If your business partner dies without a buy sell agreement in place, their ownership share usually passes to their estate, not to you. That can leave you with a new partner you never chose, or a grieving family that needs to be paid, and a business that is worth a lot on paper but has no cash set aside to buy them out.
Most owners assume the surviving partners simply absorb the shares. That is usually not how it works. Unless your operating agreement or a separate buy sell agreement says otherwise, the share follows your partner's estate plan, and whoever inherits it now has a stake in a company they may know nothing about.
The cash problem nobody plans for
Picture the week after a partner passes away. The family needs money. You need control of the business so you can keep running it. Everyone agrees the shares should be bought out, and then everyone realizes the same thing: nobody has the check.
In many closely held businesses, the value is tied up in operations, equipment, receivables and customer relationships, not sitting in a bank account. Pulling a large buyout out of working capital can strain the business at the exact moment it has lost one of its leaders.
Timing can make it harder. For larger estates, there may also be a federal estate tax, and the estate tax return and payment are generally due nine months after the date of death. A family facing that deadline has every reason to push for a fast, fair price, and a surviving partner without cash has very few good answers.
How a buy sell agreement funded with life insurance solves it
This is exactly what a buy sell agreement funded with life insurance is for. The two pieces do different jobs.
The agreement sets the rules. It spells out the price, or how the price will be determined, and who buys the shares when an owner dies. That removes the guesswork and the negotiation from one of the hardest moments a family and a business can go through.
The insurance delivers the money. A life insurance policy pays out right when the cash is needed, so the buyout can actually happen. The family gets paid, and the business stays with the people who are running it.
Having been a business owner myself, I know how easy it is to push this kind of planning down the list. There is always a customer, an employee or a payroll that feels more urgent. But this is one document that protects everyone you care about on both sides of the table.
What many older agreements get wrong
Even owners who did the planning years ago should take a fresh look. In 2024, in Connelly v. United States, the Supreme Court ruled that when the company owns the life insurance policy used to fund a buyout, the payout can raise the value of the business for estate tax purposes.
That matters because one common way to set these agreements up was to have the company own a policy on each owner and use the proceeds to redeem the shares. After that ruling, many advisors now have the owners hold policies on each other instead, often called a cross purchase arrangement. Each structure comes with its own tradeoffs, especially when there are more than two owners, so this is not a change to make on your own.
What to do this month
If you have a partner and no buy sell agreement, start that conversation now, while everyone is healthy and on good terms. If you already have one but have not reviewed it in years, pull it out and check three things: what price or valuation method it uses, who is obligated to buy, and where the money is supposed to come from.
Then put your attorney, your CPA and an insurance professional in the same room, so the legal terms, the tax treatment and the policies all line up. A buy sell agreement is also part of being ready for an eventual exit, so it belongs on your exit readiness checklist alongside your financials and your succession plan. And send this to your business partner so you can review it together.
I am not a CPA or attorney. Review tax and legal decisions with yours.
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Read the transcript
If you own a business with a partner, what happens to the company if one of you dies tomorrow?
Most owners assume the others just absorb the shares. Usually, that's not how it works. Without an agreement, your partner's share goes to their estate. So now you have a new partner you never chose, or a family that wants to be paid.
And here's the problem. The business is worth a lot on paper, but there's no cash to buy them out. The family needs money, you need control, and nobody has the check. For larger estates, there may also be a federal estate tax, generally due nine months after death.
That's what a buy sell agreement funded with life insurance is for. The agreement sets the price and who buys. The insurance delivers the cash right when it's needed. The family gets paid, and the business stays with the people running it.
But here's what a lot of older agreements get wrong. In 2024, the Supreme Court ruled that when a company owns the policy, the payout can raise the value of the business for estate tax. So many advisors now have the owners hold policies on each other instead.
If you haven't reviewed your agreement in years, do it with your attorney, your CPA and an insurance professional in the same room, and send this to your business partner for review.
