Cross-Purchase Buy-Sell Agreements

How cross-purchase buy-sell agreements are funded with life insurance, how they differ from entity redemption, and when trusteed or LLC structures may simplify ownership.

A cross-purchase agreement has the owners, not the business, buy a departing owner's interest. It can offer tax and estate advantages, but it adds policy ownership complexity that has to be designed deliberately.

How a cross-purchase works

Each owner owns, pays for, and is the beneficiary of a policy on each other owner. When an owner dies, the surviving owners receive the death benefit and use it to buy the deceased owner's interest from the estate at the price set by the agreement.

Because the surviving owners pay the purchase price themselves, they generally receive a cost basis in the acquired interest equal to the price paid, which can reduce capital gains if the business is later sold. Policy proceeds are not owned by the business, which avoids the corporate-asset valuation issue highlighted in Connelly v. United States (2024).

The policy-count problem and common solutions

With two owners, a cross-purchase needs two policies. With more owners, the number grows quickly: each owner needs a policy on every other owner, so five owners would need twenty policies. Premium burdens can also be uneven when a younger owner must insure an older one.

Common alternatives include a trusteed cross-purchase, where a trustee or escrow agent holds one policy per owner on behalf of all owners, and a separate partnership or LLC formed to own the policies. These approaches can reduce the number of policies, but they raise their own transfer-for-value, tax, and administrative questions that must be reviewed by counsel.

Choosing coverage type and amount

Death benefit amounts should track the agreed valuation. Some owners split premiums through bonus or compensation arrangements so the cost burden matches ownership; these arrangements have tax consequences that should be confirmed with your CPA.

When an owner leaves for reasons other than death, the policies they own on remaining owners, and the policies others own on them, need a planned disposition. Moving those policies carelessly can create transfer-for-value issues.

Noble Insurance Strategies does not provide legal or tax advice. Agreements, trusts, and entity structures should be drafted and reviewed by your attorney, and tax treatment confirmed with your CPA.

Suitability & Limits

Best suited to a small number of owners unless a trusteed or LLC structure is used.

Each owner must be insurable and able to pay premiums.

Policy transfers when owners exit require careful tax review.

The agreement, not the insurance, controls the obligation; documents must align.