Ask the Experts!
The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers. Here’s the question of the day.
Question: I am working with three clients who together own multiple business entities, including a partnership. The clients want to enter into a cross purchase buy-sell agreement for their businesses. Can we use one policy per insured to fund the buy-sell obligations?
Answer: Yes, if the client’s attorney properly drafts the documents.
Under a simple cross purchase arrangement, each business owner agrees to buy out the interest of the others in the event of a death. To fund their obligations, each of the three owners would own life insurance on the lives of the other two. If there were only one business entity, six life policies would be needed. With multiple business entities, the potential number of policies quickly becomes overwhelming.
It is possible to use a business conduit for the purpose of acting as the master buy-sell funding source. Life professionals have used trusteed cross purchase arrangements in the past for this purpose. In more recent years, life professionals have recommended the use of partnerships as the business conduit—to control potential transfer for value issues.
In this case, the parties already have a business partnership in the form of an LLC. The LLC can be the owner and beneficiary of the life policies, and the LLC operating agreement—which is drafted by the clients’ attorney—can properly allocate the life insurance and its death benefits between the members.
The clients’ attorney will also need to make sure that the documents include details about the buy-sell mechanics for the non-LLC entities owned by the three entrepreneurs.
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