Business Planning: Cross Purchase Agreements
Most business continuation problems can be avoided with planning that includes a cross-purchase agreement. These agreements provide for the orderly transfer of the deceased's business interest to key employees, business partners, co-shareholders, or loved ones at a fair value, determined in advance of the death of one of the business owners.
Under the terms of a cross-purchase agreement, the parties agree in advance to purchase the interest of one of the owners upon his or her death or, in some cases, disability. Generally, this means that the remaining partners, key employees, or family members agree to buy out the shares of the deceased's heirs and they agree to sell. Prices and terms of the buyout are established prior to the owner's death or, in some cases, disability, and apply to all parties who are subject to the terms of the agreement.
Options to Consider
Once a cross-purchase agreement has been established, a means is needed to provide the funds for the eventual buyout. There are generally only four choices available:
- Personal funds, which may deplete resources and cash flow, often requiring loans for ongoing business expenses or growth.
- Installment payments to heirs, which may increase the overall net cost of the purchase through interest charges and may not be acceptable to the heirs.
- Borrowed funds, which may increase the overall net cost of the purchase due to interest charges.
- Separate life insurance policies on each one of the business owners in the closely held business owned by each prospective purchaser as set forth in the agreement, with a death benefit equal to the agreed upon buyout price, which will produce the cash, immediately upon death, to fund the purchase of that decedent's shares.
Transamerica Life (Bermuda) Ltd., Transamerica Life Insurance Company, and their authorized representatives do not give tax or legal advice. The material provided is for informational purposes only and should not be construed as tax or legal advice. Clients and other interested parties must rely solely upon their own tax and/or legal advisor regarding their particular situation.