What to check and when in a buy-sell agreement's yearly review

A funded buy-sell agreement works only if three things still match on the day an owner dies: the price the agreement sets, the amount of insurance in force and the people who own and are insured under the policies. Each of the three drifts over time. A yearly review catches the drift while it is still cheap to fix. This timeline spreads the review across the calendar so that each task happens when the information it needs is available.

It assumes a buy-sell agreement already exists and is funded with life insurance. For how the structure is built, read funding a buy-sell agreement with life insurance first.

Why a single annual meeting is not enough

Many owners schedule one review meeting and try to do everything in an afternoon. The trouble is that the facts arrive at different times. Year-end financial statements are not ready on January 2. Insurers send annual statements on the policy anniversary, not the fiscal year-end. Premium due dates fall wherever the policy was issued. A health scare or a new partner does not wait for the review date.

So think of the review as a calendar with a fixed core and a few triggers. The core checks happen at set points. The triggers, described near the end, cause an immediate review whenever they occur.

The hypothetical partnership used in the examples

Say three equal partners own a design-build firm. Their agreement, signed some years ago, set a price of $3,000,000 for the whole company, so each one-third share is $1,000,000. They fund it with a cross-purchase plan: each partner owns a $500,000 term policy on each of the other two partners, six policies in all. All figures are invented for illustration.

By the time of the review, the firm is worth more than the agreement says, and one partner's role has changed. The calendar below shows how the owners would find and fix both.

Month 1: set the agenda and gather the documents

Early in the year, one person (an office manager, the company's controller or a partner) acts as the review coordinator. Their first job is to assemble a binder, paper or digital, containing:

• the current signed buy-sell agreement and every amendment,
• the most recent valuation or appraisal, and the formula if the agreement uses one,
• a list of every policy: insurer, policy number, insured, policy owner, beneficiary, face amount, premium and the date it was issued,
• the most recent annual statement or in-force illustration for each policy,
• the cap table or ownership ledger, and the operating agreement or shareholders' agreement,
• any loans secured by the policies.

The reason for starting here is simple: you cannot compare what you do not have in one place. At least half of the problems found in reviews are policies that no one can quickly find.

Month 1 task list. Name the coordinator. Collect the documents. Check that the list of policies matches the list of insureds and owners the agreement requires. Note anything missing and request duplicates from the insurer.

Month 2 or 3: valuation, once the year-end numbers are final

Valuation is the check that matters most, because the price is what the insurance has to fund. Do it when the prior year's financial statements are final.

How the agreement sets the price decides what you do:

• Fixed price. The partners sign a stated number, sometimes updated by a certificate each year. If no one has updated it, the price may be years out of date.
• Formula. A multiple of earnings, revenue or book value. Recalculate it with the new year's figures.
• Appraisal at death. An independent valuation after an owner dies. Insurance cannot be sized to a number that does not exist yet, so the partners need an estimate for planning, even if the appraisal later differs.
• Stated value reset on a schedule. Check that the schedule was actually followed.

Now compare the price with the insurance. In the example, the partners recompute the company at $3,900,000. Each third is $3,900,000 ÷ 3 = $1,300,000. The policies provide $500,000 + $500,000 = $1,000,000 for each partner's death, so the shortfall per share is $1,300,000 − $1,000,000 = $300,000. That gap would have to be paid by the survivors in installments, from the firm's cash flow or from a loan, if the agreement requires the survivors to buy at current value.

The partners then have three choices: update the agreement's price to match the insurance, add coverage to match the price, or accept the gap and say in the agreement how it will be paid. Any of the three is acceptable if chosen deliberately. What causes trouble is not noticing.

There is a related point for companies that own the policies themselves. After the Supreme Court's June 2024 decision in Connelly v. United States, life insurance proceeds the company receives to redeem an owner's shares can raise the company's value for federal estate tax purposes. The federal estate tax basic exclusion is $15,000,000 per person in 2026, so many small-business owners are well below it, but some states tax smaller estates. If either could apply to you, run the question past your CPA and your attorney and see cross-purchase vs entity-redemption buy-sell plans.

Month 2 or 3 task list. Recalculate or re-appraise value. Compare each owner's share with the face amount of the policy that funds it. Decide how to close any gap. Write the decision in the minutes.

Month 4: ownership changes

Next, check whether the people named in the agreement and the people on the policies are still the same.

• Share transfers. Did any partner gift or sell shares, put them in a trust, or add a spouse as a co-owner? If so, the agreement's definition of "owner" may no longer match reality.
• Percentages. If stakes changed, the funding amount per owner must change. Suppose one partner sold 10 percentage points to an employee-partner during the year. The three equal thirds are no longer equal, and the insurance on each partner needs to reflect the new percentages. The method for unequal stakes appears in buy-sell funding when partners differ in age, health and share.
• Entity changes. A conversion from partnership to corporation, or a new holding company, can change who the right owner of a policy is.
• Marital and estate changes. A divorce, a death in an owner's family, or new estate documents may call for a separate legal review of how the shares pass.

The reason to look at this in spring is that changes made during the year are often documented in the tax return or the annual corporate minutes, which are being prepared at this time.

Month 4 task list. Reconcile the ownership ledger with the agreement. Update schedules that list owners and percentages. Flag any transfer for the attorney.

Month 5 or 6: policy review and face amounts

With the valuation settled and ownership confirmed, review each policy.

1. Face amount against need. Use the target from the valuation step. If more insurance is needed, apply while all insureds are healthy.
2. Term length against the horizon. A 20-year policy on a 58-year-old partner might expire while the partner is still active. If it will run out, ask the insurer about the conversion privilege now, because the deadline for converting term to permanent is set by the contract and often falls years before the term ends. Do not guess the date; read the policy or ask the insurer. The mechanics are in converting term life to permanent: how the conversion option works.
3. Right owner and beneficiary. In the cross-purchase example, partner A must own the policies on B and C and be the beneficiary. A policy accidentally titled in the wrong name causes problems at the claim.
4. Policy type. If permanent insurance is used, request the statement showing cash value and loans. A policy loan reduces the death benefit that would fund the buyout; see life insurance policy loans: how they work and what they risk.
5. Contact details. Make sure the insurer has current addresses for the owners, since annual statements and lapse notices go there.

Month 5 or 6 task list. Collect the annual statements. Check owner, beneficiary, face amount and loans for each policy. Compare term expiry dates with each insured partner's expected retirement. Request quotes for increases or replacements, and ask any replacement questions before cancelling anything.

Month 7: premium payment and lapse protection

Premiums are the least glamorous item and the most common cause of failure. In a cross-purchase plan, each owner pays the premiums on the policies they own, and the other owners cannot see whether the payments are made. In an entity plan, the company pays them, and they ride on a bill that may be one of dozens.

Confirm that:

• every premium due in the year was paid and posted, with a bank record,
• the payment method is current (an expired card or closed bank account silently stops payment),
• the insurer's notices go to someone who will act on them,
• the life insurance grace periods and lapses is understood: commonly 30 or 31 days, after which a lapse ends coverage, so a missed payment is easy to miss.

A useful safeguard is to have every partner sign a short annual confirmation that their policies are paid, or to have the company's bookkeeper obtain written verification of status from the insurer. An agreement can also require partners to show proof of payment and let the others pay a missed premium and charge it back.

Month 7 task list. Obtain a status verification from each insurer. Review the payment method. Calendar premium due dates for next year.

Month 8: health, age and insurability

Changes in an insured's health affect two things. First, whether additional coverage is available at a reasonable price. Second, whether existing coverage has a safe way to continue.

Ask each partner, in a way that respects privacy:

• Has anything happened that would change their insurability? They do not have to share details with the others; they can tell the coordinator only that they are or are not still insurable at standard rates, or tell their own advisor.
• Is a term policy approaching expiry for a partner who now has health concerns? If so, the conversion rights under the policy are probably more valuable than the cost of any new policy, because a conversion does not require new proof of health. Check the deadline.
• Are there any riders, such as waiver of premium or accelerated death benefit, that affect the funding? An accelerated benefit paid while an owner is living reduces the amount left at death, which affects the buyout.

This is also the month to ask about disability. A funded death buyout does nothing if a partner is disabled and unable to work. Many agreements also cover disability, usually with a separate funding source such as a disability buyout policy or a savings reserve. Review whether it exists and still fits.

Month 8 task list. Confirm each partner's coverage status. Review conversion deadlines. Revisit disability funding.

Month 9: new partners, departures and retirements

Plan for people coming and going before it happens.

A new partner joins. Each new owner must sign the agreement, and the insurance must be rebuilt around the new group. In a cross-purchase plan with three partners, six policies exist. Adding a fourth makes four partners each own three policies, so twelve are needed. Take the difference: six more policies, three on the new partner and three owned by the new partner on the others. If the partners prefer, the company can own the policies instead, at the cost of the estate tax and creditor questions discussed in cross-purchase vs entity-redemption buy-sell plans.

A partner leaves or retires. The agreement should say what happens to the policies on a departing partner and the policies the departing partner owns. Common arrangements allow the departing partner to buy the policy on their own life, often at a price tied to its cash value. Transfers of existing policies can run into the the transfer-for-value rule, which can make part of a death benefit taxable, so involve a tax professional before any policy changes hands.

A partner's role shrinks. Someone who moves from full-time to part-time may still hold a full share. The agreement might need a different price or trigger.

Month 9 task list. List anticipated joiners and leavers for the next three years. Draft the amendments and the policy changes in advance. Ask your attorney whether a retirement trigger exists in the agreement.

Month 10: tax, entity and legal review

Before year-end, hold a short meeting with the CPA and the attorney. The agenda:

• Does the entity type still fit the agreement? S corporations, C corporations, partnerships and LLCs follow different tax rules at a buyout, and a change in entity can alter the right choice.
• Is the premium treatment still understood? Premiums for these policies are generally not deductible when the payer is a beneficiary.
• For company-owned policies on owner-employees, are the notice and consent records in place under IRC section 101(j) and is Form 8925 being filed? See the notice and consent checklist for employer-owned life insurance.
• Does the estate tax exposure of each owner justify a look at the structure? The estate tax exposure check gives a first pass, and state rules vary.
• Is there anything in the agreement that no longer works, such as a payment schedule the firm could not meet?

Month 10 task list. Hold the professionals' meeting. Send them the binder in advance.

Month 11: sign, date and distribute

Use the last quarter to put changes in writing. Minutes of the review should record who attended, what was checked, what was found and what was decided. If the agreement or any policy changes, make the amendment or the new application at this point so it is effective before year-end. Give each partner and the attorney a copy of the final binder.

Finally, store the originals somewhere accessible after a death: the attorney's office, a safe or a secure shared drive with at least two people who can open it. Surviving partners, an executor and the insurer's claims department will each want a copy, and it is better if the first search is not through a deceased partner's desk.

Month 11 task list. Sign amendments. Record minutes. File copies. Set next year's review dates.

Event triggers that cannot wait for the calendar

Some events call for an immediate review, not a scheduled one:

• a partner's death, disability or serious diagnosis,
• a divorce or marriage of a partner,
• a sale of shares or an offer to buy the company,
• a significant jump or fall in company value,
• a new loan that requires a collateral assignment of a policy,
• notice from an insurer about a lapse, a change in the policy or a premium increase.

For a first walk through what happens after a death, see the first month after a partner dies under a funded buy-sell.

Key takeaways

• Spread the review across the year, matching each check to when the information is available: documents early, valuation after year-end numbers, premium checks mid-year, legal review before year-end.
• Compare the agreement's price with the insurance on each owner. In the example, a $3,900,000 valuation against $1,000,000 of coverage per share leaves a $300,000 gap.
• Verify with the insurer, not by assumption, that every premium is paid and every policy has the right owner and beneficiary.
• Check term expiry dates and conversion deadlines before an insured partner's health or age makes new coverage hard to get.
• Rebuild the policy structure whenever a partner joins or leaves, and run transfers of existing policies past a tax professional first.