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Success Story: Life Insurance Providing Liquidity for a Cross Purchase Buy-Sell Agreement

Updated: Aug 25, 2022

Quick Facts

  • Age: 32/39

  • Client goal: To provide liquidity for a cross purchase buy-sell agreement in the event of a premature death of one of the two owners in a privately held business.

  • How the client was found: Client is a referral from a wealth advisor

  • Income / Net-Worth: $100M+ net worth; significant percentage of the client’s wealth is the value of the business

Concept Presented

Upon the death of an owner, the surviving owner will need liquidity to facilitate an orderly transfer of ownership interests and continuity of management.

Life insurance on each owner was purchased based upon a fair market value of the business and their individual percentage of ownership.

Advantages of using life insurance to fund this cross purchase buy-sell agreement

  • Life insurance proceeds are generally received income-tax free

  • Life insurance proceeds become immediately available upon death to purchase a deceased owner’s interest

  • Proceeds used to purchase the deceased owner’s interest provide liquidity for ordinary living expenses and to pay any estate tax liability

  • Surviving owners receive a step-up in cost basis in the acquired business interest

  • The value of the business does not increase because the entity does not own the policy

  • Cash value may be protected from claims of creditors

Key points we have spoken about:

  • Buy-sell agreements

  • Liquidity

  • Continuity of management and ownership interests

  • Income replacement

  • Estate taxes

  • Estate tax planning



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