Buy-sell agreement taxation covers the income-, gift-, and estate-tax consequences that arise when ownership interests are transferred under a buy-sell agreement. Tax treatment depends on whether the agreement is structured as a cross-purchase, entity-purchase, or hybrid; the entityTMs tax status; and how policies are owned and beneficiaries are designated. Key considerations include basis step-up for surviving owners, corporate alternative minimum tax exposure, characterization of payments to the departing owner or estate, and whether valuation meets IRS standards. Poorly understood tax consequences can undermine a buy-sellTMs purpose by increasing tax burdens or creating unexpected inequities among owners and heirs.

Advisors address buy-sell agreement taxation by collaborating closely with CPAs and tax attorneys. They review draft agreements to confirm that life insurance ownership and beneficiary arrangements align with desired tax outcomes and avoid transfer-for-value issues. During reviews, they revisit whether valuation formulas and funding still support efficient taxation as the business grows. Case design often includes side-by-side projections comparing cross-purchase and entity-purchase taxation for death benefits and basis. Understanding buy-sell agreement taxation enables advisors to identify when additional tax expertise is needed and to help clients avoid unintended tax traps in otherwise well-meant succession plans.