B—Cross Endorsement Buy-Sell Agreement

The trusteed cross purchase agreement is one flexible means of providing for the complete disposition of a business interest. However, the cross endorsement buy-sell agreement is an alternative which can provide the benefit of basis-step up typically found in a cross purchase agreement with the simplicity and flexibility of individual policy ownership by the insured shareholders. Unlike the trusteed cross purchase agreement and the escrow and partnership versions of that structure, each shareholder simply purchases a permanent policy on his or her own life. No third party is required to own or facilitate the arrangement. This type of arrangement is sometimes referred to as the retirement buy-sell because of the flexibility to utilize cash value policies for dual use.

DURING LIFETIME. To illustrate how this works, assume that we have a corporation owned by four stockholders, A, B, C, and D. They enter into a buy-sell agreement providing for the purchase and sale of their respective interests. Typically, this agreement is binding and obligates all stockholders, or their representatives, to either buy or sell upon their death, disability, or retirement.

To fund the agreement the stockholders simply endorse some or all of the death benefit on a policy (or policies) insuring their own life to the other shareholders. For example, A would endorse a portion of the death benefit on his or her life insurance policy (equal to the purchase obligation of that shareholder) to each of B, C, and D. Likewise, B would endorse his or her death benefit to A, C, and D. C and D would do the same with the result that each of A, B, C, and D could own a single permanent policy on his or her life that would be partially endorsed to each of the other three shareholders. A, B, C, and D can continue to own their own life insurance policy and their own shares of stock without the need to make a transfer. Like a trusteed cross purchase agreement, a cross-endorsement arrangement can substantially reduce the number of policies required to fund a cross-purchase buy-sell agreement.

UPON DEATH. Assuming that A dies first, the insurance company pays the death benefit to the shareholders as provided for under the split dollar endorsement agreements. Assuming A, B, C, and D were equal shareholders – the death benefit would be paid (tax-free) one-third to each of B, C, and D. Pursuant to the buy-sell agreement, A’s estate would transfer A’s entire stock interest (one-third each) to B, C, and D in exchange for the cash received from the insurance company. The fully funded agreement can assure that A’s surviving family receives a fair price for his or her interest in the business. But such an agreement can also serve to establish, or “peg,” the value of the stock. The remaining shareholders would have their cost basis in the business increased by the amount paid to A’s heirs. Most importantly, under this structure, if the business is sold or otherwise terminated during the insureds’ lifetimes, the life insurance policies are owned by the individual insured. All that is required is that the parties cease the annual rental of the death benefit under the endorsement split dollar arrangement.