Buy-Sell Agreement Tax Planning: The Agreement Should Determine More Than Who Buys the Business When Someone Leaves

A buy-sell agreement should determine more than who purchases an owner’s interest. Funding method, valuation, redemption structure, basis consequences, insurance ownership and transfer-tax rules can change the economic result for the business and remaining owners.

Redemption and cross-purchase structures produce different tax results

A corporate redemption may leave remaining shareholders without a direct basis increase in their shares, while a cross-purchase can increase buyer basis. Attribution and §302 rules can also affect whether a redemption receives sale treatment.

Valuation language must work when the event occurs

Fixed prices and formulas become stale. A credible agreement should address valuation method, appraisal process and update procedures, with legal counsel determining enforceability.

Life insurance funding requires tax review

Corporate-owned and individually owned policies create different cash-flow and basis effects. Section 101(j) notice/consent and Form 8925 reporting may apply to employer-owned life insurance, and transfer-for-value rules can affect death-benefit exclusion.

Connelly changed the corporate-owned insurance valuation discussion

In Connelly v. United States, the Supreme Court held that a corporation’s contractual redemption obligation did not offset corporate-owned life-insurance proceeds in valuing the corporation for federal estate-tax purposes. Existing redemption-funded arrangements should be reviewed in light of the actual facts and current law.

The agreement belongs in the succession file

Coordinate the buy-sell with entity documents, estate plan, beneficiary designations, insurance ownership and business valuation. A tax analysis cannot determine the legal sufficiency of the agreement.