CROSS-PURCHASE BUY-SELL AGREEMENTS

(Funded with Life Insurance)

WHAT IS A CROSS-PURCHASE BUY-
SELL AGREEMENT?
A cross-purchase buy-sell agreement is an
agreement among the owners of a closely held
business under which each owner agrees to
purchase the interest of the other owners, and
the other owners agree to sell their interests,
upon the occurrence of any of the specified
triggering events.
CLIENT PROFILE
A business with five or fewer owners who
need or want a business continuation plan
and do not wish to pass their interests on to
other family members such as children
HOW IT WORKS
HOW TO IMPLEMENT
1. Advisor identifies an appropriate
closely-held business whose owners
need or want a solid business
continuation plan.
2. The owners enter into an agreement
with each other under which each
owner agrees to purchase the
interests of the other owners and the
other owners agree to sell their
interests upon the occurrence of a
specified triggering event.
3. Each owner purchases a life
insurance policy (and, it is hoped, a
special buy-out disability policy) on
the life of each other owner and is the
owner, beneficiary, and typically the
premium payor of each policy.
4. Split-dollar arrangements could also
be used, or bonuses paid, especially if
dealing with a “C” corporation.
5. Premiums, of course, are not tax-
deductible, but proceeds are tax-free.

WHY USE A CROSS-PURCHASE BUY-

SELL RATHER THAN ENTITY?

The primary reason is that the purchasing owners

receive a full cost basis increase for the price paid
for the acquired business interest, reducing their
taxable gain in the event of a subsequent lifetime
sale. Further, since the business does not reflect
the life insurance policies on its balance sheet,
business valuation cannot be affected, nor will the
life insurance be subject to Alternative Minimum
Tax (AMT) at the business level. Caution: with a
corporation that has more than two owners, care
must be taken after an owner’s death to avoid
violating the transfer-for-value rule in re-arranging
ownership of the policies on the surviving owners.
Use of a “trusteed” buy-sell could be the solution.