Cross-purchase agreement
A cross-purchase agreement is a buy-sell arrangement in which each business owner buys life insurance on each of the other owners to fund buying out an owner's shares on death or permanent incapacitation. Estate planning practitioners describe each owner as paying the premiums personally and serving as the beneficiary. Surviving owners then purchase the deceased owner's shares using proceeds paid directly to them.
How it works
Each owner under a cross-purchase structure buys a life insurance policy on the other owner, pays the premiums personally, and is the beneficiary, as practitioners describe it.
Owners in a cross-purchase arrangement hold policies on one another. When one owner dies, the survivors use the proceeds paid directly to them to buy the deceased owner's shares.
The policies exist to fund the purchase of the affected owner's shares.
Policy count grows with the number of owners. Practitioners note n times (n minus 1) separate life insurance policies for a company with n owners. In a two-owner agreement, each owner buys a policy on the other's life.
Where it shows up for owners of businesses, real estate and private investments
A company with two or more owners is the setting for a cross-purchase agreement, since each owner holds a policy on each of the others.
Shares of a deceased owner are bought by the surviving owners, who receive the insurance proceeds directly. The purchase is funded by policies the survivors own themselves.
The purchasing owner's tax basis in the acquired interest is a distinct question that depends on how the purchase is structured. Practitioners point to a basis increase for the purchasing owner as a feature of the structure.
Points that are easy to confuse
A corporate redemption differs from a cross-purchase on basis.
Policy ownership sits with the individual owners in a cross-purchase arrangement. Each owner pays the premiums personally, and proceeds go directly to the surviving owners.
The number of policies tracks the number of owners, so a larger group of owners means more policies.
Common questions
How many policies does a cross-purchase agreement involve?
The count depends on the number of owners, because each owner buys a policy on each of the other owners. The proceeds from those policies fund the purchase of an affected owner's shares.
How does a cross-purchase agreement affect stock basis?
Trust and estate practitioners describe a cross-purchase buyer as increasing basis in purchased shares by the purchase price.