Two ways to structure a buy sell agreement
A cross purchase agreement has each owner personally buy a life insurance policy on every other owner. When an owner dies, the surviving owners use the death benefit to buy that owner's shares directly from the estate, and ownership passes between the individuals. An entity purchase agreement, also called a stock redemption, works differently. The business itself owns one policy on each owner and pays the premiums. When an owner dies, the company collects the death benefit and redeems the shares, buying them back from the estate rather than having the surviving owners buy them personally. Both accomplish the same basic goal: a funded, obligated buyout at death so the business does not stall and the deceased owner's family gets paid fairly. The mechanics, tax results, and administrative burden differ enough that the choice deserves real thought.
Comparing the two structures side by side
The practical differences between cross purchase and entity purchase show up in five places: how many policies the arrangement requires, who is responsible for paying premiums, who actually receives the death benefit when an owner dies, how the surviving owners' cost basis is treated afterward, and how much harder the structure gets to administer as more owners join the business. The table below lays out those five factors along with a general read on where each structure tends to fit best. None of this replaces a conversation with your attorney about your specific ownership agreement, but it gives you a starting framework before that conversation happens.
| Factor | Cross purchase | Entity purchase |
|---|---|---|
| Number of policies with 3 owners | Six policies | Three policies |
| Policy owner | Each individual owner | The business entity |
| Premium payer | Each individual owner | The business |
| Death benefit recipient | Surviving owners | The business |
| Surviving owner cost basis | Generally increases | Generally unchanged |
| Administrative complexity as owners increase | Rises quickly | Stays comparatively simple |
| Typical best fit | Two to three owners | Larger or uneven ownership groups |
Comparison of cross purchase and entity purchase buy sell structures.
Cost basis and why it matters later
One of the most consequential differences between the two structures is what happens to the surviving owners' cost basis in the business. In a cross purchase, the surviving owners personally buy the departing owner's shares, so their cost basis in the business generally increases by what they paid. That higher basis reduces the taxable gain when they eventually sell the business or their remaining shares. In an entity purchase, the company redeems the shares, not the individual owners, so the surviving owners' personal cost basis generally does not increase. The shares they already held keep their original basis, which can mean a larger taxable gain down the road even though the ownership percentages end up the same as a cross purchase. This is exactly the kind of detail that depends on your specific facts, entity type, and the language of your agreement. Confirm the actual tax treatment with your CPA or tax attorney before choosing a structure.
Variations worth knowing about
A one way buy sell agreement is used when the outcome is already clear, for example a much older partner planning to be bought out by a younger one, or a family succession where one heir is expected to take over. Instead of a mutual buyout arrangement, only one direction of purchase is funded. A trusteed cross purchase solves the policy count problem. A trustee holds a single policy on each owner rather than every owner holding a policy on every other owner, which cuts the number of policies needed and simplifies premium payments and beneficiary designations as the ownership group grows. Some businesses also use a wait and see or hybrid agreement, which delays the choice between entity purchase and cross purchase until an owner actually departs, giving the remaining owners flexibility to decide based on the tax rules in place at that time.
Which structure fits, and how Lara helps
With two or three owners who want the surviving partners to get a basis step up, cross purchase is usually the more natural fit. It gets harder to manage once you have several owners, since the number of policies grows quickly. With more owners, uneven ages or contributions among partners, or a preference for simpler administration, entity purchase tends to work better since the business holds one policy per owner rather than everyone holding a policy on everyone else. Lara Goulson is licensed in all 11 states she serves and works with business owners by phone and video, so location is rarely a barrier to getting this set up. She does not draft the buy sell agreement itself; that legal work belongs with your attorney. What she arranges is the funding, comparing policies across carriers so the insurance side of the agreement is priced and structured correctly from the start.
Get the funding structured correctly
Lara Goulson helps business owners compare disability and life insurance options that fund buy sell agreements, whichever structure your attorney recommends. She works by phone and video across all 11 states where she is licensed, and there is no cost to you for her help since carriers compensate her directly. If you already have a buy sell agreement in place or one being drafted, bring it to a call so the funding matches the language exactly.
Call (818) 472-5484 for a no cost review of your buy sell funding.
Licensed in 11 states · 5.0 rated on Google · No cost to work with you