US Legal Forms
Corporate Cross Purchase Agreement

Corporate Cross Purchase Agreement

Category:

Corporations - Cross Purchase

State:

Multi-State

Control #:

US-0920BG

Format:

Instant download

Description

A cross-purchase agreement sets forth how ownership in a business transfers if the owner dies, retires or becomes disabled. The parties to a cross-purchase agreement always include a seller and a buyer. Cross-purchase agreements aim to ensure that sellers (or their beneficiaries) receive and buyers pay a fair price for their interests.

Some cross-purchase agreements use a dollar amount to calculate the buy-out price, while others use a formula. A valuation of the interest that is the subject of the agreement should be made periodically.

A Corporate Cross Purchase Agreement is a legal agreement between two or more entities, typically shareholders or business partners, to buy out the shares of a deceased party. In the event of death or disability, the surviving parties agree to take on the shares of the deceased, ensuring the ongoing success of the business. There are two primary types of Corporate Cross Purchase Agreements: Internal and External. Internal Cross Purchase Agreements are between two or more shareholders of the same company, while External Cross Purchase Agreements involve multiple companies. Both agreements are designed to provide financial security and continuity to the business in the event of death or disability. Additionally, these agreements help to ensure that the deceased's shares are passed on to the right person or persons.

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FAQ

The main disadvantages of the cross-purchase plan are the complications that arise because each owner has to buy and manage a policy for each of their partners. The estate of the deceased owner benefits from a tax advantage with an entity purchase plan.

purchase agreement is a document that allows a company's partners or other shareholders to purchase the interest or shares of a partner who dies, becomes incapacitated or retires. The mechanism often relies on a life insurance policy in the event of a death to facilitate that exchange of value.

In a cross purchase buy-sell agreement, each business owner buys a life insurance policy on the other owner(s). With multiple owners, this can get very complex and complicated. Instead, try a trusteed cross purchase buy-sell, in which a third-party (acting as trustee) takes care of the buy-sell arrangement.

Advantages of a Cross Purchase Agreement A cross purchase agreement allows a smooth transition of ownership from departing partners or shareholders to others in the company. The transfer of ownership through the proceeds from life insurance is not subject to income tax.

The main disadvantages of the cross-purchase plan are the complications that arise because each owner has to buy and manage a policy for each of their partners. The estate of the deceased owner benefits from a tax advantage with an entity purchase plan.

With a redemption plan, the business enters into a contract with the owners to purchase each owner's interest at a specified time. In the cross- purchase arrangement, the owners establish an agreement among themselves to buy and sell the stock. The business entity is not a party to the arrangement.

The surviving owners have a better tax consequence from the cross purchase plan than the entity purchase plan in their own future exit. When the owner(s) purchase the business interest of their departed or deceased owner, their basis increases by what they pay to the exiting owner or estate of the deceased owner.

Example: Alma owns 60%, Betty 20% and Catherine 20% of their company. The cross-purchase agreement states that if one owner dies, her interest is divided equally between the survivors. Therefore, if Betty dies, Alma's ownership interest grows from 60% to 70%, while Catherine's interest grows from 20% to 30%.

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