Accounting
Buy-sell agreements and their tax and insurance considerations for surviving partners
There are two significant reasons for a client to have an updated and funded buy-sell agreement. One is to allow the surviving partner to maintain sole control of the business if one of the owners or partners were to die prematurely or become disabled.
The other is to provide an immediately available sum of tax-free dollars to pay the deceased partner’s family for their share of the business or practice. A written agreement would establish an updated value of the business, how much money the deceased’s partner’s family would receive, over what period of time and most importantly, where the funds needed to pay the deceased partner’s family would come from.
Having discussed the value, terms, mechanics and funding beforehand would not only provide for an orderly transition of the business but also avoid unnecessary disputes settled by costly litigation.
Doing so would also prevent key people, employees, vendors and customers from leaving the business, thereby maintaining the full value of the business or practice for the surviving partner and their family. Lastly, a properly drafted, funded and annually updated valuation of the business could peg the value of a business for estate tax purposes.
There are basically three types of buy-sell agreements: cross-purchase, stock redemption, and wait and see. For the purposes of this article, we’ll focus on the two most popular: the cross-purchase and stock redemption. The wait and see has components of both types of agreements but doesn’t require a decision until death occurs. The cross-purchase agreement is an agreement made directly between the partners of a business or practice. Each partner is the owner, beneficiary and premium payor of the other partner’s life Insurance policy. As always, there are benefits and detriments to any planning options and the cross-purchase is no exception.
In a cross-purchase agreement, the distinct tax benefits to the surviving partner are that at their subsequent death, their family would receive a step up in basis to the current value of the business. For example, if a business is initially valued at $1million and then over 20 years later it’s worth $3 million, there would be no capital gains tax at the subsequent death of the surviving partner on the $2 million gain as the surviving partner in a cross-purchase agreement would receive a stepped-up basis at death to the $3 million.
One of the detriments of such an agreement is that the value of the personal shares of the business are subject to the claims of the creditors. In addition, if there are three partners, there could be as many as six life insurance policies required, and 12 policies if there were four partners involved. That aside, there would be disparities as to the cost of a particular amount of life Insurance coverage for a partner in their 60s in excellent health, as opposed to a partner in their 70s in not such good health. Equalizing the individual costs for a business or practice with four or more partners could be an administrative burden.
The second type of a buy-sell agreement is called a stock redemption. In this type of an agreement the mechanics work differently. Instead of the partners owning the policies on each other’s lives, paying for one another’s premiums and being each other’s beneficiary, the business is the owner, premium payor and beneficiary of each partner’s policy. This type of arrangement makes the administration easier and equalizes the different policy charges as well as reduces the number of policies required to provide the insurance coverage for several partners. It also shields the value of the shares of the business from personal creditors.
However, the detriment to that type of an agreement is severe in that at the death of a partner there is no step up in basis in the value of the business for the surviving partner’s family at their passing. Using the prior example, if the initial value of the business or practice was $1 million and then over 20 years later, upon the death of the first partner, the value of the business was determined to be $3 million, the estate of the surviving owner would be required to pay a capital gains tax of $2 million with a basis of $1million rather than the $3 million it would have been with a cross-purchase agreement.
The Supreme Court ruling on June 6 in the case of
Buy-sell agreements frequently utilize life insurance to provide the funding mechanism for payment of the purchase price upon death, disability, retirement or a specifically mentioned triggering mechanisms outlined in the buy-sell agreement such as divorce, unresolvable differences or bankruptcy. This source of funding is designed to have the surviving partner receive the tax-free death benefit in the most tax efficient manner, which would then be used to purchase the shares of the deceased partner from their family.
Since we’ll be focusing on the use of four different types of life insurance, a brief explanation of each type of life insurance policy that could be used is in order. Term life insurance can be purchased with a five- to 40-year term of coverage where the death benefit, the premium and the duration of coverage are all guaranteed. Term insurance provides a death benefit only and is the most popular and least expensive type of coverage simply because the coverage contractually ceases to exist at the ages of 80 to 82. As a result, only 2% of term insurance coverage is ever paid out as a death benefit. However, for business owners who intend to retire or sell their business or practice before the age of 80, and only want to be protected in the event of death, term insurance is a good choice. Since a disability is more likely to occur than a premature death, it’s a good idea to address a disability by funding it with a disability buyout policy.
If one wants to guarantee their coverage beyond age 82, they can utilize a guaranteed universal life insurance policy, which for a higher annual premium can guarantee the death benefit, cost and duration of coverage up to age 120. It should be noted that the longer one wants their coverage guaranteed to last, the higher the cost.
For those business owners and partners of a practice that want to utilize life insurance for its living benefits as well as its death benefit, they can use a whole life policy with a guaranteed premium and tax- free death benefit, based on a fixed return. Another option would be a variable life policy. This type of policy’s return is based on the returns of the stock market and is not guaranteed but may provide a higher or lower return. In either case, in addition to having provided an income tax-free death benefit during the partner’s working years, the policy could have accumulated a significant build-up of tax deferred internal cash value. Then at retirement (beyond age 59 and a half) when the death benefit is no longer needed, the partners could begin withdrawing the policy’s cash value to supplement their retirement on a 100% tax-free basis, utilizing a strategy of loans and withdrawals that never have to be paid back as long as the policy survives the insured. This and other split-dollar arrangements (such as premium sharing) are an extremely popular strategy for those businesses with an adequate cash flow. This is known as a private pension. or supplemental owners retirement plan.
Similar steps can also be taken to ensure a key employee remains in the business during any such turbulent times by providing them with a deferred compensation plan. Such a plan can merely provide a death benefit only using simple term insurance, or arrangements can be made to use a whole life or variable life insurance policy that in addition to providing a death benefit, also accumulates cash value on a tax-deferred basis. This accumulation can, upon the key person’s retirement, be used to supplement their income with tax-free distributions, but only if they fulfill their end of the bargain, i.e., remaining at their place of business for a specified number of years set at the owner’s discretion. This strategy is commonly called a supplemental executive retirement plan.
The Internal Revenue Service is reportedly planning layoffs of thousands of first-year probationary employees in the midst of tax season, perhaps as soon as this week.
The layoffs are set to occur despite assurances that the IRS would wait until May 15, a month after the end of tax season, before it would accept
The IRS and the National Treasury Employees Union did not immediately respond to requests for comment, but multiple news outlets, including the
The American Institute of CPAs released a statement Sunday stressing the need for the IRS to have the ability to meet the needs of taxpayers and tax preparers during this filing season:
“For many years, one of the top priorities at the AICPA has been to promote efforts that ensure the IRS has the appropriate resources to meet the needs of taxpayers and preparers,” said the AICPA. “Our goal is to support taxpayers and our members during times of uncertainty and to provide guidance to help navigate any changes that may affect critical, time-sensitive interactions with the IRS. Many are concerned with potential challenges that could arise from recent changes throughout government. While there is a lot of speculation and many unknowns, the AICPA is actively monitoring the situation and engaging with IRS leadership and other key stakeholders to understand and mitigate the impact of these changes on IRS services. IRS service levels and modernization efforts have seen progress since the COVID-19 pandemic and we are committed to seeing those efforts continue. Americans deserve a fully functioning agency that can be respected by taxpayers and their preparers, thereby allowing them to comply with their tax obligations.”
The move to fire the probationary employees at the IRS comes as the Trump administration and DOGE have begun widespread layoffs at other departments of the federal government, not only of first-year employees, but of longer-serving employees who had earned civil service protections, along with effective shutdowns of agencies such as the
Expect plenty of changes in the world of tax under the new administration.
On Inauguration Day, President Donald Trump signed an executive order calling for a longer
Republicans in Congress are currently negotiating the contours of an extension of Trump’s signature tax legislation, the Tax Cuts and Jobs Act of 2017, along with his campaign promises of exempting certain kinds of income, such as tips, Social Security income and overtime, from taxes.
Mark Everson, a former IRS commissioner who is currently vice chairman of Alliant, a tax consulting firm in Washington, D.C., believes the administration under Treasury Secretary Scott Bessent will focus on the international front with tariffs and sanctions.
“It will be relatively more aggressive in the international arena,” said Everson. However, he believes the OECD tax deal would only be implemented through an act of Congress in the aftermath of Trump’s executive order.
(For insights on the new administration’s impact on other areas of regulation, like the PCAOB, see
He also expects to see changes at the IRS, with less emphasis on enforcement and diversity, equity and inclusion programs. “Consistent with the move against DEI, my guess would be a return to enforcement without scrutiny of results by racial grouping,” said Everson. “There’s a lot of discussion of the impact disproportionately on minorities through the Earned Income Tax Credit in terms of audit rates. I don’t think that will be considered in this approach going forward, given what they’ve already done with the abolition of the DEI offices, including, as I understand it, at the service.”
However, he expects to see continuing improvements in taxpayer service. “I do think that there will be common ground in terms of emphasis on service improvements,” said Everson. “I’m not suggesting that everything at the IRS is going to stop. Hardly. The Republicans feel very strongly about the need for good service, and I think that will be a focus of the administration once, presumably, Commissioner [Billy] Long is in office. I think there will be continuation and a great deal of focus on privacy versus efficiency. They’ll want to make the improvements on the system side, which are already underway, but I do think there will be a great deal of focus on privacy.”
Hiring freeze
The hiring freeze at the IRS could be a concern, however.
“Will they be able to maintain adequate personnel? Time will tell on that, but I think we’ll know fairly quickly,” said Everson. “The filing season has already started, and I think that the impact of departures on the workforce will be felt over time. I’m not overly concerned about the filing season, per se. Over a period of time, if people are leaving government — and the IRS does have a very high component of people who have been working from home — because that is no longer allowed, what will the impact be there? That’s very much in the mix, but it will take time to feel the effects of that.”
He expects to see more of a focus at the IRS on process in terms of enforcement activities. Trump’s proposal to create an “External Revenue Service” to collect tariffs and duties could also introduce complications, since many of those functions are already performed at the Department of Homeland Security rather than the Treasury Department.
Al Drago/Bloomberg
After the election, Trump named former Rep. Billy Long, R-Missouri, to be the
The Trump administration and Republicans in Congress have been moving to
“Without the IRA funding — and as it stands today, there’s no funding coming from any additional sources — it is certainly less likely that the IRS will be able to conduct effective audits of partnerships,” said Colin Walsh, principal and practice leader of tax advocacy and controversy services at Top 10 Firm Baker Tilly. “Something could change tomorrow, and Billy Long could become commissioner and figure out a different way to finance it. Billy Long will have his own ideas, and we’re all curious to see how he’d like to build the IRS. There’s a big push to get federal workers back into the office. What impacts might that have? Maybe the theory could be that people working in an office are going to be more effective and more efficient than people working remotely. I don’t think at this stage we can even predict, if Billy Long becomes the commissioner, what that will look like, but we can say that it is going to be different. I think comfortably, we could say it’s going to be different than what it would have been like if the IRS had $80 billion and Danny Werfel, versus $40 billion and Billy Long. It is different objectively.”
“It doesn’t mean that it will necessarily be less stringent,” he noted. “We just don’t know, whereas six months ago, we all had a pretty good idea of where this was headed, because the IRS was explicit in saying what they were going to do, creating a partnership audit task force, auditing 80 of the largest partnerships, and in practice, we were seeing that last year.”
The IRS and the Treasury may also cut back on labeling tax transactions such as micro-captive insurance as “transactions of interest.”
“The IRS lost all those cases on making things transactions of interest or reportable transactions by notice,” said Bill Smith, managing director of the national tax office at Top 25 Firm CBIZ Advisors. “They now have to go through the regulatory process, with proposed regulations, a notice and comment period, all of that. Having nothing to do with the change of administration, they suffered a pretty serious setback there. They suffered a setback with the elimination of Chevron deference. It’s all taxpayer favorable, but is it good, sound policy? The IRS collects something like 97% of the revenue for the United States. I don’t know if Elon Musk is going to be able to cut that much out. If you’re going to eliminate a lot of the income, you’d better start eliminating the expenses too.”
Virginia, Pennsylvania and Minnesota made headway this week in adding alternative paths to CPA licensure.
The Virginia House and Senate passed legislation Monday, backed by the Virginia Society of CPAs, that creates an additional pathway to licensure and ensures practice mobility for out-of-state CPAs, effective Jan. 1, 2026. This makes it the second state,
“Increasing the options accountants have to become licensed has been a major focus of the VSCPA and the profession nationwide,” VSCPA president and CEO Stephanie Peters said in a statement. “With declining college enrollments and new majors like data analytics, the competition to attract students to the accounting profession is strong. Corporations can’t run without finance teams, and businesses rely on their CPAs for valuable tax planning and strategic advice. It’s crucial we develop new ways to get accountants licensed as CPAs to become the trusted business advisors that help keep our economy running.”
The VSCPA worked with Del. Holly Seibold, D-Fairfax, and Sen. Adam Ebbin, D-Fairfax, with support from VSCPA member and Del. Joe McNamara, CPA, R-Roanoke. Both bills passed the full General Assembly unanimously. The VSCPA does not currently see any barriers to Gov. Glenn Youngkin singing the legislation.
Martin Kraft
Pennsylvania and Minnesota
Pennsylvania introduced a Senate bill to add an extra pathway to CPA licensure, allowing CPA candidates to achieve licensure with 120 college credits, two years of relevant work experience verified by a Pennsylvania CPA and passing the CPA exam. The existing pathway requiring 150 credits is still available for candidates.
“At a time when the accounting profession faces a variety of pipeline challenges, it is crucial to create innovative pathways that meet the needs of today’s workforce while safeguarding the public trust and high standards that define the CPA designation,” PICPA CEO Jennifer Cryder said in a statement.
“We believe these updates are critical to the future of the accounting profession,” she added. “By working together with our stakeholders, we can modernize licensure laws without compromising the core principles that define the CPA profession.”
The initial memo introducing the bill was led by Sen. Scott Hutchinson, R-Venango, and Sen. Nick Pisciottano, CPA-inactive, D-Allegheny. A companion bill is set to be introduced in the state House by Rep. Ben Sanchez, D-Montgomery, and Rep. Keith Greiner, CPA, R-Lancaster.
Meanwhile, Minnesota introduced a Senate bill to add two more pathways to licensure, which would allow CPA candidates to achieve licensure with a bachelor’s degree along with two years of general work experience and passing the CPA exam, or a master’s degree with one year of experience and passing the exam.
The legislation also ensures automatic practice mobility and changes regulations to make the Minnesota State Board of Accountancy the entity determining substantial equivalency, not NASBA’s National Quality Appraisal Service.
A companion bill in the Minnesota House is expected to be introduced later this week.
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