Our company will redeem a deceased owner's shares using insurance. Is that obligation automatically offset against the insurance value?
A corporate redemption obligation does not automatically offset company-owned life-insurance proceeds in valuing a deceased owner's shares.
By AE Tax Advisors Team · Updated October 28, 2026
A corporate redemption obligation does not automatically offset company-owned life-insurance proceeds in valuing a deceased owner's shares. In Connelly, the Supreme Court rejected that offset for a fair-market-value redemption. Insurance liquidity and the estate-tax value of the insured owner's shares must be modeled together.
A specific business-owner situation
A corporation buys insurance to fund a deceased shareholder's redemption. The owners assume the policy adds no net company value because the proceeds are earmarked for the purchase.
Illustrative example, not a client result.
What to establish before filing
- Identify who owns and receives the policy.
- Review the redemption agreement.
- Model valuation and liquidity after the insurance proceeds are considered.
Which fact changes the answer?
A corporate redemption differs from a cross-purchase arrangement in which surviving owners hold the policies. That structural difference can change the valuation and basis consequences.
A mistake to avoid
Do not subtract a fair-value redemption obligation dollar-for-dollar simply because the cash has a planned use.
Records that support the decision
- Buy-sell agreement.
- Policy ownership records.
- Independent valuation assumptions.
The decision to document
Revisit the funding and valuation model before assuming the existing policy amount covers the estate's needs.
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Related questions
- I will buy my partner's shares using life-insurance proceeds. Does the stock basis automatically equal the policy payout?
- Can we transfer a business life policy between owners without reviewing the transfer-for-value rules?
Sources and editorial context
- Section 101: life-insurance proceeds and exceptions
- IRS Publication 559: estates and income in respect of a decedent
- U.S. Supreme Court: Connelly v. United States
General educational information prepared with AI assistance. No individual professional review is claimed. Apply the relevant tax-year rules to the actual records. Editorial policy · AI disclosure.