Cross-Purchase or Entity Redemption After Connelly: Why Policy Ownership Matters for Mexican Owners of U.S. Companies

After Connelly, entity-owned life insurance can create an estate-tax valuation problem precisely when the policy was intended to create liquidity. For a Mexican shareholder whose U.S. corporate stock is U.S.-situs property, the ownership choice can be decisive.

Connelly Did Not End Entity Redemptions

The Supreme Court’s 2024 decision in Connelly v. United States did not make entity-redemption buy-sell agreements invalid, and it did not hold that cross-purchase arrangements are always superior. It established a narrower but consequential valuation rule: when a corporation receives life-insurance proceeds and is obligated to redeem a deceased shareholder’s shares at fair market value, the redemption obligation does not automatically offset the proceeds when the corporation is valued at the shareholder’s death.

That rule changes the default planning conversation. Before Connelly, many business owners and advisers treated entity-owned insurance as a neutral source of redemption cash. After Connelly, advisers must ask whether the insurance will increase the value of the company at the same instant the deceased owner’s interest is valued for estate-tax purposes.

For Mexican owners of U.S. corporations, the issue is amplified because domestic U.S. corporate stock is generally U.S.-situated property for a nonresident noncitizen’s federal estate. The ordinary filing threshold is only $60,000, and the United States has no estate or gift tax treaty with Mexico.

What the Supreme Court Actually Held

Crown C Supply purchased life insurance on its shareholders so the company could redeem shares at death. When Michael Connelly died, the company received $3.5 million of insurance proceeds and used $3 million to redeem his interest. The estate argued that the redemption obligation offset the insurance proceeds when valuing the company. The Supreme Court disagreed.

The Court valued the company at the moment of death, before the redemption payment. A hypothetical buyer of the deceased shareholder’s interest would take into account the corporate cash represented by the insurance proceeds. An obligation to redeem the shares at fair market value did not reduce the value of the shares because the redemption exchanged cash for an ownership interest of corresponding value.

The opinion is important, but it should be stated precisely. Connelly addressed a company’s obligation to redeem shares at fair market value. Different contractual liabilities, fixed-price agreements, debt obligations, and valuation provisions may present different questions, and any buy-sell price must also survive the general estate-tax rules governing restrictions and valuation agreements.

A Cross-Border Illustration

Consider Sierra Norte Manufacturing, Inc., a U.S. corporation with an operating value of $12 million before insurance. Diego, a Mexican citizen and resident who is not domiciled in the United States, owns one-third of the stock. Two U.S. partners own the balance. The corporation owns a $4 million policy on Diego and is obligated to redeem his shares at death.

When Diego dies, the company receives $4 million. In a simplified Connelly-style valuation—before discounts, other assets, liabilities, and appraisal adjustments—the company could be worth $16 million immediately before the redemption. A one-third interest would correspond to approximately $5.33 million, not the $4 million value implied by the pre-insurance enterprise value. The insurance intended to fund the redemption has increased the value of Diego’s U.S.-situs stock at death.

Now change only the ownership of the insurance. Each surviving partner owns a $2 million policy on Diego and uses the combined $4 million to purchase Diego’s shares. The operating company never receives the $4 million, so the insurance does not enter the company’s value. The surviving owners acquire the shares directly and generally receive cost basis in the interests purchased.

The illustration is intentionally simple and is not an appraisal. Its purpose is to show the direction of the Connelly effect: entity-owned proceeds can increase company value before redemption, while properly held cross-purchase proceeds generally remain outside the operating company.

How the Structures Compare

Why Cross-Purchase Often Deserves the First Model

For a Mexican nonresident noncitizen holding stock in a U.S. corporation, a cross-purchase can address two problems at once. First, proceeds owned and received outside the operating company generally do not increase the company’s value under the Connelly analysis. Second, the surviving purchasers generally take cost basis equal to the amount paid for the acquired shares under the ordinary cost-basis rule.

That basis may matter materially in a later sale. In an entity redemption, the surviving shareholders own a larger percentage of the company after the redemption but generally do not receive a corresponding cost-basis increase in their existing shares. The company has used cash to eliminate the deceased owner’s interest, while the survivors’ historic basis usually remains unchanged.

Cross-purchase treatment can also align the commercial transaction with the tax form: the survivors buy stock from the estate, rather than relying on a corporate distribution to qualify as a sale or exchange under the redemption rules.

Why Cross-Purchase Is Not Automatically the Answer

The disadvantages become more pronounced as the ownership group grows. With n owners, a conventional reciprocal arrangement may require n multiplied by n minus one policies. Four owners can require twelve policies; six owners can require thirty. Age, health, ownership percentage, and premium capacity may differ, making equal funding difficult.

Cross-border ownership adds further questions. A Mexican owner may be asked to own a U.S. policy on another owner’s life. Advisers must analyze insurable interest, carrier foreign-national guidelines, where the policy can be solicited and delivered, premium-payment mechanics, the situs and value of a policy the owner may hold at death, and the tax treatment of proceeds in the owner’s country of residence.

A later transfer of a policy from the company to an owner, from one owner to another, or into a trust or partnership can trigger the transfer-for-value rule unless an exception applies. The statutory exceptions are helpful, but they are not a substitute for planning the ownership chain before policies are issued.

When an Entity Redemption May Still Be Rational

An entity redemption may remain appropriate when central administration is essential, the owner group is large, premium obligations would be uneven, the entity is the only practical premium payer, or the business agreement requires the company—not individual owners—to acquire the interest. Entity type also matters. Partnerships and entities taxed as partnerships do not always produce the same basis and transfer-for-value consequences as corporations.

If an entity redemption is retained, the response to Connelly should not be denial; it should be measurement. The company should model the pre-death enterprise value, policy proceeds, redemption price, potential estate-tax value, available valuation discounts, estate liquidity, and the identity and domicile of the deceased owner. The amount of insurance may need to fund both the purchase price and a possible tax or administration burden.

The buy-sell valuation mechanism also deserves renewed attention. A stale fixed price, an ambiguous formula, or an agreement that merely declares a value without a credible appraisal process can fail commercially and may fail to control estate-tax value. Periodic independent valuation and a clearly documented methodology are more defensible than a number that no one revisits.

The Foreign Owner’s Estate-Tax Profile Changes the Stakes

For U.S. citizens and persons domiciled in the United States, the federal estate tax generally reaches worldwide property, subject to the applicable exclusion and deductions. For a nonresident noncitizen, the federal estate generally reaches U.S.-situated property under a different regime. Domestic corporate stock is expressly treated as U.S.-situated under section 2104, while section 2105 treats amounts receivable as insurance on the life of the nonresident noncitizen as outside the United States.

This asymmetry is central. A death benefit payable on Diego’s life may be outside his U.S. gross estate as a direct asset. If his U.S. corporation owns the policy, however, the proceeds can increase the value of the domestic stock that is inside his U.S. gross estate. Connelly therefore operates through valuation rather than by reclassifying the policy proceeds as the decedent’s property.

Citizenship, visa status, income-tax residence, and estate-tax domicile should not be used interchangeably. A Mexican citizen can have enough U.S. connection to qualify for foreign-national underwriting while remaining a nonresident noncitizen for estate-tax purposes. Conversely, a person who spends substantial time in the United States may have income-tax residency or domicile issues that materially change the analysis.

The Redemption or Sale Has Its Own Tax Character

The estate or heirs receive payment for an ownership interest, not life-insurance proceeds. In a corporate redemption, section 302 and the attribution rules of section 318 determine whether the payment receives sale-or-exchange treatment or is treated as a distribution. If distribution treatment applies to a foreign recipient, dividend withholding and treaty documentation can become central. A waiver of family attribution may be available in limited complete-termination cases, but it requires strict conditions and ongoing non-interest rules.

A direct cross-purchase generally presents a cleaner stock-sale form, but cross-border tax does not disappear. Article 13 of the U.S.–Mexico income-tax treaty permits U.S. taxation of certain gains, including specified real-property interests and, under its terms, certain dispositions where the seller held at least 25 percent of the company during the preceding twelve months. Domestic-law charging provisions, basis, withholding rules, and Mexican taxation must still be analyzed.

For Mexican recipients, the distinction between insurance proceeds and sale proceeds is especially important. Mexico’s Article 93 insurance exemption is limited by statutory conditions and, on its face, to proceeds from Mexican-organized and authorized insurance institutions. It does not convert the purchase price paid by surviving shareholders or a U.S. corporation into exempt insurance income.

Managing the Policy Count

When a conventional cross-purchase would require too many policies, planners sometimes use a trusteed cross-purchase arrangement or a dedicated limited liability company taxed as a partnership. A trustee or vehicle owns one policy per insured, receives proceeds, and coordinates the purchase obligations of the surviving owners. This can reduce administrative burden while keeping insurance outside the operating company.

The vehicle must be designed carefully. Advisers should address beneficial ownership, voting and withdrawal rights, allocation of premiums, changes in ownership, creditor exposure, transfer restrictions, tax classification, transfer-for-value exceptions, death-benefit allocation, and the treatment of departing or newly admitted owners. In a U.S.–Mexico structure, the vehicle’s residence and classification in both countries can be as important as its U.S. federal tax classification.

A trusteed or partnership approach is an implementation technique, not a universal solution. It should be compared against the simplicity and control of entity ownership and the directness of individual cross-ownership.

The Agreement and the Insurance Must Operate Together

A policy does not create a complete buy-sell plan. The agreement should state whether the purchase is mandatory or optional, identify the buyer and seller, define triggering events, establish the valuation process, address insufficient or excess proceeds, allocate premium obligations, govern policy ownership and beneficiary changes, and provide a method for replacing coverage if a carrier declines or a policy lapses.

The agreement should also anticipate what happens when one owner becomes a U.S. resident, returns to Mexico, transfers shares to a trust or holding company, divorces, becomes uninsurable, retires, or ceases active employment. Each event can alter policy ownership, section 101(j) status, attribution, treaty entitlement, or estate-tax exposure.

A Twelve-Point Review for U.S.–Mexico Owners

1. Classify every owner. Confirm citizenship, income-tax residence, and estate-tax domicile.
2. Confirm the entity. Record its legal form, tax classification, and place of organization.
3. Inventory U.S.-situated assets. Include domestic corporate stock held by every foreign owner.
4. Obtain a current valuation. Measure enterprise value before adding insurance proceeds.
5. Model Connelly. Quantify the potential effect on each insured owner’s interest.
6. Compare structures. Test entity redemption, direct cross-purchase, and any trusteed or partnership alternative.
7. Model premiums after tax. Treat them as nondeductible unless a specific U.S. or Mexican rule is confirmed.
8. Complete section 101(j) steps. Obtain notice and consent before issuance when applicable and calendar Form 8925.
9. Protect the section 101 exclusion. Review every contemplated policy transfer before it occurs.
10. Obtain Mexican advice. Address insurance contracting, policy ownership, and beneficiary taxation.
11. Analyze the purchase payment. Apply sections 302 and 318, the U.S.–Mexico treaty, FIRPTA where relevant, and Mexican law.
12. Revalue and re-test. Repeat the analysis after material changes in ownership, value, residence, or policy performance.

The Better Default Is to Model Before Choosing

Connelly has made it difficult to justify an entity redemption merely because it requires fewer policies. For Mexican owners of U.S. companies, the low nonresident estate-tax threshold and the situs rule for domestic corporate stock give the valuation issue unusual weight. A cross-purchase should ordinarily be modeled before entity ownership is selected.

That is a starting presumption, not a conclusion. The best structure is the one that coordinates insurability, policy administration, valuation, basis, creditor protection, U.S. estate-tax situs, U.S. income-tax treatment, Mexican tax and insurance law, treaty provisions, and the commercial expectations of the owners. The insurance should serve the agreement. The agreement should reflect the tax model. And the tax model should follow the money all the way to the ultimate recipient.

1. Authorities were reviewed through September 11, 2026. The links below are provided for reader reference; the discussion is a planning overview, not a substitute for jurisdiction-specific advice.
2. 26 U.S.C. § 101, Certain Death Benefits
3. 26 U.S.C. § 264, Certain Amounts Paid in Connection with Insurance Contracts
4. Connelly v. United States, 602 U.S. 257 (2024)
5. IRS Form 8925, Report of Employer-Owned Life Insurance Contracts
6. IRS Guidance for Nonresident Noncitizen Estates
7. 26 U.S.C. § 2104, Property Within the United States
8. 26 U.S.C. § 2105, Property Without the United States
9. Mexico Ley del Impuesto sobre la Renta, Article 93
10. Mexico Ley del Impuesto sobre la Renta, Article 27
11. Mexico Reglamento de la Ley del Impuesto sobre la Renta, Article 51
12. Mexico Ley de Instituciones de Seguros y de Fianzas, Articles 20 and 21
13. United States–Mexico Income Tax Convention
14. 26 U.S.C. § 302, Distributions in Redemption of Stock
15. 26 U.S.C. § 318, Constructive Ownership of Stock
16. 26 U.S.C. § 1012, Basis of Property
17. 26 U.S.C. § 897, Disposition of Investment in U.S. Real Property
18. IRS Estate and Gift Tax Treaties List

This article is intended for general informational purposes and does not constitute U.S. or Mexican legal, tax, insurance, investment, or valuation advice. Cross-border insurance and business-succession arrangements should be reviewed by qualified advisers in each applicable jurisdiction before a policy is solicited, issued, transferred, or used to fund a transaction. Reading this article does not create an attorney-client relationship with Anderson Law Group.