What it is:
- A plan that assures the continuation of a business after the death of an owner
How it works:
Advantages:
- Provides for business survival after the death of an owner
- Provides a plan for dealing with the company’s liabilities and financial responsibilities
- Creates a market for the business interest
- Converts non-liquid business interest into cash for family
- Facilitates the estate settlement process
- Provides money to buy the business interest
- Helps fix the value of the business interest in the estate
Cross Purchase Arrangement
Advantages
- Increased basis for survivor’s interest
- Can take advantage of possible lower tax bracket for individual
- Cash values of policies are available to individuals for lifetime buyout
- Guarantees that control goes to desired persons
Disadvantages
- Requires individuals pay for policies with personal dollars (unless split dollar is used)
- Requires more than one policy per insured if more than two parties to agreement
- Differences in ages of insureds will require a larger premium to be paid by younger parties on policies of older sharholders