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.

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The Business Planning Group
3186 Eaglecrest Lane, Clinton WA 98236
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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 Advisor (RIA), registered in the state of Washington.


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