Are you looking to ensure that your minority shareholders pay you and your family a fair price for your shares in the event of your death, disability or retirement? As the majority shareholder, you can exercise a lot of control but you want to be fair. After all, we’re talking about the business that you helped to create and grow, and your co-shareholders may be the future of the business. What’s the best way to accomplish what you need to safeguard your financial interests as well as those of the business?


One Solution – The Cross Purchase Buy-Sell Arrangement

The insured cross-purchase buy-sell agreement can help you accomplish your goals of creating a succession plan for the business while ensuring yours and your family’s financial security. And, to top it off, the tax consequences are very much in your favor.

Cross purchase buy-sell plans are ideal for businesses that have less than four co-owners. Please review Guardian’s Understanding the Funded Corporate Cross Purchase Buy-Sell Arrangement informational article for a general overview of cross purchase plans. However, where the co-owners are not equal owners, there are special considerations. In most closely-held corporations, the owners work side-by-side with the non-owner employees, and receive (or can receive) W-2 compensation income, deductible to the corporation. Let’s look at how this works tax-wise for the majority shareholder of a regular “C corporation” when there is a cross-purchase agreement in effect, funded by corporate-paid insurance on each shareholder’s life.

XYZ Corporation, with 100 shares, is owned by you with 60 shares, Mr. Bhee with 20 shares, and Ms. Carr with 20 shares. You are not related, and you are the oldest, with Carr the youngest. You enter into an insurance-funded cross-purchase agreement, stating that at the death of any shareholder, the survivor(s) must buy the deceased’s shares. The total annual premiums for the permanent life insurance needed are: $15,000 on your life, $12,000 on Bhee’s life, and $9,000 on Carr’s life. The corporation will pay all of the premiums and treat it as compensation income to the individuals as demonstrated below.
The first thing to remember is that each shareholder will own policies on each other’s lives. Since you are not the owner of the policy on your own life, and the other shareholders each own 20 shares, Bhee and Carr must each include $7,500 as compensation income (20/40 of the $15,000 premium). This compensation payment is deductible to the corporation. Similarly, the owners of the policy on Bhee’s life (you and Carr) hold 80 shares altogether, so you have compensation equal to $9,000 (60/80 of the $12,000), and Carr has $3,000 (20/80 of the $12,000). Similarly, for the $9,000 premium on Carr’s policy, your 60/80 share is $6,750, and Bhee’s is $2,250.

So far, the total taxable amounts break out like this:

Insured	You	Bhee	Carr
You	--	$7,500	$7,500
Bhee	$9,000	--	$3,000
Carr	$6,750	$2,250	--
Totals:	$15,750	$9,750	$10,500

BUT REMEMBER – the total premiums your Company paid equal $36,000. Since 60% of $36,000 is $21,600 (and 20% of $36,000 is $7,200), you can see that the $15,750 figure in the chart means you are being taxed on LESS than your proportionate share, and Bhee and Carr are being taxed on more, $9,750 and $10,500, respectively. Yet, your estate will receive the largest payment for its stock. Although it appears that you are being helped more by this arrangement, this is actually fair to all parties. For instance, since you are the majority shareholder who, in the absence of a binding buy-sell agreement such as this, you could change the entire future of the company. You could sell your controlling interest to an outsider who might take steps adverse to the minority shareholders (e.g., to force Bhee and Carr off the payroll as employees, and to deprive them of profits as shareholders and of any voice in running the business). But, by using the insured cross-purchase agreement, you are securing everyone’s future in the company and creating a succession plan that can leave the company in Bhee’s and Carr’s hands in the future. This is a good deal for you and your business partners.

Please consult with your Guardian Financial Representative if you have any questions concerning this document.


The foregoing information regarding estate, charitable and/or business planning techniques is not intended to be tax, legal or investment advice and is provided for general educational purposes only. Neither Guardian, nor its subsidiaries, agents or employees provide tax or legal advice. You should consult with your tax and legal advisor regarding your individual situation.

GEAR # 2009-1671 Approved: 02/18/2009 Expiration: 12/31/2011

Guardian Financial Representatives may call their assigned BRC Consultant directly or the BRC for Advanced Markets, at 1.800.871.7780, Option 3, Option 1, for additional information.