Howell & Associates Advanced Planning - Green Bay, Wisconsin

Client Profile

Business owners who want to continue the business in the event of the death, disability or retirement of an owner.


In a cross-purchase agreement, when an owner dies, the surviving business owners agree to purchase the deceased owner’s business interest. Each owner agrees to buy the others’ shares in the event of death, retirement or disability. Each business owner is the applicant, owner, benefi ciary and premium payor for insurance policies on the lives of every other business owner. At death, each surviving owner/ benefi ciary normally will receive the policy proceeds income-tax-free. Each surviving owner pays cash to the deceased owner’s estate, and in return the estate
transfers a pro rata portion of the deceased owner’s business interest. The result is that the state’s nonliquid business interest has been transformed into cash, and the surviving owners own 100 percent of the business.


Increase in Cost Basis The purchasing owners receive an increase in cost basis in the acquired business interest equal to the full purchase price. This is important if an owner sells the stock before his/her death, since capital gains tax will be paid on all proceeds greater than the purchaser’s basis.

Business Value The business does not refl ect the value of the life insurance policy on its
balance sheet. Thus, the value of the business does not increase.

Alternative Minimum Tax The business is not a party to the cross-purchase buy/sell arrangement, thus the life insurance is not subject to Alternative Minimum Tax (AMT).