Cross-Purchase vs Entity Redemption: Which Buy-Sell Structure Fits You?

TL;DR In a cross-purchase, the owners buy policies on each other. In an entity redemption, the business owns the policies and buys back the departing owner's share. Cross-purchase often gives surviving owners a better tax basis; redemption is simpler with several owners. The right choice depends on your situation, so loop in your CPA and attorney.

A buy-sell agreement decides what happens to an owner's share if they die or leave. Life insurance is how you fund it, so the money is there to buy the share without draining the business. There are two main ways to structure that, and they are genuinely different.

Cross-purchase

Each owner buys a life insurance policy on each of the other owners. If one dies, the survivors use the payout to buy the deceased owner's share directly from the estate.

• Upside: the surviving owners typically get a stepped-up basis in the shares they buy, which can mean a smaller tax bill if they sell later.
• Downside: it gets unwieldy fast. With four owners you need a web of policies, and owners of different ages or health can mean very different premiums.

Entity redemption

The business itself owns one policy per owner and is the beneficiary. When an owner dies, the company collects the payout and buys back (redeems) that owner's share.

• Upside: much simpler with several owners, since the company holds one policy per person instead of everyone insuring everyone.
• Downside: surviving owners usually do not get the same basis step-up, and for C corporations there can be alternative-minimum-tax considerations on the proceeds.

Quick comparison

Why this needs your advisors

Buy-sell structure sits at the intersection of insurance, tax, and corporate law, and recent court attention to how these agreements are valued has made getting the details right more important, not less. The structure should also match your operating agreement so the two do not contradict each other.

The practical path: decide the structure with your CPA and attorney, then put the right policies in place to fund it. That second part is where an independent advisor helps, shopping coverage across carriers so the funding actually fits the plan your advisors design.