A buy-sell agreement decides, in advance, what happens to an owner’s share of a closely held business when that owner dies, becomes disabled, divorces, retires or simply wants out. Without one, a Massachusetts company can find itself with a surviving spouse as a co-owner, a former spouse holding an interest after a divorce judgment, or a departing LLC member demanding fair value under the statute with no agreed price and no cash to pay it. A Massachusetts buy-sell agreement attorney drafts the triggers, the valuation method and the funding plan so that the business continues and the departing owner or family is paid fairly. Holmes Law is the practice of Michael Holmes, an attorney admitted in Massachusetts and five other states, and it prepares buy-sell agreements for Massachusetts owners remotely.
This page explains the events a buy-sell agreement should cover, the valuation approaches owners choose among, how life insurance funding works after the Supreme Court’s 2024 decision in Connelly v. United States, how Massachusetts divorce and inheritance law affect business interests, the Massachusetts estate tax, and how buyouts connect to restrictive covenants. It sits under the Massachusetts business law practice page and pairs with the page on operating and shareholder agreements. It is general information rather than advice for a particular business, and insurance and tax questions should be reviewed with the owners’ advisers.
Why Massachusetts Owners Need a Buy-Sell Agreement
The statutory defaults in Massachusetts make a buy-sell agreement especially important. For LLCs, G.L. c. 156C, § 36 permits a member to resign on six months’ written notice even when the operating agreement forbids it, and § 32 entitles a resigning member to the fair value of the interest unless a written operating agreement says otherwise. An LLC without a buyout formula therefore faces a potential demand for fair value, with the amount left to negotiation or litigation. When a member dies, § 42 gives the member’s executor or other legal representative the member’s rights for purposes of settling the estate, which can put a family member in the middle of company affairs. For corporations, shares pass under the deceased shareholder’s will or trust, and absent restrictions the surviving owners may have a new co-owner they did not choose. A buy-sell agreement replaces these outcomes with a plan.
Triggering Events
The agreement should list each event that triggers a purchase and say whether the purchase is mandatory, optional for the company or other owners, or optional for the departing owner.
Death
Death is the classic trigger, and it is usually mandatory: the estate must sell and the company or the surviving owners must buy. That certainty protects both sides; the family receives cash rather than an illiquid minority interest, and the survivors keep control. The agreement should coordinate with the deceased owner’s will or revocable trust so the executor or trustee has authority to complete the sale.
Disability
Disability is harder to define than death. The agreement should use an objective test, such as inability to perform the owner’s usual duties for a stated number of consecutive months or a determination under a disability buyout insurance policy, and should include a process for a physician’s certification. It should also address what happens if the owner recovers after the buyout is triggered.
Divorce
In Massachusetts, a divorcing spouse’s claim to a business interest can be significant, as discussed below. A divorce trigger gives the company or the owner-spouse a right to buy back any interest awarded to the non-owner spouse, so the business does not acquire a new co-owner through a divorce judgment.
Departure, Retirement and Termination
Voluntary departure, retirement, termination of employment for cause or without cause, and resignation of an LLC member under § 36 should each be addressed. Many agreements price these differently, for example full value at retirement after a stated age, a discounted value for voluntary departure within the first several years, and a further discount for termination for cause or for resignation in breach of the operating agreement. The agreement should also cover bankruptcy, a charging order under § 40, loss of a professional license, and a deadlock that the owners cannot resolve.
Valuation Methods
The price term is the heart of the agreement and the most common source of disputes.
- Agreed value: The owners set a value and update it periodically. It is simple, but owners often forget to update it, so the agreement should provide a fallback, such as appraisal, if the value is more than a stated period old.
- Formula: A multiple of earnings, revenue or book value. It is predictable but can drift from reality as the business changes.
- Independent appraisal: One or more qualified appraisers value the interest as of the trigger date. It is the most accurate and the most expensive, and the agreement should specify the standard of value, whether discounts for lack of control or marketability apply, and how the appraiser is chosen.
The standard of value deserves attention. Section 32’s default for a resigning LLC member is “fair value,” and whether discounts for a minority interest or lack of marketability apply to a fair value determination can itself become a point of dispute. An agreement that intends to use “fair market value,” which in appraisal practice typically reflects such discounts, or that intends to exclude them, should say so explicitly. The agreement should also specify payment terms, including any down payment, the length of an installment note, interest, security for the note, and restrictions on distributions or new debt while the note is outstanding.
Funding the Buyout With Insurance
A buyout is only as good as the buyer’s ability to pay. Life insurance is the most common funding tool for the death trigger, and disability buyout insurance can fund the disability trigger. There are two basic structures.
Entity Redemption
In a redemption agreement, the company owns policies on each owner’s life and buys back the deceased owner’s interest with the proceeds. It is administratively simple, with one policy per owner regardless of the number of owners. Employer-owned life insurance must also satisfy the federal notice and consent requirements of Internal Revenue Code § 101(j) to preserve the income tax exclusion for the death benefit.
Cross-Purchase
In a cross-purchase agreement, each owner owns policies on the other owners and buys the deceased owner’s interest directly. The surviving owners receive a cost basis in the purchased interest equal to the price they pay, which can reduce gain on a later sale. With several owners, the number of policies multiplies, and a trust or partnership is sometimes used to hold the policies, which raises transfer-for-value questions that need careful handling.
Connelly v. United States (2024)
In Connelly v. United States, 602 U.S. 257 (2024), the Supreme Court unanimously held that, for federal estate tax purposes, a corporation’s contractual obligation to redeem a deceased shareholder’s stock does not offset the life insurance proceeds the corporation receives to fund the redemption. As a result, the insurance proceeds increased the value of the company, and of the deceased shareholder’s shares, for estate tax purposes. The decision has led many owners to reconsider entity-owned redemption structures in favor of cross-purchase arrangements, or to adjust the agreement and policy ownership in other ways. It matters for Massachusetts owners in particular because the Massachusetts estate tax applies at a much lower threshold than the federal tax, so an increase in the value of the business can create or enlarge a Massachusetts estate tax liability even when no federal tax is due. Existing redemption agreements drafted before 2024 should be reviewed.
Massachusetts Divorce and Business Interests
Massachusetts is not a community property state, but its divorce statute is among the broadest in the country. Under G.L. c. 208, § 34, the Probate and Family Court may assign to either spouse “all or any part of the estate” of the other, considering factors such as the length of the marriage, each spouse’s contributions, and the conduct of the parties. Massachusetts courts have treated property owned before the marriage, and property received by gift or inheritance, as potentially part of the divisible estate, depending on the circumstances. A business interest one spouse founded or inherited can therefore be valued and considered in a Massachusetts divorce.
A buy-sell agreement cannot bind the Probate and Family Court on how to divide the marital estate, and a court is not necessarily required to accept the agreement’s formula price as the value of the interest for divorce purposes. What the agreement can do is protect the company: it can require that any interest awarded to a non-owner spouse be sold back at the agreement price, and it can require each owner’s spouse to sign a consent acknowledging the transfer restrictions. Owners who want more certainty about how a business interest will be treated in a divorce should consider a prenuptial or postnuptial marital agreement alongside the buy-sell agreement. Massachusetts also gives a surviving spouse a statutory right to waive the will and take an elective share under G.L. c. 191, § 15, and a buy-sell obligation should be coordinated with the owner’s estate plan so the spouse’s rights and the company’s purchase right do not collide.
Massachusetts Estate Tax Interplay
Massachusetts imposes its own estate tax, and since 2023 it applies to estates exceeding $2 million, with no portability of an unused exemption between spouses. That threshold is far below the federal exemption, so many Massachusetts business owners who owe no federal estate tax will still face Massachusetts estate tax. The value of a closely held interest is often the largest and least liquid asset in such an estate.
A buy-sell agreement affects estate tax in two ways. First, the agreement price may or may not be respected as the value for estate tax purposes; under Internal Revenue Code § 2703 and the related regulations, a price set by agreement among family members is disregarded unless it is a bona fide business arrangement, not a device to transfer property to family for less than full value, and comparable to arm’s-length arrangements. Massachusetts generally values estates by reference to federal rules. Second, the agreement provides the liquidity the estate needs to pay the tax. Because the Massachusetts exemption is not portable, married owners often need credit shelter planning in their trusts, and the buy-sell agreement should be drafted to allow transfers into and out of those trusts. Larger estates may use irrevocable trusts to hold insurance outside the taxable estate, which interacts with the cross-purchase or redemption choice.
Restrictive Covenants in a Buyout
When an owner sells out, the remaining owners usually want protection against that owner opening a competing business. Massachusetts’s Noncompetition Agreement Act, G.L. c. 149, § 24L, sharply limits noncompetes for employees, generally capping them at twelve months and requiring garden leave or other agreed consideration. But the statute expressly excludes noncompetition covenants made in connection with the sale of a business entity or substantially all of its assets, or the disposal of an ownership interest, when the party restricted is a significant owner who will receive significant consideration or benefit from the sale. A buy-sell agreement can therefore include a noncompete that applies when an owner’s interest is purchased, judged under Massachusetts common-law reasonableness standards rather than § 24L. The covenant should be tied clearly to the sale of the ownership interest and supported by the purchase price, and it should be separate from any employment noncompete the same person signed as an employee, which remains subject to the statute. The page on Massachusetts business contracts discusses § 24L in more detail.
Keeping the Agreement Current
A buy-sell agreement is not a one-time document. Owners should revisit it whenever ownership changes, a new owner joins, the business’s value changes significantly, insurance policies are replaced, an owner marries or divorces, or the tax law changes. The agreed value should be updated on the schedule the agreement sets. The agreement should be consistent with the operating agreement or bylaws, the share certificate legends required by c. 156D, § 6.27 for corporations, and each owner’s estate plan.
Frequently Asked Questions
What happens to my Massachusetts LLC interest if I die without a buy-sell agreement?
Under c. 156C, § 42, your executor or other legal representative may exercise your rights for purposes of settling your estate, and your heirs would receive your economic interest. Whether they can become members depends on the operating agreement or the consent of the other members. The business would have no agreed price or funding for a buyout.
Does Connelly mean I should not use a redemption agreement?
Not necessarily, but it means that under a redemption agreement, life insurance proceeds paid to the company increase its value for estate tax purposes. Many owners are moving to cross-purchase or other structures, and anyone with an existing redemption agreement should have it reviewed in light of the decision.
Will a Massachusetts divorce court follow my buy-sell price?
Not necessarily. The Probate and Family Court has broad authority under c. 208, § 34 and is not required to adopt an agreement price. The buy-sell agreement’s main job in divorce is to keep ownership within the business.
Can a buy-sell agreement include a noncompete?
Yes. A noncompete made in connection with the sale of a significant owner’s interest is excluded from the Massachusetts Noncompetition Agreement Act, although it must still be reasonable under common law.
How often should we update the agreed value?
At least as often as the agreement requires, commonly annually. A fallback appraisal clause protects the owners if they forget.
Speak With a Massachusetts Buy-Sell Agreement Attorney
A buy-sell agreement is one of the few documents that protects both the business and the families behind it. Michael Holmes drafts and reviews Massachusetts buy-sell agreements, coordinates them with operating agreements, insurance and estate plans, and helps owners update agreements written before Connelly. To schedule a consultation, contact Holmes Law.