.
- Company-owned life insurance (death triggers) - if the team concludes death funding at the entity level is appropriate, the company may apply for coverage on covered owners subject to underwriting and any employer-owned life insurance requirements counsel and the CPA flag.
- Gary Cosby - funding only - Gary Cosby is a licensed life insurance agent, licensed in all 50 U.S. states. His role is to help owners explore life insurance options that can fund an attorney-drafted death-triggered redemption or entity-purchase obligation. He does not replace the attorney, CPA, or valuation professional.
That order protects owners from buying policies before the legal duty and price rules exist - and from treating insurance as a substitute for documents and tax advice.
Conclusion
A stock redemption buy-sell agreement puts the corporation in the buyer seat when a covered owner leaves under the contract. Entity-purchase is the same buyer-role idea for LLCs and partnerships, using interest language instead of stock language. Death-triggered company-owned life insurance can supply liquidity for a redemption the agreement already requires; it does not create the requirement, does not fund every lifetime trigger, and does not settle tax or valuation questions on its own.
If your counsel has drafted - or is drafting - an entity-purchase or stock-redemption agreement and you want to discuss life insurance funding for death-triggered obligations, reach out to review options with Gary Cosby. Bring your attorney and CPA into the same conversation so funding matches the documents and the tax plan - not the other way around.
Frequently Asked Questions
Is a stock redemption agreement the same as a buy-sell agreement?
A stock redemption agreement is a type of buy-sell structure: the company redeems the departing owner's shares. "Buy-sell agreement" is the broader term that also includes cross-purchase and hybrid designs. See buy-sell agreements for business for the full map.
What is the difference between stock redemption and entity-purchase?
Stock redemption is the corporate form (company buys shares). Entity-purchase is the broader label for the company buying a departing owner's interest, including LLC or partnership interests. Do not label non-corporate interests as stock.
Does company-owned life insurance create a duty to redeem shares?
No. The written agreement creates purchase and sale duties. Life insurance may fund a death-triggered redemption if the company owns a policy and a covered death occurs. Other triggers need separate planning.
Did Connelly ban stock-redemption buy-sell agreements?
No. Connelly is a narrow Supreme Court holding about valuation issues when corporate-owned life insurance and closely held stock interact in an estate context. It is not a prohibition on redemption structures and does not mean cross-purchase is always preferable. Coordinate documents, valuation, and insurance with counsel and a CPA. Opinion link: https://www.supremecourt.gov/opinions/23pdf/23-146_i42j.pdf.
Do remaining owners always get a basis step-up in a redemption?
No. Do not assume universal step-up, universal "no basis change," or universal dividend treatment. A CPA evaluates the entity, the transaction form, and current law for the specific facts.
Who should I call first - the insurance agent or the attorney?
Start with the attorney for the agreement, then valuation and CPA work, then life insurance funding for death-triggered obligations if appropriate. Gary Cosby's lane is insurance funding only, after the legal and tax framework is in motion.
