One disadvantage to insurance-funded cross-purchase buy-sell plans becomes apparent when there are several owners. For example, if there were five owners, each of them would have to own a policy on each of the other four owners. This would mean that a total of 20 different policies would be required.
To get the benefits of the increased tax basis and a fewer number of policies, one should consider a trusteed buy-sell agreement.
DURING LIFE
Each owner signs an agreement with an independent trustee to do the following:
-Endorse their stock certificates in blank and deliver them to the trustee.
-Agree to allow the trustee to take out an insurance contract on his or her life.
-Contribute funds to pay the premiums on the policies on the lives of the other owners.
AT DEATH
-The trustee collects the insurance proceeds on the decedent's life and delivers them to his or her estate.
-The trustee, under the terms of the agreement, sees that the corporation issues new shares to each of the surviving owners in exchange for the shares which belonged to the deceased owner.
Note:
In situations involving three or more co-stockholders, the death of the first stockholder to die can create a "transfer for value" problem for the surviving stockholders under IRC Sec. 101(a)(2)(B)
