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Cross purchase buy-sell arrangements

Why choose a cross purchase buy-sell arrangement?

Cross purchase buy-sell arrangements are a business succession strategy in which the owners enter into an agreement to cross-own life insurance on one another.

Upon death, the remaining owner(s) uses the death benefit proceeds to purchase the deceased owner’s share.

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The opportunity

This strategy can:

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

  • A simple business succession strategy
  • Provides a source of funds for the purchase of partner’s share of the business
  • Step-up in basis for shareholders
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Target client

Businesses with the following characteristics:

  • No more than two or three owners
  • May be organized as an S corporation, C corporation, LLC or partnership

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When to use a cross purchase or entity redemption strategy

There are multiple considerations when selecting a buy-sell strategy suitable for a business owned by three or more people.

Learn when to use each

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 on the other owner(s).
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  • If Owner A dies first, Owner B receives the policy’s income tax-free death benefit on Owner A.
  • 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-purchase benefits and considerations


  • Basis increase for the surviving owners
  • Can reallocate the owners’ interests at buyout
  • Assets safe from business creditors life insurance policies funding the agreement


  • Difficult to use insurance proceeds for personal retirement
  • Requires multiple policies on each owner
  • Not safe from personal creditors

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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