August 28, 2026
4:13 am

What Is a Cross-Purchase Agreement?

A cross-purchase agreement is a written contract in which the individual owners of a business promise to buy each other’s shares personally when one of them dies, retires, becomes disabled, or leaves — and each owner usually owns a life insurance policy on every other owner to pay for it. The business itself is not the buyer. The surviving humans are. That single structural detail is what separates a cross-purchase agreement from every other kind of buy-sell arrangement, and it is why a 74-year-old who sold his half of a plumbing company in 2009 may still be paying premiums on a policy insuring a former partner.

The term belongs to the family of documents lawyers call buy-sell agreements. You will see it printed at the top of the signature page, referenced in a shareholder agreement, or named in an operating agreement as “the Cross-Purchase Agreement dated ___.” It appears again in the ownership section of a life insurance application, because the policies that fund it are owned by individuals rather than by the company.

This page explains the decision the agreement forces on you, the two ways businesses answer it, and — the part almost nobody addresses — what to do about the policies that outlive the agreement. Pine Lake Legacy provides education and a free policy review only; it does not provide legal or tax advice, and the structure described here should be confirmed with your own attorney and CPA.

In This Article

The Decision the Agreement Forces: Who Signs the Check
The 2024 Supreme Court Case That Changed the Calculation
The Arithmetic Problem: Why Cross-Purchase Breaks Down Past Three Owners
Where You Actually Meet the Term in Your Paperwork
Terms It Gets Confused With, and the Boundary Line
The Orphaned Policy: What Happens When the Business Is Long Gone
Frequently Asked Questions

The Decision the Agreement Forces: Who Signs the Check

Every buy-sell arrangement answers one question: when an owner exits, who pays for the departing owner’s interest? There are only two real answers, and the choice between them is the whole decision.

Under a cross-purchase agreement, the surviving owners pay personally. Amir and Dana each own half of a machine shop. Amir owns a $2 million policy on Dana; Dana owns a $2 million policy on Amir. When Dana dies, Amir collects $2 million as the policy beneficiary, hands it to Dana’s estate, and receives Dana’s 50% of the company. Amir now owns 100%.

Under the alternative — an entity purchase or redemption agreement — the company owns the policies, collects the proceeds, and buys back the departing owner’s shares itself. The surviving owner’s percentage rises because there are fewer shares outstanding, not because he bought anything.

The practical differences are not cosmetic. In a cross-purchase, the surviving buyer gets a stepped-up cost basis in the shares he just bought, equal to what he paid. In a redemption, he does not; his basis in his original shares is unchanged, which can produce a much larger capital gain if he later sells the business. That basis question is the most common reason accountants push closely held businesses toward the cross-purchase form. Our companion page on entity purchase agreements works the other side of the same decision.

The 2024 Supreme Court Case That Changed the Calculation

In Connelly v. United States, 602 U.S. 257 (2024), the Supreme Court decided unanimously that a corporation’s contractual obligation to redeem a deceased shareholder’s stock is not a liability that reduces the corporation’s value for federal estate tax purposes. In plain terms: when a company owns the life insurance and uses the death benefit to buy back shares, that death benefit is counted as a corporate asset when the decedent’s shares are valued for the estate tax return.

The practical effect is that a redemption funded with company-owned insurance can inflate the taxable value of the estate the arrangement was supposed to help. A cross-purchase, where the policies are owned by individuals rather than the company, does not create that particular problem — the proceeds never sit on the corporate balance sheet.

This mattered enormously to advisors in 2024 and 2025, and many closely held businesses restructured. If your family business signed a redemption agreement before 2024 and nobody has looked at it since, that is a conversation for your attorney and CPA, not for a website. What this page can tell you is that the restructuring wave is real, that it moved policies between owners, and that policy ownership changes have tax consequences of their own — which is the next section.

The Arithmetic Problem: Why Cross-Purchase Breaks Down Past Three Owners

Cross-purchase agreements are funded with individually owned policies, and each owner needs a policy on each other owner. The number of policies required is n × (n − 1), where n is the number of owners.

2 owners: 2 policies
3 owners: 6 policies
4 owners: 12 policies
5 owners: 20 policies
6 owners: 30 policies

Twelve separate contracts, twelve premium notices, twelve sets of beneficiary designations, and twelve chances for one to lapse quietly. Worse, owners are rarely the same age or in the same health, so a 62-year-old with a cardiac history pays far more to insure himself than his 41-year-old partner pays to insure her — while receiving less coverage on a per-dollar basis.

Three common workarounds exist: an insurance LLC or partnership that holds one policy per owner and allocates the proceeds; a trusteed cross-purchase, where a trustee holds the policies for the owners’ benefit; or a wait-and-see agreement that defers the choice between cross-purchase and redemption until the triggering event actually happens. Each has its own tax traps. All three are drafted by an attorney, not chosen from a website.

Feature	Cross-Purchase Agreement	Entity Purchase (Redemption)
Who buys the interest	The surviving owners, personally	The business itself
Who owns the policies	Each owner, on every other owner	The company
Policies needed (4 owners)	12	4
Basis step-up for survivors	Yes, equal to purchase price	No
Effect of Connelly (2024)	Proceeds are not a corporate asset	Proceeds counted in company value for estate tax
Common failure point	Forgotten individually owned policies	Stale valuation clause

The Arithmetic Problem: Why Cross-Purchase Breaks Down Past Three Owners

Where You Actually Meet the Term in Your Paperwork

Four documents carry it, and they should agree with each other. They frequently do not.

The agreement itself. Look for the valuation clause — fixed price, formula, or independent appraisal — and the date it was last updated. A price set in 2006 and never revisited is the single most common defect in these documents.

The life insurance application and policy declarations page. In a true cross-purchase, the owner and the beneficiary are individuals, not the company. If the declarations page shows the corporation as owner and beneficiary, you have a redemption arrangement regardless of what the agreement is titled.

The corporate tax return. A C or S corporation paying premiums on owner-level policies is reporting something — often as compensation or as a distribution. Form 1120-S Schedule K-1 and the company’s books should reflect that consistently.

The estate plan. The agreement’s price may be the value used on Form 706 if the agreement meets the requirements of Internal Revenue Code section 2703 — broadly, that it is a bona fide business arrangement, not a device to transfer value to family for less than full consideration, and comparable to arm’s-length terms. Ask your attorney whether yours does.

Terms It Gets Confused With, and the Boundary Line

Entity purchase / stock redemption agreement. Company buys, company owns the policies. No basis step-up for survivors, and after Connelly the proceeds count in the corporate valuation. This is the true opposite of a cross-purchase.

Key person insurance. Company-owned coverage that replaces lost profits or funds a search for a replacement. It does not buy anyone’s shares and creates no obligation to purchase. Businesses often carry both.

Wait-and-see buy-sell. A hybrid that gives the company a first option to redeem and the surviving owners a secondary option to cross-purchase. Written as one agreement, it can become either structure.

Split-dollar arrangement. A method of sharing premium cost and policy benefits between two parties. It is a funding mechanic, not a purchase obligation, and it can sit underneath either buy-sell structure.

Personal care agreement. Unrelated. That is a family caregiving contract, and confusion arises only because both are sometimes called “the agreement” in the same conversation about an aging parent’s affairs.

The Orphaned Policy: What Happens When the Business Is Long Gone

This is where the term meets the reader’s real decision. Cross-purchase policies are individually owned, and individually owned things get forgotten. A retired owner in his seventies may still hold a $1 million policy on a partner he bought out fifteen years ago, still be paying premiums by bank draft, and no longer have any reason for the coverage to exist.

Four honest options exist, and the order matters. First, confirm the agreement is actually terminated or superseded — a policy that still funds a live obligation should not be touched. Second, check whether the policy can simply be transferred to the insured, who may want it; a transfer to the insured is one of the exceptions to the transfer-for-value rule in Internal Revenue Code section 101(a)(2). Third, price surrender: the carrier will tell you the cash surrender value in writing, and gain above your basis is ordinary income. Fourth, ask whether the policy has a market value above surrender before you cancel anything.

That fourth step is the one people skip. A policy insuring a person in their seventies or eighties, particularly one with declining health, can be worth materially more than its cash surrender value — see how policy fair market value is determined and what to do with a buy-sell policy nobody needs anymore. Warning: a transfer of a policy for value can make part of the death benefit taxable to the buyer, and post-2017 “reportable policy sale” rules add Forms 1099-LS and 1099-SB to the paperwork. Route that question to your CPA before signing anything.

If you want to know whether an old buy-sell policy still has value, send the policy cover page for a free, no-obligation review, or call (732) 978-9575. If the answer is that the policy is worth more surrendered or kept, you will hear that.

Frequently Asked Questions

Who owns the life insurance in a cross-purchase agreement?

Each business owner personally owns a policy on each of the other owners and is named as the beneficiary. The company is neither owner nor beneficiary. If your declarations page lists the corporation in either role, the arrangement is functioning as a redemption, whatever the document is titled. Confirm the ownership line with the carrier in writing.

How many policies does a cross-purchase agreement require?

The formula is n times n minus one. Two owners need two policies, three owners need six, four need twelve, and five need twenty. Past three owners the administrative load usually pushes families toward a trusteed cross-purchase, an insurance LLC, or a wait-and-see structure. That choice belongs with your attorney and CPA.

What did the Connelly decision change?

In Connelly v. United States, 602 U.S. 257 (2024), the Supreme Court held unanimously that a redemption obligation does not offset life insurance proceeds when valuing a company for federal estate tax. Company-owned buy-sell insurance can therefore raise the taxable value of the decedent’s shares. Many closely held businesses reviewed their agreements after the ruling.

I bought my partner out years ago. Can I cancel the policy on him?

Usually yes, once the underlying obligation is genuinely terminated, but check the sequence first. Confirm in writing that the agreement is superseded, ask whether the insured wants the policy transferred to him, get the cash surrender value from the carrier, and find out whether the policy has a market value above surrender before you stop paying.

Is a cross-purchase agreement the same as key person insurance?

No. Key person coverage is owned by the company and pays the company for the economic loss of losing an important employee or owner. It creates no obligation for anyone to buy anyone’s shares. A business can reasonably carry both, which is why the two get confused on the same premium statement.

Does selling an old buy-sell policy create a tax problem?

It can. The transfer-for-value rule in Internal Revenue Code section 101(a)(2) can make part of a death benefit taxable to a buyer, and rules added in 2017 for reportable policy sales bring in Forms 1099-LS and 1099-SB. Amounts you receive above your cost basis are generally taxable to you. Ask your CPA before signing.

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