What is the Structure and Purpose of a Cross-Purchase Buy-Sell Agreement
Every business or enterprise owner should prepare for the future of the company for his departure, whether it is due to death, disability, or any other event. Unwelcome situations may arise, such as a hostile takeover from the deceased spouse, or a surprise bankruptcy filed by a partner. There are ways to protect the company from such events, and one of these is having a buy-sell agreement in place.
A buy-sell agreement is a legal contract stipulating what happens to a company in the event of a partner’s death, disability, or exit. The partners can agree to let the company purchase the deceased’s holdings, and this is called an entity-purchase buy-sell agreement.
The other type is a cross-purchase buy-sell agreement. This is the most basic of buy-sell agreements. The partners agree to purchase the shares of the departed partner without requiring the company to purchase any.
In a cross-purchase buy-sell agreement, the partners take on life insurance policies on each other, and one of them is the beneficiary. Life insurance can then be used to fund the purchase for the remaining shares when the partner passes away or becomes disabled from continuing the business. This is exempted from income tax and creditors cannot claim the life insurance proceeds. This is ideal for business partners who are around the same age as each other so the premium is roughly the same amount for everyone.
If there are too many partners in the company, or if they are of varying ages, the premium can be expensive. The face amount for the life insurance policy is often equal to the amount of the partner’s share in the company’s holdings. The partners can opt to appoint a trustee who becomes the beneficiary across all life insurance policies. This trustee then is responsible for distributing the shares amongst the remaining partners.
A cross-purchase buy-sell agreement can include a predetermined amount in the event of a buyout. This may be updated often depending on the market value or according to an independent appraisal. This buyout can be applicable for instances such as a partner’s divorce, so as not to mess up the financial aspect of the business in the future.
A good cross-purchase buy-sell agreement must be carefully worded to avoid loopholes. Getting an excellent attorney is vital to drafting a binding cross-purchase buy-sell agreement. East Coast Financial of Central Florida has a network of estate lawyers that are experts in drafting or reviewing cross-purchase buy-sell agreements for companies. They can assist in ensuring that proper clauses and language are in place for the business structure.
East Coast Financial of Central Florida also ensures that the life insurance policies in a cross-purchase buy-sell agreement are well funded so your business is taken care of in the event of untimely death or disability. Their team of experienced agents will guide you step by step as you plan for your enterprise’s agreement. They can recommend legal partners that will assist you in drafting the binding agreement and in finding the correct funding source. East Coast Financial of Central Florida promises to deliver a properly funded buy-sell agreement for your business. Please visit here for more details: https://ecfofcf.net/funding-a-buy-sell-agreement