Cross Purchase Agreement

A Cross Purchase Agreement would require each stock owner to purchase a life Insurance policy on the lives of other stock holders and making themselves the beneficiary. In the event that an unfortunate situation arises, the proceeds from the insurance will then be used to purchase the deceased or disabled partner’s ownership interests from his/her estate.

Who should have a Cross Purchase Agreement

Why and who would need to establish a cross purchase Buy/Sell Agreement? When business partners agreed to start a business each person has an interest in the business while working or if a pre-mature death or disability were to occur. In the event of such an occurrence the interest is passed onto the owner’s heirs. By having this agreement in place it prevents any confusion or uncertainty on what happens to their interest. It gives piece of mind to the remaining partners and the deceased estate.

There are 3 ways to fund an agreement

• From profits of business
• Create a side cash account
• Use life insurance

Why use life insurance as a funding mechanism for the agreement

• The purchasing owners receive a step-up in cost basis in the acquired business interests, which reduces any future taxable gains.
• The business does not reflect the value of the life insurance policy on its balance sheet. Thus, the value of the business does not increase.
• The business is not a party to the cross-purchase buy-sell agreement so the proceeds will be tax-free.

A Funded Cross-Purchase Agreement, as a type of Buy-Sell Agreement, can be your assurance that even when your partner is gone, your business will continue to grow and to provide value, as you wished when you first laid out your foundation. Call us today for a complimentary conversation to see “How well are you planned and how can you tell?”