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Many small and mid-sized businesses have no written plan for what happens if an owner retires, becomes disabled, or dies. Those that do often face a practical problem when funding a cross-purchase buy-sell with life insurance: the number of policies multiplies fast.
Key takeaways
- Cross-purchase agreements give surviving owners a basis increase equal to the price they pay, which entity redemptions don’t.
- With more owners, policies multiply: three owners need 6 policies, four need 12.
- Partnerships can use one policy per owner held jointly by the other partners; other entities often use a separate LLC or partnership to hold the policies.
Three owners, six policies. Four owners, twelve. A cross-purchase gets complicated fast without the right structure.
Why a written agreement matters
Without a written buy-sell agreement, owners don’t know who their partner will be tomorrow, whether that’s a deceased partner’s heirs or a competitor who bought out a co-owner. Oral understandings rarely hold up.
Why cross-purchase is often preferred
In a cross-purchase, owners buy each other’s interests directly, so the surviving owners’ income tax basis increases by the full purchase price. The 2024 Supreme Court decision in Connelly v. United States added another reason: when a corporation owns life insurance to redeem a deceased owner’s shares, the proceeds can increase the company’s value for estate tax purposes. See buy-sell agreements and transition planning.
The problem: too many policies
Each owner must own insurance on every other owner, so the number of policies is n × (n − 1). Two owners need two policies; three need six; four need twelve.
Solutions
- Partnerships and LLCs taxed as partnerships: buy one policy per owner, held by the other owners jointly with right of survivorship. When an owner dies, rights reallocate among survivors, and because they’re partners, the transfer-for-value partner exception generally applies.
- Corporations or when personal ownership is uncomfortable: hold the policies in a separate LLC or partnership created for that purpose, or use a trusteed cross-purchase.
Any structure only works if everyone follows through: the estate sells, and the survivors use the proceeds to buy. Coordinate with the clients’ attorney and tax advisor.
Frequently asked questions
How many policies does a cross-purchase buy-sell need?
n × (n − 1), where n is the number of owners. Three owners need six policies; four need twelve.
How did Connelly v. United States affect buy-sell agreements?
The 2024 decision held that corporate-owned life insurance used for a redemption can increase the company’s value for estate tax, making cross-purchase structures more attractive.
Can a partnership avoid multiple buy-sell policies?
Yes. Partners can hold one policy per owner jointly with right of survivorship, generally within the transfer-for-value partner exception.
Reviewed by Tim Fuller on 2026-09-25
Tim Fuller
President, SRS Inc.
Tim leads SRS Inc., a full-service IMO (Independent Marketing Organization) and BGA (Brokerage General Agency), connecting independent financial professionals with life, annuity, disability income, and long-term care solutions from 60+ carrier partners.
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