Tax Dangers of Having the Wrong Business Buy/Sell Plan

In some cases, “stock redemption” style buy/sell plans (as opposed to “cross purchase” types) can result in needless taxation when one partner dies and the survivor(s) buy them out. Here’s why: with a cross purchase, the tax-free life insurance proceeds are paid to a partner, who then takes them and buys the dead partner’s stock; this purchase increases the surviving partner’s tax basis, so when eventually sells his share, capital gains are smaller and more of the sale proceeds are a tax-free return of basis. With the stock redemption style, the insurance money goes directly to the company, wasting the tax-free benefit of the insurance and keeping the survivor’s tax basis the same. If you have a buy/sell, getting a second opinion and update review could save you a bundle. This would also be a good time for a cost/benefit analysis on the life insurance, to see if you could get more benefit for less money. Camarda provides the services discussed here, too.

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