βοΈ Why This Matters Now
Two changes collided in 2024 and 2026 β one from the Supreme Court, one from Washington State β and most buy-sell agreements were built before either one existed.
What changed nationally:
On June 6, 2024, the U.S. Supreme Court ruled unanimously in Connelly v. United States: when a company redeems a deceased owner's shares using company-owned life insurance, that insurance counts as a company asset for estate tax purposes β even though the company is contractually obligated to spend it on the buyout.
In the case itself, the numbers moved like this:
Company value, as reported: $3.86 million
Company value, once the insurance was included: $6.86 million
Additional estate tax owed: approximately $890,000
The agreement worked exactly as written. It still produced a tax bill nobody had planned for β and the ruling applies to any entity redemption agreement funded by company-owned life insurance, in any industry, at any size.
What changed locally, in Washington:
Starting January 1, 2026, the federal estate tax exemption rose to $15 million per person. Washington's exemption didn't move with it β it remains $3 million per person, and it is not portable between spouses.
That gap means a business that feels comfortably under the federal threshold can still land well inside Washington's exposure once the Connelly mechanism is factored in β particularly for companies funding a buy-sell agreement with company-owned insurance.
π The two changes compound. A structure that made sense before 2024 can now create the exact tax exposure it was built to prevent.
