Using U.S. Life Insurance to Fund Cross-Border Buy-Sell Agreements

U.S. life insurance can provide timely liquidity when a business owner dies, but a cross-border buy-sell succeeds only if the insurance contract, the ownership agreement, and the tax residence of every participant are designed as one transaction.

Liquidity Is Only the Beginning

For a closely held business with owners on both sides of the U.S.–Mexico border, the death of a shareholder or partner creates an immediate conflict between liquidity and continuity. The deceased owner’s family may want cash. The surviving owners may need control. The business may have substantial enterprise value but insufficient liquid assets to purchase the interest without borrowing, selling operating assets, or accepting an unwanted successor as an owner.

Life insurance can solve the liquidity problem elegantly. A predictable stream of premiums can create a substantial pool of cash precisely when the buy-sell obligation is triggered. Under U.S. federal income-tax law, amounts received under a life-insurance contract by reason of the insured’s death are generally excluded from gross income under Internal Revenue Code section 101(a)(1).

That familiar rule is only the starting point. In a cross-border arrangement, the result depends on who owns the policy, who pays the premium, who receives the death benefit, who purchases the deceased owner’s interest, and where each participant is resident or domiciled for tax purposes. The insurance payment and the purchase of the ownership interest are separate transactions, and they may be taxed in different countries under different rules.

The Ownership Structure Comes First

Two structures dominate traditional buy-sell planning. In an entity-redemption arrangement, the operating company owns insurance on one or more owners, receives the death benefit, and uses the proceeds to redeem the deceased owner’s shares or interest. In a cross-purchase arrangement, the owners—or a carefully designed acquisition vehicle—own policies on one another, receive the proceeds, and purchase the deceased owner’s interest directly from the estate or heirs.

The simpler structure is not always the safer structure. An entity redemption may reduce the number of policies, centralize premium payments, and align control of the funding with the company’s obligation. A cross-purchase may keep insurance outside the operating company, improve the surviving purchasers’ basis in the acquired ownership interest, and avoid the valuation problem addressed by the Supreme Court in Connelly v. United States. The right answer is fact-specific.

The Death Benefit and the Purchase Price Are Different Payments

Assume a U.S. corporation receives a $5 million death benefit and then pays $5 million to redeem a deceased shareholder’s stock. The corporation may have received life-insurance proceeds that are excluded from U.S. gross income. The estate, however, did not receive insurance proceeds. It received consideration for stock.

The same distinction applies to a cross-purchase. The surviving owners may receive insurance proceeds, but the deceased owner’s estate receives a purchase price. That second payment must be characterized independently as a sale, exchange, redemption, distribution, or other transfer. Its treatment depends on the entity type, the owner’s basis, the redemption rules, attribution rules, the location of business assets, the seller’s tax residence, and any applicable treaty.

A plan that stops after concluding that the death benefit is “tax-free” has answered only half of the tax question.

Are the Premiums Deductible

The U.S. Rule

In a conventional U.S. buy-sell arrangement, premiums generally are not deductible. Internal Revenue Code section 264(a)(1) denies a deduction for premiums on a life-insurance policy when the taxpayer paying the premium is directly or indirectly a beneficiary under the policy. That is ordinarily the case when a corporation owns insurance intended to fund its own redemption obligation. It is also the ordinary economic result when an individual owner pays premiums on a policy whose proceeds will fund that owner’s purchase obligation.

The policy’s legitimate business purpose does not convert the premium into a deductible operating expense. A prudent financial model therefore treats buy-sell premiums as an after-tax funding cost unless advisers identify a specific, supportable exception.

The Mexican Rule Is Narrower Than a General Business-Purpose Test

Mexican law contains targeted provisions for certain employee-benefit insurance and for insurance intended to compensate a taxpayer for a reduction in productivity caused by the death, accident, or illness of specified technicians or managers. Article 27 of the Ley del Impuesto sobre la Renta and Article 51 of its regulations impose detailed conditions on qualifying key-person arrangements. Among other requirements, the regulatory rule calls for term coverage of no more than twenty years with level premiums, a qualifying employment or industrial-partner relationship, and the taxpayer’s status as policyholder and irrevocable beneficiary.

Those provisions do not establish a general rule that any premium is deductible merely because the policy supports a buy-sell agreement. A Mexican business considering a deduction should test the actual policy, insured, beneficiary, and business purpose against the statutory and regulatory conditions, as well as the governing insurance rules.

Are the U.S. Death Benefits Taxable

For a properly structured policy, the U.S. federal income-tax result is generally favorable. Section 101(a)(1) excludes death benefits received by reason of the insured’s death. The exclusion can apply whether the beneficiary is an individual or a business entity. Three recurring traps deserve attention.

Transfer for value. A policy transferred for valuable consideration can lose part of the section 101 exclusion. The Code contains important exceptions, including certain transfers to the insured, a partner of the insured, a partnership in which the insured is a partner, or a corporation in which the insured is a shareholder or officer. A restructuring should be reviewed before ownership changes—not after.

Employer-owned life insurance. Section 101(j) can limit the exclusion for an employer-owned contract unless a statutory exception applies and the insured receives written notice and provides written consent before issuance. Owner-employees are not automatically outside the rule.

Reporting. Businesses with employer-owned contracts may have an annual Form 8925 reporting obligation. The notice, consent, and reporting process should be treated as part of the policy closing checklist.

These requirements are technical, but they are manageable when addressed at issuance. They become much harder to repair after the insured has died.

The Mexican Recipient Must Be Analyzed Separately

Mexico generally taxes its residents on income from domestic and foreign sources. Article 93, fraction XXI, of the Ley del Impuesto sobre la Renta provides exemptions for qualifying life-insurance benefits, but the provision states that its treatment applies only to income received from insurance institutions organized under Mexican law and authorized by the competent Mexican authorities.

Accordingly, a Mexican tax resident receiving proceeds directly from a U.S. carrier should not assume that the U.S. income-tax exclusion automatically produces an equivalent Mexican exemption. On the face of Article 93, a policy issued by a non-Mexican insurer does not fit the institution requirement. The final Mexican treatment may also depend on the identity of the beneficiary, who paid the premium, the purpose of the policy, and whether the payment is made to an individual, an estate, a trust, or a company.

The analysis changes again when the Mexican recipient is not the insurance beneficiary. If a Mexican family or estate receives consideration for the deceased owner’s business interest, the payment is purchase consideration rather than an insurance benefit. Mexican tax, U.S. tax, basis, treaty, and reporting consequences must be determined for that disposition.

Limited U.S. Nexus Is an Underwriting Issue and a Tax Issue

Foreign-national life-insurance programs offered by U.S. carriers ordinarily require a demonstrable connection to the United States. Business ownership, banking and investment relationships, U.S. real estate, visa status, family ties, and travel patterns may be relevant, but underwriting standards differ substantially among carriers. A sufficient connection for underwriting does not by itself make a Mexican owner a U.S. income-tax resident or estate-tax domiciliary.

Mexican insurance law must also be considered. Articles 20 and 21 of the Ley de Instituciones de Seguros y de Fianzas regulate insurance activity in Mexico and restrict contracting with foreign insurers in specified circumstances. For personal insurance, the rules expressly consider whether an individual policyholder is in Mexico when the contract is made and, for a corporate policyholder, whether the insured resides in Mexico.

The correct question is therefore not simply whether a Mexican partner can purchase U.S. insurance. The planning team should determine whether a carrier will underwrite the person, where solicitation and contracting may lawfully occur, who can own and benefit from the policy, and how both countries will characterize the resulting payments.

Connelly Changed the Entity-Redemption Analysis

In Connelly v. United States, the Supreme Court unanimously held that, when valuing a closely held corporation for federal estate-tax purposes, life-insurance proceeds payable to the corporation increased the corporation’s value and the corporation’s obligation to redeem the deceased shareholder’s shares at fair market value did not offset that increase. The Court focused on value at the moment of death, before the corporation spent the insurance proceeds on the redemption.

For a Mexican owner of a U.S. corporation, the indirect effect can be especially important. Stock issued by a domestic corporation is U.S.-situated property for the U.S. estate-tax regime applicable to a nonresident noncitizen. The Form 706-NA filing threshold is generally only $60,000 of U.S.-situated assets, and Mexico is not among the countries listed by the IRS as having a U.S. estate or gift tax treaty.

At the same time, section 2105 treats amounts receivable as insurance on the life of a nonresident noncitizen as property situated outside the United States. That favorable rule does not prevent entity-owned insurance from increasing the value of U.S.-situs corporate stock. The policy proceeds may be outside the decedent’s estate as a direct asset yet still increase the value of an asset that is inside the estate—the stock. This is why policy ownership must be considered together with the owner’s estate-tax profile.

The Buy-Sell Payment May Trigger Its Own U.S.–Mexico Analysis

If a redemption qualifies as a sale or exchange under section 302, the seller generally measures gain against basis. If it does not qualify, the payment may be treated as a distribution subject to dividend rules and potentially U.S. withholding for a foreign recipient. Family and entity attribution under section 318 can change the result. A direct cross-purchase more naturally produces sale treatment, but the seller’s tax residence, the company’s assets, and the treaty still matter.

The U.S.–Mexico income-tax treaty contains separate rules for dividends and capital gains. Article 13 allows source-country taxation in specified circumstances, including certain interests in real-property-rich entities and, subject to its terms, dispositions by a person who held at least a 25 percent participation during the preceding twelve months. The treaty is an income-tax treaty; it does not supply the estate-tax relief that an estate-tax treaty might provide.

A cross-border buy-sell should therefore be modeled through the recipient level: from carrier to policy beneficiary, from buyer to the deceased owner’s estate or heirs, and finally to the persons who will retain or distribute the funds.

A Better Planning Sequence

1. Classify every owner. Confirm citizenship, income-tax residence, U.S. substantial-presence or green-card status, and estate-tax domicile. These are related but not identical tests.
2. Fix the commercial deal before selecting the insurance. Define who must buy, who must sell, the valuation method, payment timing, and treatment of debt, discounts, and control premiums.
3. Model both ownership structures. Compare entity redemption and cross-purchase using after-tax premiums, policy count, basis consequences, creditor risk, administrative control, and the Connelly valuation effect.
4. Test insurability and lawful placement. Confirm carrier underwriting, insurable interest, permitted solicitation and contracting locations, premium flow, currency, and policy-delivery requirements.
5. Document U.S. compliance at issuance. Address section 101(j) notice and consent, Form 8925, transfer-for-value restrictions, beneficiary designations, and ownership-control provisions.
6. Obtain Mexican advice on the actual participants. Analyze the Mexican-resident insured, owner, premium payer, beneficiary, estate, and ultimate recipient rather than assuming one answer applies to all.
7. Separate the two tax models. Model the insurance proceeds and the sale or redemption proceeds independently, including withholding, basis, treaty, estate-tax, and reporting consequences.
8. Revisit the arrangement regularly. Ownership, value, residency, insurability, policy performance, and law change. A buy-sell should be reviewed after major acquisitions, relocations, recapitalizations, and ownership transfers.

The Central Question Is Who Should Own the Policy

U.S. life insurance can be an exceptionally effective source of liquidity for a multinational buy-sell agreement. Its strength is timing: capital becomes available when the business and the deceased owner’s family need it most. But the cross-border version requires more than matching a death benefit to an estimated purchase price.

The planning architecture must coordinate the policy, the buy-sell obligation, corporate valuation, U.S. estate-tax situs, U.S. income-tax rules, Mexican insurance law, Mexican income-tax treatment, treaty provisions, and the ultimate destination of the funds. In that setting, the most important question is not merely how much insurance to purchase. It is who should own it, who should receive it, and what transaction occurs next.

1. Authorities were reviewed through September 11, 2026. The links below are provided for reader reference; the discussion is a planning overview, not a substitute for jurisdiction-specific advice.
2. 26 U.S.C. § 101, Certain Death Benefits
3. 26 U.S.C. § 264, Certain Amounts Paid in Connection with Insurance Contracts
4. Connelly v. United States, 602 U.S. 257 (2024)
5. IRS Form 8925, Report of Employer-Owned Life Insurance Contracts
6. IRS Guidance for Nonresident Noncitizen Estates
7. 26 U.S.C. § 2104, Property Within the United States
8. 26 U.S.C. § 2105, Property Without the United States
9. Mexico Ley del Impuesto sobre la Renta, Article 93
10. Mexico Ley del Impuesto sobre la Renta, Article 27
11. Mexico Reglamento de la Ley del Impuesto sobre la Renta, Article 51
12. Mexico Ley de Instituciones de Seguros y de Fianzas, Articles 20 and 21
13. United States–Mexico Income Tax Convention

This article is intended for general informational purposes and does not constitute U.S. or Mexican legal, tax, insurance, investment, or valuation advice. Cross-border insurance and business-succession arrangements should be reviewed by qualified advisers in each applicable jurisdiction before a policy is solicited, issued, transferred, or used to fund a transaction.