Buy-Sell Agreement Funding
Cross-Purchase Buy-Sell Agreements: Owners Insuring Each Other
Published October 6, 2026 · Updated October 10, 2026
Short Answer: What a Cross-Purchase Buy-Sell Agreement Is
A cross-purchase buy-sell agreement is a contract in which co-owners of a business agree to buy a departing owner's interest themselves, rather than having the business buy it. Life insurance commonly funds it: each owner owns, pays for and is beneficiary of a policy on each other owner, and uses the death benefit to buy the deceased owner's interest from the estate or heirs.
The question usually comes from partners, shareholders and members of closely held companies who already have, or are drafting, a buy-sell agreement and want to understand the cross-purchase plan before comparing it with other designs. In an entity-purchase (redemption) agreement, by contrast, the business itself owns the policies and buys back the interest; Business Life Insurance compares the two on its page on cross-purchase versus entity-purchase. The Supreme Court described the arrangement in the same terms: "an arrangement in which shareholders agree to purchase each other's shares at death and purchase life-insurance policies on each other to fund the agreement" (Connelly v. United States, 602 U.S. 257 (2024)).
The Planning Objective Behind a Cross-Purchase Plan
When a co-owner dies, the business inherits a problem before it inherits anything else. The deceased owner's interest passes to an estate or to heirs who may not work in the business, may want cash rather than an ownership stake, and may have no agreed way to set a price. The surviving owners, meanwhile, may not want an outside co-owner and may not have the cash to buy the interest. Without a binding plan, the result can be a dispute, a forced sale or a liquidation.
A cross-purchase agreement addresses three needs at once:
- Ownership continuity. The agreement says who buys the interest, so ownership stays with the people running the business.
- Valuation certainty. The agreement fixes a price or a method for setting one, so the estate and the survivors are not left to negotiate at a difficult moment.
- Liquidity. Life insurance supplies cash at the moment the purchase obligation arises.
The agreement is the plan; the insurance is only the funding mechanism. A policy without a binding agreement leaves the survivors with cash and no obligation, and an agreement without funding leaves them with an obligation and possibly no cash.
The agreed price also matters beyond the owners' bargain. For federal estate-tax purposes, Section 2703 of the Internal Revenue Code provides that the value of property is generally determined "without regard to" an agreement to acquire it at less than fair market value or a restriction on its sale, unless the agreement is "a bona fide business arrangement," is "not a device to transfer such property to members of the decedent's family for less than full and adequate consideration," and has terms "comparable to similar arrangements entered into by persons in an arms' length transaction" (26 U.S.C. § 2703). Business valuation for buy-sell funding and the estate-tax treatment of the agreed price need individual review of the agreement by qualified valuation, tax and legal professionals. Buy-sell funding generally is explained on the site's buy-sell life insurance page, and broader planning on its business succession page.
How the Cross-Purchase Structure Works
Mechanically, the structure rests on four facts about each policy: who owns it, who pays for it, who is the beneficiary, and how the proceeds are used.
- Ownership. Each co-owner applies for and owns a separate policy on the life of each other co-owner.
- Premiums. The owning co-owner pays the premiums, the periodic payments that keep the policy in force, from personal funds.
- Beneficiary. The owning co-owner is named as beneficiary, the person who receives the death benefit.
- Use of proceeds. At an owner's death, each surviving owner collects the death benefit on the policy he or she owns and uses it to buy the agreed share of the deceased owner's interest from the estate or heirs.
Policy count. With N owners, a direct cross-purchase plan needs N × (N − 1) policies. In a hypothetical three-owner business, that is 3 × (3 − 1) = 3 × 2 = 6 policies. Two owners need 2 × 1 = 2 policies.
Premiums are not deductible. Section 264(a)(1) of the Internal Revenue Code provides that "No deduction shall be allowed for— (1) Premiums on any life insurance policy … if the taxpayer is directly or indirectly a beneficiary under the policy or contract" (26 U.S.C. § 264(a)(1)). In a cross-purchase plan, each owner is the beneficiary of the policies he or she pays for.
Death benefit. Section 101(a)(1) provides that "gross income does not include amounts received … under a life insurance contract, if such amounts are paid by reason of the death of the insured" (26 U.S.C. § 101(a)(1)). That general rule is subject to the transfer-for-value rule of section 101(a)(2) and the employer-owned contract rule of section 101(j).
After the buyout. The surviving owners' policies on each other generally remain in force. The deceased owner, however, owned policies on the survivors' lives, and those policies become assets of the estate. The agreement commonly addresses whether they are sold to the insured survivors, to other owners, or surrendered. Any such sale is a transfer of a policy, which brings the transfer-for-value rule into play.
Parties Involved in a Cross-Purchase Agreement
Every owner in a cross-purchase agreement holds two roles at once. Until someone dies, each owner is both a potential buyer and a potential seller, and which role becomes real depends on the order of deaths.
- The co-owners (partners, shareholders or LLC members) are the parties to the agreement. Each agrees to buy if another owner dies and agrees that his or her own interest will be sold if he or she dies first.
- The policy owner and premium payer for each policy is the co-owner who will need cash to buy.
- The beneficiary of each policy is that same co-owner.
- The insured under each policy is the co-owner whose life it covers.
- The sellers at a death are the deceased owner's estate or heirs; the buyers are the surviving owners.
- The business entity is not a party to the insurance contracts in a pure cross-purchase plan.
That last point carries tax weight. Section 101(j) applies to an "employer-owned life insurance contract," which it defines as one "owned by a person engaged in a trade or business" under which that person is directly or indirectly a beneficiary, covering an employee (26 U.S.C. § 101(j)(3)(A)). IRS Notice 2009-48, A-1, states that "a contract that is owned by the owner of an entity engaged in a trade or business (such as for purposes of financing the purchase of an equity interest of another owner) … is not an employer-owned life insurance contract." The same notice, A-3, adds that ownership "by a partnership or sole proprietorship does not prevent the contract from being treated as an employer-owned life insurance contract." Whether a given policy is owned by an owner or by the business is a fact to confirm in each arrangement.
Who This Structure Is For
Cross-purchase plans are typically considered by closely held businesses with two or more co-owners: partnerships, S corporations, C corporations and professional practices. The business form matters because some federal rules turn on it.
- Partnerships. The transfer-for-value exceptions in section 101(a)(2)(B) include a transfer "to a partner of the insured" and "to a partnership in which the insured is a partner" (26 U.S.C. § 101(a)(2)(B)). That becomes relevant if policies later change hands among partners.
- Corporations. The same list includes "a corporation in which the insured is a shareholder or officer," but it does not include a co-shareholder. Shareholders who insure each other directly therefore stand differently from partners if a policy is ever reassigned.
- Small ownership groups. Because the policy count is N × (N − 1), the structure is administratively simpler with fewer owners.
- Owners who want proceeds outside the business. In a cross-purchase plan, proceeds go to the owners, not the entity.
Professional practices carry an extra layer: professional licensing and ownership rules, including who may hold an interest after a death, vary by state and profession and are outside the scope of this page.
When a Cross-Purchase Plan May Fit
Certain facts tend to appear where owners and their advisers consider a cross-purchase plan. None of them decides the question on its own.
- Two or three owners, where the policy count stays manageable: two policies for two owners, six for three.
- Owners of similar age and health, so the premium cost each owner bears is roughly comparable.
- A partnership, where the section 101(a)(2)(B) exceptions for transfers to a partner of the insured or to a partnership in which the insured is a partner bear on any later policy transfers.
- A preference for keeping proceeds off the entity's books, so the insurance is not an asset of the business.
- A preference for direct obligations, where each owner wants a contractual promise from the other owners rather than from the entity.
We're Here for You
We're your trusted California business life insurance advisor. Call us 7 days a week, or send us a message, to have a real conversation about what your business needs.
When a Cross-Purchase Plan May Not Fit
Rapid growth in the number of policies is the most visible strain. Five owners need 5 × (5 − 1) = 5 × 4 = 20 policies, each with its own premium schedule, beneficiary designation and owner.
Other facts can also weigh against the structure:
- Age or health differences. A younger owner insuring an older or less healthy owner may face much higher premiums than the older owner pays in return.
- Personal liquidity. Each owner pays premiums personally. The Supreme Court observed that a cross-purchase agreement "would have required each brother to pay the premiums for the insurance policy on the other brother, creating a risk that one of them would be unable to do so" (Connelly v. United States, 602 U.S. 257 (2024)).
- Trusteed arrangements. Where owners consider having a trustee hold the policies to reduce the policy count, the arrangement adds its own ownership and tax questions that turn on how it is drafted.
The entity-purchase alternative is covered on the site's comparison page.
Tax Treatment of a Cross-Purchase Buy-Sell Agreement
Four federal income-tax questions arise in nearly every cross-purchase plan: premiums, the death benefit, transfers of policies, and basis. An estate-tax question about the price sits alongside them.
Premiums. Section 264(a)(1) provides that no deduction is allowed for "Premiums on any life insurance policy … if the taxpayer is directly or indirectly a beneficiary under the policy or contract" (26 U.S.C. § 264(a)(1)). Because each owner is the beneficiary of the policies he or she pays for, the rule applies directly.
Death benefit. Section 101(a)(1) provides that, "Except as otherwise provided in paragraphs (2) and (3), subsection (d), subsection (f), and subsection (j), gross income does not include amounts received (whether in a single sum or otherwise) under a life insurance contract, if such amounts are paid by reason of the death of the insured" (26 U.S.C. § 101(a)(1)). The exceptions named in that sentence are the limits that matter.
Transfer for value. Section 101(a)(2) provides that "In the case of a transfer for a valuable consideration, by assignment or otherwise, of a life insurance contract or any interest therein, the amount excluded from gross income … shall not exceed an amount equal to the sum of the actual value of such consideration and the premiums and other amounts subsequently paid by the transferee." The limit does not apply, under section 101(a)(2)(B), "if such transfer is to the insured, to a partner of the insured, to a partnership in which the insured is a partner, or to a corporation in which the insured is a shareholder or officer." It also does not apply under section 101(a)(2)(A) where the transferee's basis is determined by reference to the transferor's basis.
The practical effect for a cross-purchase plan is concrete. A policy that each owner applies for originally is not a transfer. A policy that later moves from one owner to another, for example when a deceased owner's estate sells its policy on a survivor to another survivor, or when owners are added or leave, is a transfer. Between partners, a transfer to a partner of the insured is on the exception list. Between co-shareholders, a transfer to a co-shareholder is not on the list, so the limit may apply and the exclusion may be reduced. Transfers of policies between owners need individual review by qualified tax, legal and insurance professionals.
A separate rule, section 101(a)(3), provides that the section 101(a)(2)(A) and (B) exceptions do not apply to a "reportable policy sale," defined as an acquisition where "the acquirer has no substantial family, business, or financial relationship with the insured apart from the acquirer's interest" in the contract. The Treasury regulation adds that a substantial financial relationship exists where the acquirer has "a common investment … with the insured and a buy-out of the insured's interest in the common investment by the co-investor(s) after the insured's death is reasonably foreseeable," and also states that "The sole fact that an acquirer is a partner of the insured, a partnership in which the insured is a partner, or a corporation in which the insured is a shareholder or officer, is not sufficient to establish a substantial business or financial relationship with the insured" (26 C.F.R. § 1.101-1(d)(3)(i), (d)(4)(ii)). Whether a particular transfer is a reportable policy sale depends on these relationship tests and the facts.
Employer-owned contracts. Section 101(j)(1) provides that for an employer-owned life insurance contract, the exclusion "shall not exceed an amount equal to the sum of the premiums and other amounts paid by the policyholder for the contract." That cap is lifted only where a section 101(j)(2) exception applies, either one based on the insured's status (for example, an employee within the 12 months before death, or a director or highly compensated employee when the contract was issued) or one for amounts paid to the insured's heirs or used to buy an equity interest from them, and also the written notice and consent requirements of section 101(j)(4) were met "before the issuance of the contract." Neither an exception alone nor notice and consent alone is enough. Section 6039I adds an annual return and recordkeeping requirement for policyholders owning employer-owned contracts (26 U.S.C. § 6039I).
In a pure cross-purchase plan, Notice 2009-48, A-1, states that a contract "owned by the owner of an entity engaged in a trade or business (such as for purposes of financing the purchase of an equity interest of another owner) … is not an employer-owned life insurance contract." Section 101(j) therefore generally does not reach policies the owners themselves own. Whether a particular arrangement is in fact owner-owned, rather than owned or paid for in a way that makes the business a direct or indirect owner or beneficiary, is a fact a qualified tax professional confirms.
Basis. A surviving owner's tax basis in an interest bought from a deceased owner's estate or heirs, and how it compares with the result of a redemption by the entity, depends on the business form and the facts, especially in a partnership with its own basis rules.
Estate tax. The agreed price may or may not control the estate-tax value of the interest. Section 2703 disregards an agreement to acquire the interest "at a price less than the fair market value" unless it meets all three requirements of section 2703(b) (26 U.S.C. § 2703). In Connelly, the Court said of a share redemption agreement: "Although such an agreement may delineate how to set a price for the shares, it is ordinarily not dispositive for valuing the decedent's shares for the estate tax." That decision addressed one estate-tax valuation question on its facts and decided nothing about income tax or other entity types.
Potential Advantages of the Cross-Purchase Structure
Owners and their advisers commonly weigh the following features. Each describes how the structure works; none is a result any reader can count on.
- Proceeds outside the entity. Death benefits go to the owners, so they do not appear as an asset of the business. The Connelly opinion observed that with a cross-purchase agreement the proceeds "would have gone directly to" the surviving shareholder, not to the corporation.
- Section 101(j) generally outside the picture. Under Notice 2009-48, A-1, owner-owned contracts used to finance buying another owner's interest are not employer-owned contracts.
- Broader transfer exceptions for partners. Section 101(a)(2)(B) lists a partner of the insured and a partnership in which the insured is a partner, which gives partnerships more room when policies must later move.
- Clear obligations. Each owner knows exactly whom he or she must buy from and who must buy from his or her estate.
- Owner control of policies. Each owner controls the policies he or she owns, so the business cannot borrow against or surrender them.
Important Considerations in a Cross-Purchase Plan
Administration is often underestimated at the start. Every policy in an N × (N − 1) grid needs its premiums paid on time, its beneficiary designation kept current and its owner identified correctly.
- Premium imbalance. The owners who are older or in poorer health are the costliest to insure, so the owners insuring them bear more cost. Some agreements address this through adjustments among owners; the terms are a matter of drafting.
- Departures other than death. Disability, retirement and voluntary sale can also trigger a buyout. What happens to each policy at those events depends on the agreement's terms and the insurers' contract provisions.
- Reassignment and transfer for value. Adding an owner, losing an owner or a partial buyout often leads to moving policies. Each move is analyzed under section 101(a)(2) and, between co-shareholders, outside the section 101(a)(2)(B) list.
- Valuation. The price or method fixed in the agreement is tested for estate-tax purposes under section 2703.
- State insurance rules. Policy forms, free-look periods and filing requirements vary by state, and insurers' forms, procedures and timing vary from insurer to insurer; these are confirmed with the insurers involved.
- Keeping the plan current. Agreements are commonly revisited when ownership changes, when the business's value changes significantly, or when an owner's insurability changes, so that the coverage still matches the obligation.
Tax and Legal Coordination for a Cross-Purchase Agreement
A cross-purchase agreement is first a legal contract. Its triggering events, valuation method, funding provisions and policy-disposition terms are drafted by legal counsel.
Tax coordination covers the premium rule of section 264(a)(1), the death benefit rules of section 101(a)(1) and (a)(2), basis, and the transfer-for-value exceptions. Partnerships add their own basis rules, which interact with a buyout in ways that depend on the partnership's elections and history. The estate-tax treatment of the agreed price under section 2703 involves legal and tax counsel together.
Employer-owned contract rules under section 101(j), with their notice and consent requirements and the section 6039I reporting requirement, apply to employer-owned contracts. Notice 2009-48, A-1, states that a contract "owned by the owner of an entity engaged in a trade or business (such as for purposes of financing the purchase of an equity interest of another owner) … is not an employer-owned life insurance contract"; whether a particular arrangement is truly owner-owned depends on its facts.
Insurance professionals confirm policy ownership, beneficiary designations, premium obligations and what happens to each policy at each triggering event; these details vary by insurer and by state. Business Life Insurance provides general educational information only, not individualized tax, legal or insurance advice.
Alternatives to the Cross-Purchase Structure
Several other designs fund the same obligation in different ways.
- Entity purchase (redemption). The business owns the policies, pays the premiums, collects the proceeds and redeems the departing owner's interest. Because the business is the owner and beneficiary, section 101(j) and its notice and consent rules come into play. The site's comparison page addresses the choice.
- Trusteed cross-purchase. A trustee or escrow agent holds the policies for the owners, so one policy per owner can sometimes serve the whole group. The tax treatment depends on how the trust and agreement are drafted and how ownership interests are characterized, which makes it a fact-specific design.
- Wait-and-see (hybrid). The agreement leaves open, until the triggering event, whether the entity, the owners or both will buy. It adds flexibility and also complexity in drafting and in deciding who owns the policies.
The choice among structures turns on the number of owners, the business form, the tax objectives and the owners' circumstances. A buy-sell agreement is also distinct from a broader succession plan, a distinction the site covers on its page on buy-sell agreements and succession planning.
Hypothetical Example: Three-Owner Partnership
This example is hypothetical. It uses round numbers and simplified assumptions to show the mechanics only.
Assumptions (hypothetical):
- Three equal partners, A, B and C, each own a one-third interest.
- The business is valued at $3,000,000, so each interest is valued at $3,000,000 ÷ 3 = $1,000,000.
- Each partner applied for and owns the policies he or she holds; no policy has been transferred.
- The agreement requires the two survivors to buy a deceased partner's interest equally.
Policy count: 3 × (3 − 1) = 6 policies.
- A owns a policy on B and a policy on C.
- B owns a policy on A and a policy on C.
- C owns a policy on A and a policy on B.
- Each policy has a $500,000 death benefit, so 2 survivors × $500,000 = $1,000,000 is available to buy one interest.
At Partner A's death (hypothetical):
- B collects $500,000 on B's policy on A.
- C collects $500,000 on C's policy on A.
- B pays $500,000 and C pays $500,000 to A's estate: $500,000 + $500,000 = $1,000,000.
- Each survivor acquired one-half of A's one-third interest: 1/3 ÷ 2 = 1/6.
- Each survivor now holds 1/3 + 1/6 = 1/2 of a $3,000,000 business.
Tax points in this hypothetical:
- Under section 101(a)(1), amounts paid by reason of A's death are generally excluded from gross income. Because no policy was transferred, the section 101(a)(2) limit is not triggered on these facts. Under Notice 2009-48, A-1, partner-owned policies financing the purchase of another owner's interest are not employer-owned contracts. If a policy had moved to a partner of the insured, section 101(a)(2)(B) lists that transfer among its exceptions.
- Each partner's premiums were not deductible under section 264(a)(1), because each partner was beneficiary of the policies he or she paid for.
- A's estate now owns A's former policies on B and C. What happens to them depends on the agreement, and any sale of them is a transfer analyzed under section 101(a)(2).
This example is hypothetical and does not represent any reader's result. Actual policy amounts, premiums and tax treatment depend on the specific facts and contracts involved.
We're Here for You
We're your trusted California business life insurance advisor. Call us 7 days a week, or send us a message, to have a real conversation about what your business needs.
Frequently Asked Questions
How many life insurance policies are needed for a cross-purchase buy-sell agreement?
A direct cross-purchase plan needs N × (N − 1) policies, where N is the number of owners. Two owners need 2 policies, three need 6 and four need 12. Each owner holds one policy on each other owner's life.
Is the death benefit received under a cross-purchase agreement taxable income?
Section 101(a)(1) provides that amounts received under a life insurance contract and paid by reason of the insured's death are generally excluded from gross income. The transfer-for-value rule of section 101(a)(2) can limit the exclusion if a policy was transferred for valuable consideration. The exceptions in section 101(a)(2)(B) include transfers to a partner of the insured or a partnership in which the insured is a partner, but not to a co-shareholder.
What is the transfer-for-value rule and how does it affect a cross-purchase agreement?
Section 101(a)(2) limits the exclusion, after a transfer for valuable consideration, to the value of the consideration plus premiums and other amounts the transferee later pays. Section 101(a)(2)(B) excepts transfers to the insured, a partner of the insured, a partnership in which the insured is a partner, or a corporation in which the insured is a shareholder or officer. A co-shareholder is not on that list, so reassigning policies among co-shareholders is analyzed with care.
Does the employer-owned life insurance rule under section 101(j) apply to a cross-purchase agreement?
Generally not, in a pure cross-purchase plan. IRS Notice 2009-48, A-1, states that a contract owned by the owner of an entity to finance buying another owner's interest is not an employer-owned life insurance contract. Whether a particular arrangement is truly owned by the owners, rather than by the business, is a fact confirmed with a qualified tax professional.
What are the main disadvantages of a cross-purchase buy-sell agreement?
The policy count grows quickly as owners are added, which increases administrative work. Premium costs can be unequal when owners differ in age or health, and each owner pays premiums from personal funds. Policy disposition at non-death events, such as disability or retirement, depends on the agreement's terms.
Educational information only. Not legal, tax, investment or insurance advice. Product availability and outcomes depend on individual circumstances.