In a cross-purchase arrangement, the stockholders own life insurance on each other, and the survivor buys out the shares of the deceased stockholder. If more than three stockholders are involved, a cross-purchase arrangement may be cumbersome due to the number of policies required.

A purchasing stockholder will increase their basis in the stock acquired under a cross-purchase agreement because they pay for the shares personally. An increased basis is important to the stockholder who anticipates a possible future sale or gift of the stock at some point in their lifetime.

Strategy — Cross-Purchase Arrangement

At Inception

Owners A and B enter into an agreement that if either should become disabled or die, the surviving owner will buy out the business interest from the individual/estate using the policy proceeds.

In the Event of the Death or Disability of Owner A

The Benefits and Tax Considerations of a Cross-Purchase Arrangement

The Benefits

Benefits to Your Business

Benefits to Surviving Owners

A buy-sell agreement allows a smooth transition to a new ownership arrangement in the event of death or disability. The agreement can reduce the potential delays, conflicts, and expenses of those making a claim on the business.

In the event an owner dies or becomes totally disabled and the buy-sell agreement is activated, the surviving or non-disabled owner’s basis will increase by the purchase price they paid for the decedent’s interest under this agreement — reducing the amount of taxable capital gain upon a future sale of the business interest. Peace of mind that the business can continue to operate in the event of the death or disability of an owner. In the event of death, the buy-sell agreement will provide the proper valuation formula or amount to be paid to the deceased’s estate. Utilizing life insurance as a funding vehicle in such an agreement is an ideal way to provide the funds necessary to meet that obligation. In the event of disability, the buy-sell agreement will provide the proper valuation formula or amount to be paid to the disabled partner. Utilizing disability insurance as a funding vehicle in such an agreement is an ideal way to provide the funds necessary to meet the obligation.

Tax Considerations

Owners	Deceased Owner's Estate	Disabled Owner
Premiums paid personally by each individual owner are not tax deductible.	Decedent's shares receive a step up in basis to fair market value. The life insurance policy owned by the decedent on the life of the other owner may be purchased or surrendered.	Generally, the proceeds from a disability income insurance policy are paid to the disabled owner income tax free. When the buy-out is between an entity and a disabled owner and results in a termination of the disabled owner's interest, it is taxed as a liquidation of his or her interest.