The shareholders enter into a binding
agreement for the purchase and sale of their respective interests in the corporation. This agreement
obligates the remaining shareholders to buy, and the departing shareholders to sell, the departing
shareholder's stock at an agreed-upon or determinable price at the happening of some triggering event.
Each shareholder purchases life insurance
on the other shareholders, naming himself owner and beneficiary of each policy.
The corporation has no purchase obligation under the cross-purchase agreement.
Upon the shareholder's death, the surviving
shareholders receive life insurnace proceeds with which they will purchase the decedent's stock.
At his death, the shareholder's stock
becomes part of his estate. The estate then sells that stock to the surviving shareholders in return
for cash generated by the life insurance policies.
A cross-purchase agreement provides that the remaining shareholders will each
purchase, pro rata, the interest of a departing shareholder upon the happening of a triggering event.
The shareholders enter into a binding agreement for the purchase and sale of their respective interests
in the corporation. This agreement obligates the remaining shareholders to buy, and the departing shareholder
to sell, the shares of a departing shareholder at an agreed-upon or deteminable price. In a cross-purchase
agreement, only the remaining shareholders are obligated to purchase shares, allowing the corporation to remain
a non-party to the agreement.
In order to fund their purchase obligations, each shareholder purchases life
insurance on the other shareholders equal to their pro rata share of the insured's stock interest. Each
shareholder is the owner and beneficiary of the policies on the lives of the other shareholders. Upon
a shareholder's death, the surviving shareholders receive the policies' proceeds with which they purchase
their share of the stock from the decendent's estate. Depending on the year of the death the decendent's
estate receives a new, fair market valuation "step-up" in basis for the stock owned at death. As such, the
decendent's estate typically recognizes no capital gain pursuant to this sale.
Increase in Basis. The surviving shareholders receive an increase in their
corporate basis commensurate with the purchase price of their shares.
Corporate creditors. Corporate creditors have no recourse against the life insurance
proceeds or policy cash values held by the shareholders.
Alternative Minimum Tax. Life insurance proceeds received by the shareholders will not increase
the corporate alternative minimum tax liability.
Dividends. Cross-purchases do not give rise to dividend questions or attibution rules.
Multiple Policies. Funding a cross-purchase agreement with life insurance becomes
increasingly difficult to administer with each additional shareholder.
Premium Payments. The shareholders may have difficulty paying premiums. The corporation
may assist in these payments through deductible bonuses.
Estate Inclusion. The cash value of policies owned on other shareholders' lives are
includable in the decendent shareholder's estate.
Transfer-for-Value. In multi-party arrangements, interests in policies on other
shareholders' lives acquired by a co-shareholder from a decendent's estate may create a transfer-for-value
which may cause a portion of the death benefit to be subjected to income tax.
The Business Planning Group
3186 Eaglecrest Lane, Clinton WA 98236
Phone: 206-255-5700 Fax: 206-260-2721
At The Business Planning Group, Inc.™ (BPG) our focus is to provide our clients with strategic,
knowledge-based consulting and advice. At times, we may also assist our clients with securities-related services.
However, these services may only be provided to individuals residing in the states in which we are registered or
permitted to conduct securities-related business. The information contained in this website is intended for use
only by residents of these states or for individuals interested in BPG's financial planning and consulting services.
By viewing our site, you are verifying that you meet one of those two criteria. Fee-based consulting and advisory
services offered through The Business Planning Group, Inc.,™ an independently owned and operated Registered Investment
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