Glossary
Cross-purchase agreement
A buy-sell arrangement in which each surviving owner personally buys a departing owner's share, usually funded by life insurance the owners hold on one another.
Also called: cross purchase buy-sell, cross-purchase buy-sell agreement, cross-purchase plan
In a cross-purchase agreement, the owners of a business agree that when one of them dies, becomes disabled or retires, the others will buy that owner's interest at a price or by a formula set in advance. To fund it, each owner buys and owns a life insurance policy on each of the others, pays the premiums, and collects the death benefit to pay the estate.
The mechanical drawback is the policy count: n owners need n x (n - 1) policies. Two owners need 2, three need 6, five need 20. Say three equal partners each insure the other two (a hypothetical). That is six policies, and differences in age and health mean unequal premiums that the partners must even out.
The tax case for it is real. Death benefits paid to a policy's beneficiary are generally income-tax-free, and the surviving owners get a cost basis equal to the price they pay, a step-up that an entity redemption does not give them. The policies also sit outside the company, away from its creditors. The transfer-for-value rule (IRC section 101(a)(2)) can make proceeds taxable when a policy is sold for value outside its exceptions, which matters when a partner leaves or joins. A CPA and an attorney should review the plan.
cross-purchase vs entity redemption buy-sell plans compares the two structures, entity redemption defines the alternative, and buy-sell agreement funding calculator sizes the funding.
Last reviewed October 10, 2026