A Cross Purchase buy/sell agreement is a popular strategy used in succession planning. In a typical cross purchase agreement, each owner purchases a life insurance policy for each of the other owners. So, for example, in a business with three partners, six life insurance policies are purchased. Naturally, the more owners involved, the more complicated and expensive this type of agreement can be.
But there is another option—a twist on the typical buy/sell. It’s called a Trusted Cross Purchase agreement. In a Trusted Cross Purchase agreement, only one insurance policy is purchased per person and the policies are then held by a trust, until such time as the policies are paid out.
There are other advantages, too, aside from purchasing fewer policies. The insurance company takes on the risk of early death or disability—thereby initiating an early buy out. This type of agreement also ensures there will be the necessary funds to purchase the business, and the policies typically benefit from the tax-free “inside build-up” of the monies invested in the policies.
Of course, disadvantages do exist. Using current funds to purchase the life insurance polices take away from capital that could be used to grow the business now. Plus, should one of the partners decide to terminate employment for any reason beside death, the life insurance policies are only worth the cash surrender value.
In reality, there is no one-size-fits all buy/sell agreement. Each business situation is different, and an experienced attorney should evaluate each business by its unique circumstances. If you would like to learn more about a Trusted Cross Purchase agreement, or any other buy/sell agreement, contact me at 618-659-4499 or email@example.com.