Buy-Sell Agreements for Owner Death, Disability, Divorce, and Departure

By Hank FasthoffJuly 5, 2026

An owner's death, disability, divorce, retirement, or departure can force a private company to answer four questions at once. Who may acquire the ownership interest, who must buy it, what price applies, and how will the buyer pay?

Your buy-sell agreement should state the answer to each question before a triggering event occurs. Texas LLC owners may place those terms in the company agreement or a separate agreement, while corporate owners often use a shareholders agreement together with restrictions in the certificate of formation, bylaws, or share records.

Each Trigger Requires Separate Terms

Death, disability, resignation, termination, retirement, divorce, bankruptcy, and loss of a required professional license affect an ownership interest in different ways. Your agreement should state whether each event creates a purchase option or a mandatory purchase, who may exercise an option, when notice must be sent, and when the transaction must close.

Disability provisions need an objective standard. You should define the required duration, the medical evidence or insurance determination that establishes disability, whether partial disability qualifies, and whether an owner may return before the purchase closes.

Employment termination requires a separate classification. Owners commonly negotiate different pricing for death or retirement, voluntary resignation, termination without cause, and termination for defined misconduct. You should define each category and state whether the purchase price changes, because a dispute over cause can become a dispute over the value of the ownership interest.

Bankruptcy provisions require federal analysis. Bankruptcy law can limit the enforcement of transfer restrictions and clauses triggered by a bankruptcy filing, so you should avoid promising an automatic result that federal law may prevent.

Death and Divorce Under Texas LLC Law

Texas LLC law separates economic ownership from management authority. Under Section 101.106 of the Texas Business Organizations Code, a membership interest may be community property, but a member's right to participate in management is not community property.

When an interest passes through divorce or death, Section 101.1115 treats the spouse or successor as an assignee to the extent of that person's interest. Sections 101.108 and 101.109 generally entitle an assignee to the assigned allocations and distributions without admitting the assignee as a member or granting management rights. Admission as a member requires approval from all members unless the company agreement changes that rule.

Section 101.1115 preserves agreements for the purchase or sale of a membership interest on death or divorce. Your company agreement may require a purchase, establish a valuation procedure, and set payment terms. Spousal consents can also acknowledge transfer restrictions and reduce a subsequent dispute over whether a spouse received notice of them.

Corporate shares require a different process. Sections 21.210 and 21.211 permit reasonable restrictions that require an offer, impose a purchase obligation, require consent, preserve S corporation status, or cause an automatic transfer. Under Section 21.213, a corporation should conspicuously note the restriction on each share certificate or on the notice for uncertificated shares. An omitted notation can make the restriction ineffective against a transferee for value who lacked actual knowledge.

Cross Purchase, Entity Purchase, and Hybrid Structures

In a cross purchase, the remaining owners buy the departing owner's interest. Each buyer may own life or disability insurance on the other owners and use the proceeds to fund the purchase. This structure can become cumbersome when several owners must hold policies on one another.

An entity purchase requires the company to buy or redeem the interest. One company can own a policy on each covered owner, receive the proceeds, and fund the purchase. You should confirm that the company can make a lawful distribution and account for tax treatment and creditor claims.

Under a hybrid agreement, owners designate more than one buyer or funding source. The company may receive the first option, the remaining owners may receive a subsequent option, or the purchase obligation may change if the company lacks enough cash or legal authority to complete the redemption. Your agreement should state the order of those rights and obligations instead of leaving the parties to negotiate after the triggering event.

Tax Consequences Follow the Purchase Structure

A corporate cross purchase generally provides each buyer with cost basis in the shares purchased under Section 1012 of the Internal Revenue Code. When a corporation redeems shares, the remaining shareholders haven't purchased those shares and generally receive no additional basis in the shares they retain.

Section 302 determines whether a corporate redemption receives sale or exchange treatment or is taxed under the distribution rules. Complete termination, percentage reduction, family attribution, and waiver requirements can affect that classification.

An LLC taxed as a partnership requires a separate analysis. Payments to a departing member can implicate partnership distribution rules, payments to retiring partners, outside basis, inside basis, and a possible Section 754 election. Corporate redemption rules shouldn't be applied to an LLC taxed as a partnership without reviewing its tax classification and the character of each payment.

Corporate Life Insurance Under Connelly

In Connelly v. United States, 602 U.S. 257 (2024), a corporation received life insurance proceeds and used part of them to redeem a deceased shareholder's stock. The Supreme Court held that the corporation's fair market value redemption obligation did not offset the insurance proceeds when valuing the deceased owner's shares for federal estate tax purposes.

A fair market value redemption exchanges corporate cash for stock of equal value. That exchange leaves each surviving share with the same economic value, which supported the Court's conclusion that the redemption obligation did not reduce corporate value. The Court limited its analysis to the fair market value redemption before it, leaving other contractual obligations to their terms and facts.

Connelly makes policy ownership and purchase structure part of estate planning. Insurance proceeds received by a company may increase the company's value before the redemption, while insurance held by the purchasing owners may produce a different valuation and basis result. You should coordinate the buy-sell agreement with the owner's estate plan instead of treating the insurance policy as a separate funding document.

For a decedent dying in 2026, the federal basic exclusion amount is $15 million. Prior taxable gifts, deductions, elections, ownership of the policy, and the rest of the taxable estate can affect the estate tax calculation, so the exclusion amount alone doesn't determine the result.

Contract Price and Federal Tax Value

A price that binds the owners under state contract law may receive different treatment for federal estate and gift tax purposes. Section 2703 generally disregards a below market purchase right or a restriction on sale or use when valuing property.

You can qualify for the statutory exception only through a bona fide business arrangement that doesn't serve as a device to transfer property to family members for less than full and adequate consideration. Its terms must also compare to similar arrangements entered in an arm's length transaction. You should document the business purpose, use a defensible valuation method, and review the agreement when ownership or family relationships change.

Valuation Terms Need a Complete Method

Fair market value and fair value can produce different results. Fair market value commonly asks what a willing buyer would pay a willing seller when neither acts under compulsion and both know the relevant facts. Fair value may refer to a statutory or contractual standard that treats control premiums and marketability discounts differently. Your agreement should define the chosen standard.

A fixed price can provide certainty when owners update it on schedule. You should state what happens when the signed valuation is several years old, because an outdated certificate can produce a price disconnected from the business at the time of purchase.

Formula pricing may use revenue, earnings, book value, or another financial measure. You should define owner compensation adjustments, nonrecurring items, debt, excess cash, working capital, insurance proceeds, related party transactions, and the measurement period. A short formula without those definitions invites two accountants to produce two prices.

An appraisal process should identify the valuation date, standard of value, level of value, applicable discounts, appraiser qualifications, access to records, and treatment of goodwill. You should also specify whether the parties will use one jointly selected appraiser or separate appraisers with a process for resolving a material difference.

Funding Must Match the Purchase Obligation

Life insurance can provide cash after an owner's death, but the policy amount may differ from the purchase price when business value changes. Your agreement should address premium payments, policy ownership, beneficiaries, proof that coverage remains in force, use of excess proceeds, and the buyer's obligation if proceeds fall short.

Policy transfers require tax review. Section 101 generally excludes qualifying life insurance death benefits from gross income, but the transfer for value rule can limit that exclusion after a policy transfer unless an exception applies. When a business owns coverage on an employee, employer owned life insurance notice, consent, and reporting requirements can also apply. You should settle policy ownership before issuance and review any transfer when ownership changes.

Installment payments can fund a purchase without insurance or cover a shortfall. Your agreement should state the down payment, interest rate, payment dates, maturity, collateral, guaranties, prepayment rights, default remedies, acceleration rights, and any subordination to senior lenders. The seller's estate or former owner bears credit risk until the note is paid.

Company Purchases Face Distribution Limits

A contractual purchase obligation can't authorize a company to make a payment prohibited by Texas law. For corporations, Section 21.303 prohibits a distribution that violates the certificate of formation, leaves the corporation insolvent, or exceeds the statutory distribution limit.

Texas LLCs face a related balance sheet restriction. Section 101.206 generally prohibits a distribution if the company's liabilities would exceed the fair value of its assets immediately after payment, subject to the statute's specified adjustments.

Your agreement should address the possibility that the company lacks legal authority or available cash to pay the full price at closing. A delayed closing, installment note, purchase by remaining owners, or reduction tied to the maximum lawful payment may provide an alternative, but each choice changes the seller's risk and the tax analysis.

Transfer Restrictions Need Company Records

LLC owners should align the buy-sell agreement with the certificate of formation, company agreement, membership ledger, and any spousal consent. Conflicting documents can produce disputes over voting rights, amendment standards, valuation, and who has authority to bind the company.

Corporate owners should place restrictions in a location authorized by Section 21.210 and make the notation needed for enforceability under Section 21.213. If the corporation issued uncertificated shares, the notice sent under the Texas Business Organizations Code should contain the restriction.

S corporation restrictions should limit transfers to eligible shareholders and protect the one class of stock requirement. Professional entities should address the death, disability, disqualification, or loss of license of an owner whose eligibility depends on professional licensing law.

Guarantees and Transition Terms

A departing owner may remain liable on a lease, line of credit, equipment note, merchant account, or other guaranty after selling the ownership interest. A promise from the company to seek a release doesn't bind the lender, so your agreement should state who must request consent, whether closing depends on release, and what indemnity or security applies when a creditor refuses.

Transition terms should address access to bank accounts, books, passwords, tax records, customer information, intellectual property, insurance, and company property. You should also state who communicates with employees, customers, lenders, and vendors, and when the departing owner loses authority to act for the company.

Any confidentiality, nonsolicitation, or noncompetition covenant must comply with applicable law and match the owner's role. Purchase price allocation can also affect tax treatment and the enforceability analysis, so restrictive covenants and tax provisions should be reviewed together.

What You Should Decide Before Signing

You should identify every event that may trigger a purchase and decide whether it creates an option or an obligation. You should also name the buyer, set the priority among possible buyers, define the valuation method, and state when the price becomes final.

You should coordinate the agreement with insurance ownership, estate planning, tax classification, company records, and lender requirements. If the agreement requires a company purchase, you should provide an alternative for a payment that would violate a distribution limit or exceed available funds.

You should review the agreement when value changes, a new owner joins, an owner marries or divorces, the company changes tax classification, insurance coverage changes, or a lender requires new guaranties. A buy-sell agreement written for the original owners may produce the wrong buyer, price, or tax result after the business changes.

You should use the buy-sell agreement to turn an owner's departure into a defined transaction. That result depends on coordinated trigger terms, transfer restrictions, valuation, funding, tax treatment, and company authority to complete the purchase.