When Is A Cross Purchase Buy-Sell Agreement Plan Used

If several business owners are seeking the benefits of a cross-purchase agreement, but at the same time want to avoid the risks associated with a cross-purchase, the formation of a separate limited liability company managed by a manager („Insurance LLC“) should be considered to own and manage the insurance policies that insure the lives of business owners. Existing policies held by owners can be transferred to Insurance LLC, or new policies can be purchased from Insurance LLC. Each member of Insurance LLC is designated as the beneficial owner of life insurance policies that insure other members whose interest in that member`s business unit is to be acquired under the operating company`s purchase and sale agreement on death. Life insurance policies must also designate the insurance LLC as the beneficiary. The fact that Insurance LLC owns all policies provides centralized management and creditor protection for the policies it holds, and avoids the inclusion of inheritance tax for its owners, benefits that are otherwise not available if the individual owners own the policies. It also avoids poor tax outcomes if an owner leaves the business and ownership of the policy needs to be adjusted. While incorporating an insurance LLC into a purchase-sale agreement can result in costs and complexity, the benefits of an insurance LLC can often outweigh these costs. Ownership of the insurance LLC is equivalent to that of the business unit, and an independent person or corporate trustee should act as manager. Each member of Insurance LLC must make capital contributions equal to the premiums of the life insurance policy for which he or she is designated as the beneficial owner, in accordance with the member`s purchase obligation under the operating company`s purchase and sale agreement. If a policy has more than one beneficial owner, each member`s contribution to the policy premiums should be proportional to the member`s total percentage of interest in the business unit (if the purchase-sale provides for a pro-rated purchase). Example.

A has a total interest of 35% in the business unit and B has a total interest percentage of 5% in the business unit. A and B are the beneficial owners of a policy that ensures the life of C, with an annual premium of $1,000. A would make an annual contribution of $875 (35%/40% x $1,000), and B would make a contribution of $125 (5%/40% x $1,000). Typically, the farmer`s unit pays life insurance premiums on behalf of its owners to ensure that premiums are paid. Provisions may be included in the operating company`s purchase and sale agreement, which requires the company to make contributions to Insurance LLC on behalf of its members, and the company must treat these contributions as distributions to its owners who, as mentioned above, are also the owners of The Insurance LLC. For each policy whose member is designated as beneficial owner, a separate capital account is held, which is credited for the contribution to the payment of the insurance premium. Assuming that the policy held by Insurance LLC is a temporary policy, the contribution expires during the year because the policy expires without further payments. Each time members re-contribute to the payment of the premium, ownership of the death benefit is reallocated. This accounting is done separately for each owner`s policy.

Note that if a policy held by Insurance LLC is a present value policy, contributions will not expire and will appear in the principal account of that policy. Separate management of the capital account allocates the insurance securities received from LLC Insurance to surviving members who are required to acquire the deceased member`s shares in the business unit. .