What a Template Agreement Gets Right — and Why That’s Not Enough
A well-written template buy-sell agreement correctly establishes the basic framework: the parties are identified, a triggering event (usually death) is named, and a price or valuation method is stated. For a small business with no co-owners, no S-Corp election, no life insurance funding, and a static value, a template may function adequately.
Most Georgia businesses don’t fit that description. S-Corps are common. Business values change. Partners come and go. Life insurance ownership structures matter for federal estate tax after 2024. A template that worked at signing becomes a liability as the business grows and the law changes around it.
Problem 1 — The Fixed Price Goes Stale and Fails the IRS Test
Template buy-sell agreements almost universally use a fixed price: the parties agree on a dollar amount at signing and the agreement requires the surviving owner to buy the deceased owner’s interest at that price. A fixed price that goes unupdated fails the IRS’s three-prong test under IRC § 2703(b).
To be recognized for estate tax purposes, a buy-sell agreement must satisfy all three requirements:
A bona fide business arrangement — the agreement must serve a legitimate business purpose beyond transferring assets to family members at below-market value.
Not a device to transfer property to family below fair market value — the IRS specifically targets agreements where a fixed price was set years ago and has not kept pace with actual business growth.
Comparable to arm’s-length terms — the agreement’s pricing mechanism must reflect what unrelated parties would negotiate. A fixed price set in 2018 for a business now worth three times as much does not meet this standard.
When a buy-sell agreement fails the three-prong test, the IRS disregards the agreement price entirely for estate tax purposes. The estate is taxed on the IRS-determined fair market value — which may be far higher than the agreement price — while heirs are contractually bound to accept only the lower price. The estate pays tax on value it never receives. The Tax Court confirmed this framework in Bommer Revocable Trust (T.C. Memo. 1997-380), and the IRS continues to apply it.
An attorney-drafted agreement uses a formula or appraisal-based valuation method rather than a fixed price, and requires regular updates to maintain the arm’s-length standard. A template has no mechanism for this.
Problem 2 — The S-Corp Transfer Restriction Is Missing
If your business is an S-Corporation, your buy-sell agreement must include explicit restrictions on who can receive shares at a triggering event. Under IRC § 1361(b)(1), an S-Corp cannot have the following as shareholders:
A corporation — including the business entity itself in certain redemption structures.
A partnership — a deceased owner’s interest cannot pass to a partnership without terminating the S election.
An ineligible trust — only specific trust types qualify as S-Corp shareholders (QSSTs, ESBTs, grantor trusts, and testamentary trusts within a limited window). A revocable living trust qualifies as a grantor trust during the owner’s life — but only if the operating agreement and buy-sell agreement explicitly address the trust’s eligibility.
A nonresident alien individual — an owner whose interest passes to a foreign national beneficiary terminates the election on the date that person acquires the shares.
Under IRC § 1362(d)(2), the S election terminates on the first day an ineligible shareholder holds stock. The termination is retroactive to that date. The business loses its pass-through tax treatment for the entire year, triggering a built-in gains tax and potentially years of amended returns.
Template agreements do not include these restrictions because they are not S-Corp specific. An attorney-drafted agreement for an S-Corp includes a transfer prohibition clause, specifies which trust types are permitted, and requires seller representations about buyer eligibility before any transfer closes.
Problem 3 — The Redemption Structure Wasn’t Updated After Connelly
Before June 6, 2024, a common structure for a two-owner business was an entity redemption agreement: the company owns life insurance on each owner, and at death the company uses the proceeds to buy back the deceased owner’s shares. This structure was considered simpler than cross-purchase and avoided the need for each owner to personally own policies on the other.
The Supreme Court’s unanimous ruling in Connelly v. United States (2024) changed the tax calculus for every existing entity redemption agreement. The Court held:
Life insurance proceeds received by the corporation to fund a redemption are included in the corporation’s fair market value for estate tax purposes. The company’s obligation to redeem the decedent’s shares does NOT offset those proceeds.
The practical effect: when the company receives $3 million in life insurance proceeds to buy back a deceased owner’s shares, those $3 million are added to the company’s value for purposes of calculating what the deceased owner’s estate is worth. The redemption obligation — the company’s promise to spend those proceeds on the buyout — does not reduce the company’s value. The estate is taxed on the inflated value.
In the actual Connelly case, Michael Connelly’s shares were revalued from $3 million to $5.3 million due to $3 million in insurance proceeds received by the company. The additional estate tax: $889,914.
Any redemption-funded buy-sell agreement drafted before June 2024 — including every template available before that date — does not account for this ruling. An attorney-drafted agreement in 2025 or later uses a cross-purchase structure, an insurance LLC, or an updated entity redemption structure with specific Connelly protections. A template does not. See Funded vs. Unfunded Buy-Sell Agreements in Georgia for a full breakdown of funding structures and post-Connelly considerations. For a side-by-side comparison of both structures and how to choose between them, see Cross-Purchase vs. Entity Redemption Buy-Sell Agreements in Georgia.
Problem 4 — Triggering Events Don’t Cover All Exit Scenarios
Template buy-sell agreements typically cover one triggering event: death. An attorney-drafted agreement covers the full range of events that force an ownership change:
Disability — a permanent disability that prevents an owner from participating in the business. Templates rarely define “disability” in a way that aligns with the business’s insurance coverage, which creates a gap between when the insurance pays and when the agreement triggers.
Divorce — without a buy-sell agreement provision covering divorce, a co-owner’s spouse can receive a business interest through property division. Your co-owner’s divorce becomes your problem. Georgia is an equitable distribution state — marital property is divided fairly, which may include a share of the business.
Bankruptcy — a co-owner’s personal bankruptcy can result in a trustee taking ownership of their business interest. A properly drafted buy-sell agreement includes a right of first refusal triggered by bankruptcy proceedings.
Voluntary exit — what happens when a co-owner simply wants to leave? A template that only covers death leaves the remaining owners with no mechanism to compel a sale or establish a price for a voluntary departure.
Each missing triggering event is a scenario where ownership can transfer to an unwanted party without any mechanism for the remaining owners to respond. The eight most common structural failures in Georgia buy-sell agreements — including missing triggering events — are covered in 8 Problems With Buy-Sell Agreements Georgia Business Owners Miss.
Problem 5 — The Funding Mechanism Isn’t Specified or Is Wrong
A buy-sell agreement that names a price but provides no funding mechanism is legally valid and operationally useless. When the triggering event happens and there is no money to complete the buyout, the agreement does not execute. The deceased owner’s interest stays in the estate. The surviving owner has a contractual obligation but no money to fulfill it.
Template agreements either omit the funding mechanism entirely or include generic language about “arranging appropriate funding” — which is not a funding mechanism. An attorney-drafted agreement specifies the exact funding structure, names the policies, identifies the owners and beneficiaries, and coordinates with the insurance structure to ensure proceeds arrive in the right hands at the right time.
For a two-owner business post-Connelly, that typically means a cross-purchase structure where each owner holds a policy on the other — not an entity-owned redemption policy. The attorney ensures the funding structure, the ownership structure, and the agreement work together. A template cannot make these connections.
What an Attorney-Drafted Agreement Covers That a Template Doesn’t
An attorney-drafted buy-sell agreement for a Georgia business covers the agreement itself and the ecosystem around it:
S-Corp transfer restrictions that prohibit transfers to ineligible shareholders and specify which trust types qualify — protecting the S election at every triggering event.
An IRC § 2703-compliant valuation method — formula-based or appraisal-based rather than fixed price — that satisfies the arm’s-length standard and holds up to IRS scrutiny when the estate is valued.
A post-Connelly funding structure that routes insurance proceeds through the correct ownership arrangement and avoids the estate tax inflation the Supreme Court confirmed in 2024.
Full triggering event coverage — death, disability, divorce, bankruptcy, and voluntary exit — with definitions that align with the business’s insurance coverage and operating agreement.
Coordination with the operating agreement and trust structure so all three documents address the same triggering events in consistent ways. A buy-sell agreement that conflicts with the operating agreement produces a legal dispute instead of a smooth transition.
At The Hive Law, a standalone buy-sell agreement costs $1,500 to $3,000 as a flat fee. For a business with a co-owner and meaningful value, that is the cost of one avoided dispute — before attorney fees, probate costs, or estate tax exposure are factored in. See the buy-sell agreement pricing page for a full breakdown. For the complete succession planning picture, see the business succession planning service page.
