15.2 Stockholder Cross-purchase Agreement

• Library: A Lawyer's Guide to Estate Planning: Fundamentals for the Legal Practitioner (ABA) (2018 Ed.)

15.2 Stockholder Cross-Purchase Agreement

Two brothers own a family business and desire to enter into a buy-sell agreement. The following agreement funds the buyout at death with life insurance. A purchase during lifetime is restricted with a right of first refusal, although no price is set for a purchase during lifetime. This form can easily be modified for a partnership. A complete discussion of buy-sell agreements appears in Chapter 10.

AGREEMENT

THIS AGREEMENT, made and entered into between Richard R. Roe, hereinafter referred to as First Party; and James J. Roe, hereinafter referred to as Second Party;

First and Second Parties are the Stockholders in a corporation known as XYZ Company, Inc., 1000 Main Street, Madisonville, Kentucky. The interest of each of the Stockholders in the corporation is as follows:

Richard R. Roe 500 shares

James J. Roe 500 shares

? Comment: If a stockholder cross-purchase agreement (unlike a partnership cross-purchase or corporate redemption agreement) that is funded by life insurance involves three or more stockholders, the transfer-for-value rule will cause a disastrous income tax result. After the death of the first stockholder, consideration must be given to this rule, and a decision may have to be made to switch to a redemption agreement. See the discussion at 10.31.

The purpose of this Agreement is threefold: (a) to provide for the purchase by the survivor of the decedent's interest in the corporation; (b) to provide the funds necessary to carry out such purchase; and (c) to restrict the sale of stock during the lifetime of the Stockholders.

? Comment: A cross-purchase agreement is often preferable to a redemption agreement because the sale or exchange versus dividend income tax problem does not exist for this type of agreement. This will make a cross purchase preferable, particularly when the buy-sell involves family members.

It is, therefore, mutually agreed by First Party and Second Party as follows:

1. Neither First Party nor Second Party shall assign, encumber, or dispose of any portion of their respective interest in XYZ Company, Inc., by sale or otherwise, without complying with the terms of this Agreement and without the prior written consent of the other Stockholder.

2. First Party is insured under Policy 123,456, issued by ABC Life Insurance Company, for $200,000, and Second Party is the applicant, owner, and beneficiary thereof.

Second Party is insured under Policy 654,321, issued by ABC Life Insurance Company, for $200,000, and First Party is the applicant, owner, and beneficiary thereof.

? Comment: Because each stockholder owns life insurance policies on the life of the other stockholders, a cross-purchase agreement can involve a large number of policies when there are very many stockholders. Also, if there is a very great age disparity between stockholders, the younger stockholders will be paying more in insurance...