{"id":1207,"date":"2024-11-14T21:01:12","date_gmt":"2024-11-14T21:01:12","guid":{"rendered":"https:\/\/webdesign.quoteplicity.com\/keyperson\/?p=1207"},"modified":"2024-12-11T21:58:36","modified_gmt":"2024-12-11T21:58:36","slug":"cross-purchase-buy-sell-agreement","status":"publish","type":"post","link":"https:\/\/webdesign.quoteplicity.com\/keyperson\/cross-purchase-buy-sell-agreement\/","title":{"rendered":"What Is A Cross-Purchase Buy-Sell Agreement?"},"content":{"rendered":"\t\t
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A cross-purchase buy-sell agreement is a written and binding agreement wherein each business partner or shareholder individually agrees to purchase the interest of a partner\/owner if one of the conditions that triggers the agreement occurs.<\/p>\n\n\n\n

Triggering events generally include the death, disability or retirement of a business owner or otherwise sale of a shareholder\u2019s interest. The agreement outlines the terms of the sale and establishes a formula for determining the actual sales price of the stock based on the company\u2019s valuation.<\/p>\n\n\n\n

It also obligates the remaining business owners to buy the departing owner\u2019s shares of the company based on each owner\u2019s individual percentage of interest outlined in the agreement. As part of the agreement, the departing shareholder, or her heirs, is also obligated to sell her interest in the company.<\/p>\n\n\n\n

With a cross-purchase plan, the company is not a party to the agreement.<\/p>\n\n\n\n

How Does a Cross-Purchase Life Insurance Work?<\/h2>\n\n\n\n

We identified cross-purchase life insurance as an optimum vehicle for funding\u00a0any buy-sell plan<\/a>. To do this, each business owner purchases a policy on the life of each of the other owners in an amount equaling their share of the purchase price of the insured owner\u2019s interest.<\/p>\n\n\n\n

Each business owner is the policy owner and beneficiary of each of the policies on the lives of the other owners. In the event an owner dies, the remaining business owners receive the proceeds of the life insurance policies and use these proceeds to purchase the deceased owner\u2019s business interest at a previously agreed-upon price.<\/p>\n\n\n\n

When a deceased owner\u2019s interest is purchased, the surviving owners generally receive a \u201cstep up\u201d in the cost basis of their business interest while the former owner\u2019s estate receives instant liquidity at a fair market value for their business interest.<\/p>\n\t\t

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Advantages of Cross-Purchase Buy-Sell Plans<\/h3>\n\n\n\n

A properly drafted cross-purchase buy-sell agreement that is funded with life insurance will have the following advantages.<\/p>\n\n\n\n

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  1. Creates a directive for a smooth business transition in the event of an unforeseen death.<\/li>\n\n\n\n
  2. Creates an instant market for the business at a pre-arranged fair market value.<\/li>\n\n\n\n
  3. Remaining owner\u2019s receive an increase or \u201cstep up\u201d in their cost basis equal to the price of the shares purchased.<\/li>\n\n\n\n
  4. May establish a usable fair market value for the business for estate tax purposes.<\/li>\n\n\n\n
  5. Policy proceeds and cash values are not accessible by the creditors of the business.<\/li>\n\n\n\n
  6. There are no dividend issues with cross-purchase plans.<\/li>\n\n\n\n
  7. Life insurance proceeds received by the business owners are not subject to corporate taxation nor will they increase the alternative minimum tax liability.<\/li>\n\n\n\n
  8. Provides liquidity for the deceased owner\u2019s estate.<\/li>\n<\/ol>\n\n\n\n

    Disadvantages of Cross-Purchase Buy-Sell Plans<\/h3>\n\n\n\n

    The disadvantages of cross-purchase buy-sell agreements include:<\/p>\n\n\n\n

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    1. Life insurance policies are not owned by the business so any cash values cannot be considered company assets.<\/li>\n\n\n\n
    2. Depending on the varying ages of the business owner\u2019s actual premium payments may vary greatly.<\/li>\n\n\n\n
    3. Some policies may lapse if the business owner doesn\u2019t keep up with premium payments.<\/li>\n\n\n\n
    4. Requires more policies that a stock redemption plan therefore is more difficult to administer. If more than 3 owners, the number of policies required may get excessive. For example, if there are 5 business owners, 20 policies will be required.<\/li>\n\n\n\n
    5. Policy cash values are subject to the personal creditors of the business owner.<\/li>\n<\/ol>\n\t\t
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      Cross-Purchase Buy-Sell Agreements and Taxes\u00b9<\/h3>\n\n\n\n

      Tax issues concerning cross-purchase life insurance plans include:<\/p>\n\n\n\n