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Cross endorsed buy-sell arrangement

Why choose a cross endorsed buy-sell arrangement?

A cross endorsed buy-sell arrangement is a business succession strategy in which the business owners purchase life insurance policies on their own lives, and “rent”1 a portion of the death benefit to the other owners. The rented portion of the death benefit serves as a source of funds with which to purchase the shares of a deceased owner.

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The opportunity

This strategy can:

  • Ensure business continuity and maintain marketability in the event of an owner’s death
  • Guarantee a buyer for their share of a business
  • Create liquidity for a deceased owner’s family
  • Avoid conflict of interest between surviving owners and the family of a deceased owner
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Three valuable features

  1. Each owner owns his or her own policy
  2. Provides a source of funds for the purchase of a partner’s share of the business
  3. Strategy is estate-tax neutral if executed properly
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Target client

Businesses with the following characteristics:

  • Partnerships and LLCs taxed as partnerships
  • C or S corporations where there is more than one owner, and the business owners are also partners in another business with common ownership that is taxed as a partnership
  • Need to create a funding mechanism to fund a buy-sell agreement

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How it works

  • The business owners enter into an agreement prepared by an attorney. The agreement provides that on the death of one owner, the surviving owner(s) will buy the deceased owner’s share of the business with cash.
  • Each business owner applies for and owns a life insurance policy insuring him/herself.
  • A portion of the death benefit is endorsed to the other owner(s).1
Cross endorsed rental buy sell lg
  • If Owner A dies first, Owner B receives the endorsed death benefit from Owner A’s policy.
  • Owner B uses the death benefit to buy Owner A’s share of the business from the surviving family.
  • Owner A’s family receives cash, and Owner B retains the business and becomes the sole owner.
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Cross endorsed benefits and considerations


  • Gives a basis increase for surviving owners
  • Can reallocate the owners’ interests at buyout
  • Cash value and death benefit are safe from business creditors
  • Works well for two or three business owners
  • Allows business owners to own and control the life insurance policies funding the agreement
  • Ensures business is transferred according to owners’ wishes
  • Agreement can terminate at any time with each owner retaining his or her life insurance policy


  • Not safe from personal creditors
  • Administration can be complex with more than two or three business owners
  • Written notice and consent rules may apply
  • Rental income must be recognized by each owner
  • May have transfer-for-value issues; clients should discuss this strategy with their legal and tax advisors

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1. With the endorsed death benefits, each owner charges the other owners a fee for “rental” of the death benefit. This fee is based on the reportable economic benefit of the death benefit’s cost, and must be reported as taxable income.

Life insurance products contain fees, such as mortality and expense charges, (which may increase over time) and may contain restrictions, such as surrender periods.

Please keep in mind that the primary reason for purchasing life insurance is the death benefit.

Additional agreements may be available. Agreements may be subject to additional costs and restrictions. Agreements may not be available in all states or may exist under a different name in various states and may not be available in combination with other agreements.

Policy loans and withdrawals may create an adverse tax result in the event of lapse or policy surrender and will reduce both the surrender value and death benefit. Withdrawals may be subject to taxation within the first fifteen years of the contract. Clients should consult their tax advisor when considering taking a policy loan or withdrawal.

The Policy Design chosen may impact the tax status of the policy. If too much premium is paid, the policy could become a modified endowment contract (MEC). Distributions from a MEC may be taxable and if the taxpayer is under the age of 59 ½ may also be subject to an additional 10% penalty tax.    

An annuity is intended to be a long-term, tax-deferred retirement vehicle. Earnings are taxable as ordinary income when distributed, and if withdrawn before age 59½, may be subject to a 10% federal tax penalty. If the annuity will fund an IRA or other tax qualified plan, the tax deferral feature offers no additional value. Qualified distributions from a Roth IRA are generally excluded from gross income, but taxes and penalties may apply to non-qualified distributions. Please consult a tax advisor for specific information. There are charges and expenses associated with annuities, such as surrender charges (deferred sales charges) for early withdrawals.

This information may contain a general discussion of the relevant federal tax laws. It is not intended for, nor can it be used by any taxpayer for the purpose of avoiding federal tax penalties. This information is provided to support the promotion or marketing of ideas that may benefit a taxpayer. Taxpayers should seek the advice of their own tax and legal advisors regarding any tax and legal issues applicable to their specific circumstances.

For financial professional use only. Not for use with the public. This material may not be reproduced in any form where it is accessible to the general public.

DOFU 10-2022