A Cross-Purchase Agreement provides that the remaining shareholders will each purchase, pro rata, the interest of a departing partner / owner / shareholder upon the happening of a triggering event.
The shareholders enter into a binding agreement for the purchase and sale of their respective interests in the corporation. This agreement obligates the remaining shareholder to buy, and the departing shareholder to sell the shares of a departing shareholder at an agreed-upon or determinable price.
In a Cross-Purchase Agreement, only the remaining shareholders are obligated to purchase shares, allowing the corporation to remain a non-party to the agreement.
In order to fund their purchase obligations, each shareholder obtains life insurance on the other shareholders equal to their pro rata share of the insured's stock interest. Each shareholder is the owner and beneficiary of policies on the lives of the other shareholders.
Upon a shareholder's death, the surviving shareholders receive the policies' proceeds with which they purchase their share of the stock from the decedent's estate.
The decedent's estate receives a new, fair market valuation - a "step-up" in basis - for the stock owned at death (I.R.C. section 1014). As such, the decedent typically recognizes no capital gain pursuant to this sale.
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Fielder Financial Management, Ltd. not affiliated with Girard Securities, Inc. Mark Fielder, OSJ, Registered Principal. CA. Insurance Lic. # 0690576.