Unit XX Business Insurance

Buy-Sell Agreements — Which Plan When?

Although a qualified attorney must make this recommendation based on the client's situation, here are some rules-of-thumb:

Number of principals

Because of the potentially large number of policies involved, cross-purchase plans are usually not favored when there are more than three principals in the business.

Example: If four principals enter a cross-purchase buy-sell agreement, 12 separate policies will be needed. In an entity-purchase/stock redemption plan, only four policies would be needed. The number of policies needed in a cross-purchase plan is determined by this formula...

Number of policies = n(n-1)
Where n = number of shareholders

Age of Principals

Cross-purchase plans generally favor older owners; entity-purchase/stock redemption plans tend to favor younger owners.

Ownership interest

Cross-purchase plans tend to favor majority owners; entity-purchase/stock redemption plans generally favor minority owners.

Comparative tax brackets

For corporations, a cross-purchase plan may be more appropriate if the principals' individual tax brackets are lower than the corporate tax bracket. A stock redemption plan may be appropriate if the corporate tax bracket is lower than the owner/shareholders' individual tax brackets. If the business may be taking in new principals in the future, adjusting the insurance policies in a cross-purchase plan can be more complicated than under an entity-purchase/stock redemption plan.

Convertibility

Cross-purchase plans are readily converted to entity-purchase/stock redemption plans. Because of transfer-for-value problems, it is less attractive to convert entity-purchase/stock redemption plans to cross-purchase plans. Cross-purchase plans avoid IRS "attribution" rules that can create problems in family-owned corporations.

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