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CROSS-PURCHASE BUY-SELL AGREEMENTS (Funded with Life Insurance)
WHAT IS A CROSS-PURCHASE BUYSELL 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.
HOW TO IMPLEMENT
1. Advisor identifies an appropriate closely-held business whose owners need or want a
CROSS-PURCHASE BUY-SELL AGREEMENTS (Funded with Life Insurance)
WHAT IS A CROSS-PURCHASE BUYSELL 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.
HOW TO IMPLEMENT
1. Advisor identifies an appropriate closely-held business whose owners need or want a
CROSS-PURCHASE BUY-SELL AGREEMENTS (Funded with Life Insurance)
WHAT IS A CROSS-PURCHASE BUYSELL 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.
HOW TO IMPLEMENT
1. Advisor identifies an appropriate closely-held business whose owners need or want a
WHAT IS A CROSS-PURCHASE BUY- HOW TO IMPLEMENT SELL AGREEMENT? 1. Advisor identifies an appropriate A cross-purchase buy-sell agreement is an closely-held business whose owners agreement among the owners of a closely held need or want a solid business business under which each owner agrees to continuation plan. purchase the interest of the other owners, and 2. The owners enter into an agreement the other owners agree to sell their interests, with each other under which each upon the occurrence of any of the specified owner agrees to purchase the triggering events. interests of the other owners and the other owners agree to sell their CLIENT PROFILE interests upon the occurrence of a specified triggering event. A business with five or fewer owners who 3. Each owner purchases a life need or want a business continuation plan insurance policy (and, it is hoped, a and do not wish to pass their interests on to special buy-out disability policy) on other family members such as children the life of each other owner and is the owner, beneficiary, and typically the premium payor of each policy. HOW IT WORKS 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.
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