I—Trusteed Cross Purchase Agreement

The trusteed cross purchase agreement is one means of providing for the complete disposition of a business interest. Trusteed cross purchase agreements are also known as “custodian” or “escrowed” agreements. The provisions for an escrow agent can be part of the cross purchase agreement, or provided for in a separate agreement. The trusteed cross purchase agreement can be used with either a corporation or a partnership. With a sole proprietorship, a similar escrowed arrangement could be established between the sole proprietor and a key employee. However, since the key employee has no ownership interest, there are no reciprocal obligations to buy and sell. The sole proprietor would merely be obligated to sell and the key employee obligated to buy.

In recent years there has been a substantial increase in the use of cross purchase agreements (as opposed to entity purchase agreements). The factors contributing to this include: (1) the avoidance of the attribution rules with a family-held corporation; (2) the increase of cost basis for the surviving stockholders; and (3) the ability to convert to a entity purchase agreement using the same policies without running afoul of the transfer for value rules.

Under this arrangement the owners use a third party to carry out their cross purchase agreement. Although sometimes referred to as a “trustee,” this individual is not acting as a trustee in a formal trust sense. Rather, the trusteed cross purchase agreement more closely resembles an escrow arrangement, under which an escrow agent acts as agent for the owners in carrying out their mutual obligations to each other.