In a cross-purchase buy-sell agreement, each business owner purchases, owns, and is beneficiary of life insurance on the other owner or owners. If one owner dies, the surviving owner receives the policy proceeds and uses them to purchase the deceased owner’s business interest from the estate or designated successor. The arrangement provides liquidity and a predetermined method for transferring ownership, helping the business continue without forcing a sale of assets or requiring the surviving owner to obtain financing at a difficult time.
An entity-purchase agreement differs because the business itself owns policies on each owner and uses the proceeds to redeem the deceased owner’s interest. The number of policies can be an important distinction. With two owners, a cross-purchase arrangement usually requires two policies. With several owners, each may need policies on all other owners, which can become administratively complex.
The agreement should be drafted and reviewed by qualified legal and tax professionals. The insurance policy alone does not create the buy-sell obligation; the written agreement establishes the purchase terms, valuation method, triggering events, and funding mechanism. The producer’s role is to help identify appropriate funding, not to draft legal agreements.
References/topics from the Study Guide: Buy-Sell Agreements; Cross-Purchase Plans; Entity-Purchase Plans; Business Continuation; Life Insurance Funding.
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