Using Life Insurance to Fund the Agreement

Life insurance is often an appropriate way to help fund a cross-purchase agreement, but this may depend on the health and ages of the owners. Manageable periodic premium payments can help assure the availability of funds for purchasing a deceased owner's business interest, regardless of when the owner dies. If a reserve or investment fund is used, it may take years to accumulate an adequate fund.

Premium Payments

Regarding premium payments, with a cross-purchase agreement each owner pays for the policies he or she owns. However, premiums can be burdensome for younger owners who must pay for policies on older owners who may also have a larger business interest. There are no rules or guidelines that can be applied in every situation. It may be easier to use an entity or stock redemption agreement so the business itself makes the premium payments.

Split-Dollar Cross Purchase

An owner could insure another owner whose interest he or she is obligated to purchase by means of a split-dollar arrangement. For example, Alpha and Theta enter into a cross purchase agreement and help fund their respective obligations by obtaining life insurance on each other's life. They enter into split dollar arrangements with their corporation which prescribe a sharing of premiums and death proceeds. Each owner-employee will pay a part of the premium, equal to the economic benefit of the coverage for that year on the insured co-owner. Under a separate agreement, the corporation could bonus out annually an amount sufficient to cover the taxable economic benefit.

When Theta dies, the insurance company pays part of the death proceeds to the corporation as reimbursement under the terms of the split-dollar arrangement. The balance of the proceeds are paid to Alpha, who uses them to help purchase Theta's interest from his estate. The IRS issued split-dollar final regs in September 2003.