It's definitely unclear in BG3 but in actual D&D ceremorphosis kills the host and the mind flayer is formed from their body/mind/memories. So in Wyll's case volunteering for transformation would be a bad idea because he would immediately go to Avernus to serve Mizora forever whereas if he lives he still has time to escape his pact. BG3 says that mind flayers don't have a soul but the ones touched by the astral tadpoles do seem to retain their personalities. My interpretation is that BG3 ceremorphosis destroys the soul which is the only "true" death in D&D, so becoming a mind flayer guarantees you will never have an afterlife, which is a pretty big deal
Anyway, best choice imo is Karlach. She's dead regardless, it's not clear where her soul is going, and this way she becomes a selfless hero and continues some form of existence
Yes, everyone stays tentacle free. You have to make certain choices and have gale ok with becoming a bomb but other than that yes everyone lives except the emperor and gale.
Edit: For anyone who wants to see this here is how I remember doing this ending:
Act 3 & Ending spoilers
spoiler
Step 1 make sure you have the hammer to free orpheus
step 2 tell Emperor to fuck off
step 3 open orpheus' orb
step 4 tell orpheus there is a way without him sacrificing himself and no on needs to transform
(there might be an option to talk to Gale here to make sure he's cool with going boom but I don't recall 100%)
step 5 get to the brain stem with Gale and company
step 6 have a final convo with Gale and send him up
Gale nuke (Act 2) means Orpheus probably gets munched by the Emperor. Act 3 is basically the same as everything else but Gale kamekazi's at the last minute meaning Orpheus got munched, Tav/Karlach transformed, or Orpheus sprouted.