Glossary

Entity redemption

A buy-sell arrangement in which the business itself buys a departing owner's interest, usually funded by company-owned life insurance on each owner.

Also called: stock redemption agreement, entity purchase agreement, redemption buy-sell, entity-purchase plan

In an entity redemption plan, the company, not the other owners, agrees to buy a departing owner's interest at a price or by a formula fixed in advance. The company usually owns a life insurance policy on each owner, pays the premiums, is the beneficiary, and uses the proceeds to redeem the shares when an owner dies.

Its appeal is simplicity. Owners need one policy each, so five owners need five policies, against 20 under a cross-purchase plan, and a single payer handles the premiums for owners of different ages and health.

The trade-offs are real. Surviving owners' cost basis does not rise, because they did not buy the shares. The policy is a company asset, exposed to the company's creditors. And since Connelly v. United States (decided June 6, 2024), the Supreme Court has held, unanimously, that life insurance proceeds a company receives to fund a redemption count as a corporate asset when valuing the company for federal estate tax, and the redemption obligation does not offset them. For owners of closely held corporations, that can raise the estate tax value of the business, and plans written before 2024 deserve an attorney's and a CPA's review.

cross-purchase vs entity redemption buy-sell plans compares the two structures, cross-purchase agreement defines the alternative, and Funding a buy-sell agreement with life insurance after Connelly covers how to fund either.

Last reviewed October 10, 2026

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Related terms

Buy-sell agreement A contract among a business's owners that sets who can buy a departing owner's share, at what price, and how the purchase is funded. Cross-purchase agreement A buy-sell arrangement in which each surviving owner personally buys a departing owner's share, usually funded by life insurance the owners hold on one another. Key person insurance Life or disability insurance a business owns on a critical owner or employee, paid to the business to offset the financial hit of losing that person. Insurable interest A real financial stake in the thing insured, such that you would lose money if it were damaged or a person died; without one a policy generally cannot pay. Corporate-owned life insurance (COLI) Life insurance a company buys on its employees' lives, with the company as owner and beneficiary, often used to fund benefits or cover key people.

Related guides

Business succession planning and the insurance that funds it How a succession plan uses buy-sell agreements, life and disability insurance and key person coverage to transfer a closely held business smoothly. Funding a buy-sell agreement with life insurance after Connelly Funding a buy-sell with life insurance, disability buyout cover or a sinking fund, and how Connelly v. United States (2024) affects entity redemptions. Cross-purchase vs entity redemption buy-sell plans Compare cross-purchase and entity-redemption buy-sell structures on policy count, basis, creditor risk and estate tax after Connelly v. United States (2024). Disability buy-out insurance: funding a buy-sell when an owner is disabled How disability buy-out policies fund a buy-sell agreement when an owner is disabled, including elimination periods, trigger definitions and tax treatment. Employer-owned life insurance: notice and consent rules under IRC 101(j) What IRC 101(j) and Form 8925 require of employers that own life insurance on employees: written notice and consent before issue, exceptions, fixes, and filing.

Related tools

Buy-sell agreement funding calculator Shows how many life insurance policies a cross-purchase or entity-redemption buy-sell plan needs, and the face amount of each, for up to six owners.