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Cross-Purchase vs Entity-Purchase: Which Insurance-Funded Buy-Sell Works for Your Business?

When a high-net-worth (HNW) owner-manager plans for business succession in the United States, choosing the right insurance-funded buy-sell structure is a cornerstone decision. Two common funding architectures — cross-purchase and entity-purchase (redemption) — produce very different tax, administrative, and liquidity results. This article compares both options with practical examples, pricing guidance, and state-specific considerations (New York, California, Texas) so you can decide which structure best protects value, preserves liquidity, and minimizes unexpected estate outcomes.

Quick definitions

  • Cross-Purchase: Each remaining owner buys life insurance on each co-owner. When one owner dies, the survivors use proceeds from their policies to buy the deceased owner’s interest.
  • Entity-Purchase (Redemption): The business (or an entity owned by the business) buys life insurance on each owner. The company purchases the deceased owner’s interest with the policy proceeds.

Both designs are commonly funded with term, whole life, universal life, or survivorship (second-to-die) policies depending on timing, tax goals, and whether the goal is to buy out multiple owners at once.

Head-to-head comparison

Feature Cross-Purchase Entity-Purchase (Redemption)
Policy owner Individual co-owners Business entity
Number of policies N × (N–1) — more policies for many owners N policies — one per owner
Basis (tax) to buyer Survivor’s basis in acquired interest = purchase price (step-up possible at seller’s estate) Entity’s basis increases by purchase price; can create different basis/tax outcomes for the deceased owner’s heirs
Administrative complexity Higher (many policies, multiple owners) Lower (fewer policies, centralized ownership)
Estate inclusion risk Potentially lower if structured properly Company-owned policies may lead to estate inclusion depending on incidents of ownership and incidents of transfer
Best for Small groups (2–3 owners) where survivors want increased tax basis Corporations, S-corps, and closely-held firms with multiple owners or preference for centralized funding

Advantages and disadvantages — practical view

Cross-Purchase: Why owners choose it

  • Tax basis advantage: Surviving owners' basis in the purchased interest equals the purchase price, which often increases the survivor’s basis and improves future capital gains treatment.
  • Direct ownership: Survivors directly own the acquired shares — cleaner from governance perspective.
  • Useful for small owner groups: Works well with 2–3 owners (e.g., two co-owners in a NYC professional practice).

Drawbacks:

  • Administrative burden grows quickly with owners (for 4 owners, each needs 3 policies = 12 policies).
  • Funding complexity when owners have different insurability profiles.

Entity-Purchase: Why businesses choose it

  • Simplicity: The company owns one policy per owner — easier to administer for larger ownership groups.
  • Corporate control: The business receives proceeds, which can be critical when operating continuity is a priority (common with family businesses in Los Angeles, Houston, or Chicago).
  • Works well with corporate entities: Especially favorable if the company prefers centralized cash flow and balance sheet management.

Drawbacks:

  • Potential adverse tax consequences for the deceased owner’s heirs if not drafted properly (e.g., estate inclusion issues in New York or Massachusetts).
  • Surviving owners do not receive an increased basis in the acquired shares automatically.

Tax & estate considerations (U.S.-focused)

  • Federal estate tax exclusion and state estate taxes matter. For HNW owners in New York or California, state estate tax and community property rules (California) can alter outcomes.
  • Company-owned policies can be included in a deceased owner’s estate if the owner retained incidents of ownership (access, beneficiary controls). Properly drafted irrevocable life insurance trusts (ILITs) or assignment-of-policy steps are common mitigants.
  • Cross-purchase can create a favorable step-up in basis for buyers, reducing future capital gains exposure on a later sale of the business interest.

Authoritative resources:

Funding choices and cost examples (market-typical)

Which policy type to use depends on goals:

  • Term life: Economical for near-term liquidity needs (common for younger owners or for a short predetermined buyout period).
  • Permanent life (Whole/UL): Used when lifelong coverage is required, or when the buyout may occur many years later.
  • Survivorship (Second-to-die): Useful when the business is expected to be transferred only after both owners die (common in family-owned businesses where children eventually receive the company).

Illustrative premium ranges (U.S. market averages — examples compiled from Policygenius market data and public carrier business pages; your actual quote will vary by age, health, and product):

Carrier examples for business succession (U.S. firms widely used by HNW owners):

Note: Permanent policy first-year premiums for $1M coverage for a 50-year-old can vary widely across carriers and product types; expect annual premiums in the low-to-high thousands for universal/whole life vs. hundreds for term. Always obtain carrier illustrations for exact pricing.

Choosing the right structure for HNW owner-managed businesses (New York, California, Texas)

Factor your decision on:

  • Number of owners: Cross-purchase suits 2–3 owners; entity-purchase is preferred for larger groups.
  • State tax profile: New York and some New England states have separate estate tax regimes. California’s community property rules can affect tax basis after death.
  • Liquidity needs: If the company must maintain operations and cash flow, entity-purchase centralizes funding and can be faster.
  • Family governance: If intra-family transfers are expected, coordinate buy-sell terms with family governance policies to avoid conflict and unintended wealth shifts.

See also:

Implementation checklist (step-by-step)

  1. Confirm buy-sell triggering events: death, disability, retirement, deadlock, involuntary transfer.
  2. Choose buyout valuation method and update valuation triggers regularly. (See related: Valuation Triggers and Insurance Coverage: Aligning Policy Design with Succession Events)
  3. Determine cross-purchase vs. entity-purchase based on owner count and tax objectives.
  4. Select policy types (term vs. permanent vs. survivorship) and obtain carrier illustrations.
  5. Address estate inclusion using ILITs or policy assignments if needed.
  6. Document funding, notice, and payment mechanics in the buy-sell agreement and update beneficiary designations.
  7. Coordinate with tax counsel to model estate and basis outcomes, particularly in New York, California, or Texas.

Final considerations

  • There is no universal “best” option. For most HNW owner-managers in the USA:
    • Use cross-purchase when there are few owners and buyers want step-up basis benefits.
    • Use entity-purchase when administrative simplicity, corporate control, and centralized liquidity are priorities — especially for larger ownership groups or companies in high-operational risk sectors.
  • Cost differences between term and permanent policies are dramatic; matching policy type to your expected timing of the buyout can deliver significant premium savings.
  • Always obtain carrier-specific illustrations (New York Life, Northwestern Mutual, MassMutual) and run estate-tax and basis scenarios with qualified tax counsel.

Sources and further reading:

Relevant internal resources:

If you are planning a buy-sell funded with insurance, schedule policy illustrations and estate-tax simulations for your specific state (e.g., New York, California, Texas) — each scenario materially changes the right architecture.

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