F—Wait and See Buy Sell Agreement

Choosing between a cross purchase and entity purchase agreement is often made difficult because of changing individual and business circumstances, as well as the inevitable “reforms” to our tax laws. One solution to this dilemma is the highly flexible “wait and see” buy-sell agreement, under which the owners agree among themselves, and with the business, to buy and sell their respective interests.

DURING LIFETIME. To illustrate how this works, assume that we have a corporation which is owned equally by A and B. As with both cross purchase and entity purchase agreements, the “wait and see” agreement provides for valuation of their interests, sale upon death, disability, or retirement, and the specific terms of payment. However, unlike cross purchase and entity purchase agreements, the “wait and see” buy-sell agreement does not specifically identify the purchaser. The purchaser and amounts of purchase are not determined until after the death of either A or B.

Life insurance funding of the agreement can be accomplished in a number of ways. A and B ordinarily purchase life insurance contracts on each other (as with cross purchase agreements). Alternatively, the business could purchase life insurance contracts on both A and B (as with entity  purchase agreements). A third alternative involves a combination of the first two methods. Our example assumes that A and B purchase life insurance contracts on each other, are the policy owners, premium payors, and beneficiaries. Under current tax law, having A and B own the insurance and buy the deceased shareholder’s interest at death creates the best tax result by providing for an increase in the survivor’s cost basis equal to the purchase price.

UPON DEATH. For example, should A die first, his stock passes to his family or estate. At the same time, the insurance company pays a tax-free death benefit to B, as beneficiary of the contract insuring A’s life. Pursuant to the agreement the following steps are implemented:

• First step - The business has a first option to purchase A’s stock.


• Second step - If the business does not exercise its option, or purchases less than all of A’s stock, B has a second option to purchase A’s stock.


• Third step - The business is required to purchase any of A’s stock not previously purchased by either the business or B.

Under the first and third steps the business could obtain funds for purchasing A’s stock by borrowing the death proceeds received by B. As with cross purchase and entity purchase agreements, the “wait and see” buy-sell agreement can also serve to help “peg,” or establish, the value of the stock for estate tax purposes.