Who Gets the Band Name? What a Buy-Sell Agreement Really Does for Your Business

Think back to your favorite band. The one whose cassette practically lived in your car deck until the tape wore thin, the vinyl or CD that could have burned a hole in the player. For a while, a group of people in a garage made something that felt bigger than any one of them. Then the inevitable happened. Somebody quit. The lead singer went solo. The drummer, sadly, passed away. And suddenly the questions nobody wanted to ask in the good years came due all at once. Who owns the name? Who controls the catalog? Who gets to keep playing the songs, and who gets cut a check and shown the door? Who fills in for the missing band members in the meantime, can the band function without those roles?

A closely held business works the same way. You and your partners built something real, often the most valuable thing any of you owns at the time. But ownership is not a guitar you can just hand to the next person who walks in. When an owner leaves, retires, divorces, or dies, the interest has to go somewhere. The only real question is whether you decided where ahead of time, or whether you left it to chance, the courts, and a few relatives who may never have set foot in the place.

That is what a buy-sell agreement is for. It is the agreement the smart bands sign before they make it big, not after the breakup.

The Contract You Write While Everyone Still Likes Each Other

The buy/sell agreement is a binding contract among the owners of a business, or between the owners and the company itself, that spells out exactly how an ownership interest changes hands when a triggering event occurs. The triggers are the self selected milestones and or misfortunes you can see coming if you are honest with yourself: death, disability, retirement, divorce, bankruptcy, or a partner simply deciding it is time to walk. 

The cleanest way to picture it is a prenuptial agreement for the business. Nobody signs a prenup because they expect things to fall apart. They sign it because they are clear-eyed enough to make the hard decisions while everyone is still on good terms and thinking rationally. A buy-sell agreement does the same work. It sets the rules of the exit while the relationships are intact, the company is humming, and no one is grieving, angry, or lawyered up.

There are two common ways to structure one, and the difference matters more than it used to thanks to recent legal developments in the Supreme Court. In what is called a redemption arrangement, the company itself buys back the departing owner's interest. Redeeming the value of the owners interest into the company. In a cross-purchase arrangement, the remaining owner(s) buy that interest individually. Both can work beautifully. Both can also create unexpected tax consequences if no one thought through the funding, which is exactly where the recent Supreme Court decision changed the math. More on that shortly.

What Happens To Your Business When There Is No Plan

Here is the part that should grab your attention. If you do not have an agreement, your share of the business does not vanish or quietly pass to your partner or spouse. It becomes an asset of your estate, and it travels through probate like everything else you own. That means delay, public exposure of private business affairs, and a real possibility that a controlling interest lands in the hands of someone with no interest in running the place and no idea about the logistics.

The most famous cautionary tale of this generation makes the point better than any statute. When Prince died in 2016, he left no will and no plan for an estate that included a priceless music catalog. What followed was roughly six years of litigation, dueling appraisers, and a drawn-out fight with the IRS over what the whole thing was actually worth, all before a single heir saw a meaningful dime. The lesson is not that Prince was careless. The lesson is that the absence of a plan does not mean the questions go away. It just means a court answers them, slowly, expensively, and in public.

Now shrink that down to your business. Your spouse inherits a stake in a company they have never operated, suddenly partnered with people they may barely know. Your remaining partners are forced into business with someone who would rather just be cashed out. The sudden change in circumstances may leave the remaining partners in no position to complete a buyout. The momentum you spent decades building stalls at the exact moment the company needs steady hands. A buy-sell agreement short-circuits all of it. It moves the interest along a path you chose, on terms you set, with the liquidity to back it up funded by life insurance. 

The Valuation Curveball: Connelly v. United States

If your business is substantial enough that estate taxes are in play, we encourage you to know about a case the Supreme Court decided on June 6, 2024. In Connelly v. United States, two brothers owned a closely held company and had a buy-sell agreement funded with company-owned life insurance, a setup so common it is practically the default. When one brother died, the company collected the insurance proceeds and used them to redeem his shares, just as planned.

The IRS, and ultimately a unanimous Supreme Court, said the life insurance proceeds counted as a company asset that increased the firm's fair market value for estate tax purposes. The company's obligation to spend that money buying back the shares did not offset it. In plain terms, the very insurance meant to fund a clean transition inflated the taxable value of the deceased owner's stake, and the estate owed more than anyone expected. An asset gained after death was deemed part of the estate, and thus the company’s total value, leading to increased tax costs.

The ruling did not rewrite the tax code, but it did rewrite a lot of assumptions that had been relied on in previous buy/sell agreements. It is the reason structure now matters as much as intent. The same dollars, arranged as a cross-purchase agreement or held in a separate trust rather than owned by the company, can produce a very different result. This is not a problem to solve with a template you found online at midnight.

The backdrop matters too. Thanks to the One Big Beautiful Bill Act signed in July 2025, the federal estate tax exemption is now a permanent $15 million per individual and $30 million for married couples in 2026. That means most estates will never owe a federal estate tax at all. But for owners of higher-value businesses, the Connelly trap is alive and well, and the planning has to be deliberate.

Why This Is a Team Sport

An agreement that says the right things but has no money behind it is a promise with nothing to back it.

Here is where people get tripped up. They assume a buy-sell agreement is purely a legal document, so they call a lawyer and consider it handled. The drafting is only half the job. An agreement that says the right things but has no money behind it is a promise with nothing to back it. Like a great EP no label ever pressed, it sounds good and goes nowhere.

A well-built buy-sell agreement is the product of two professionals working in coordination. The attorney drafts the contract: the triggering events, the transfer mechanics, the valuation method, and the structure that keeps the whole thing tax-efficient and enforceable. The financial planner and insurance professional handle the part that makes it real. They determine how the purchase will actually be funded, most often through life insurance and sometimes disability coverage, and they size the policies to a defensible valuation of the business rather than a number scribbled on a napkin.

That coordination is not something to ignore. It is the difference between a plan that works and a plan that backfires. Connelly turned in part on the fact that the business had no professional appraisal locked in when the agreement was executed, which left the door open for the IRS to assign its own, larger number. Don’t assume your estate is smaller than it is and end up with the unwelcome surprise of additional taxation. When your attorney and your financial planner are talking to each other, the valuation method is established up front, the funding is structured to match the legal form, and the policies are owned by the right party for the tax result you want. When they are not talking, you get a document and a policy that were never introduced, and your family and business partners discover the mismatch at the worst possible moment.

At Cornerstone Legal, we are accustomed to sitting at that table alongside a client's financial and insurance advisors. The goal is one coherent plan, not three good ideas that never met. Solo singers, guitarists, and drummers are fine, but the real magic happens when they come together in coordination.

The Real Payoff Is Peace of Mind

Strip away the statutes and the structures and you are left with something simpler. A buy-sell agreement removes the guesswork at the precise moment people are least able to handle it. It protects the partners who stay, spares the family from inheriting a job they never wanted, and lets you step back, whether by retirement or something less expected, knowing the business and the people who depend on it are accounted for.

If you operate in Washington, there is one more reason not to wait. The state imposes its own estate tax with a threshold far below the federal exemption, which means thoughtful structuring can matter here even for businesses well under that $15 million federal line. As a firm serving clients across the Pacific Northwest and beyond, we know the right approach depends on your state, your entity, and your particular circumstances.

You spent years writing the songs. Decide now who gets to keep playing them. If you own a piece of a closely held business and have never put a buy-sell agreement in place, or yours has not been reviewed since before Connelly, consider a conversation with a Cornerstone Legal attorney. The best time to make these calls is while everyone still likes each other.