Cross-Purchase Insurance and the Surviving Owner's Basis

In a cross-purchase arrangement, the surviving owner's basis in purchased shares generally follows the actual purchase cost, not automatically the insurance payout. The tax treatment of insurance proceeds is a separate question. Excess proceeds retained personally do not themselves increase the basis of shares acquired.

A specific business-owner situation

An owner receives a $1 million policy benefit and uses $800,000 to buy a deceased partner's corporate shares. The share purchase price, not the entire payout, is the starting basis amount.

Illustrative example, not a client result.

What to establish before filing

Confirm policy and share ownership.
Reconcile proceeds to purchase consideration.
Track purchased shares separately from previously owned shares.

Which fact changes the answer?

A corporation redeeming its own shares differs from one owner purchasing another's shares. The buyer and the property acquired determine whose basis changes.

A mistake to avoid

Do not add the full death benefit to stock basis simply because insurance funded the purchase.

Records that support the decision

Policy settlement.
Share purchase agreement.
Stock basis and closing records.

The decision to document

Maintain separate insurance and stock-purchase schedules and review transaction costs and any noncash consideration.

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Sources and editorial context

General educational information prepared with AI assistance. No individual professional review is claimed. Apply the relevant tax-year rules to the actual records. Editorial policy · AI disclosure.

I will buy my partner's shares using life-insurance proceeds. Does the stock basis automatically equal the policy payout?