Cross Purchase Agreement

In a Cross Purchase Agreement, each owner purchases a policy on the other owner(s) with their own after tax funds. When a triggering event occurs, the surviving owner(s) use the benefits paid by the insurance policy to fund the purchase of the deceased or exiting owner's portion of the business.

Basic Advantages:*

• Death benefit is typically income tax free..
• The policy and proceeds are not owned by the business and are typically out of reach to the business's creditors.
• In some instances, taxation issues may be more favorable than with an entity purchase.

Common Concerns:*

• Personal after tax funds are used to purchase the insurance and the premium is not tax deductible.
• The cost to each of the owners may be different. For example, a younger partner may have to pay a much higher premium for insurance on an older, health rated partner. The older partner may benefit from the relatively less expensive rates to insure the younger partner's life.
• If there are multiple owners, each must own a policy on every other owner, increasing administrative complexity and possibly total expense.

Note: Split Dollar Funding may be used to allow the business entity to assist the owners in purchase of the insurance policies. Under a Split Dollar Funding program, the business agrees to pay most or all of the insurance premium. The business can then reflect the security interest in the cash value of the plan as an asset. When the policy pays benefits, the company recovers what it paid in premiums. The down side to this is that the longer the policy is in force, the larger the portion that will go to the company rather than for the intended use. In some circumstances, the remaining amount may not be sufficient to make the designated purchase. This can be avoided through use of an adjustable or scheduled term rider or similar features that allow the policy amount to increase with time.

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* - These are some common consideration but by no means an exhaustive list of considerations. There are a number of tax and legal issues that can only be addressed by a careful examination of your specific situation by a qualified professional.