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.