We’ve just covered the Entity Buy Sell in which the business is the main player in Business Succession. However, for whatever reason(s), you may not want the business involved in your Buy Sell planning. In this regard, the Cross Purchase Plan would be your answer. The Cross Purchase plan, also known as a Criss-Cross Plan, involves the owners as the main players in the buy sell business succession plan. Here’s how it works.
This is also a formal agreement drafted by an Attorney. When a specific triggering event occurs (retirement, divorce, disability, etc), each of the remaining shareholders/owners BUYS the agreed upon shares of the departing shareholder. Simultaneously, the seller (departing shareholder or shareholders estate) receives CASH in selling the departing shareholder’s stock in the business.
For example, let’s say a business has two (2) owners, Owner A and Owner B. Under a Cross purchase plan, if Owner B is the departing owner, Owner A agrees to PURCHASE the interest of Owner B’s share in the business and Owner B or his/her estate agrees to SELL his/her interest in the business.
Some of the ADVANTAGES of a Cross purchase plan include the following.
1. The shareholders/owners may be in a lower income tax bracket than the company. Thus, there could be cost savings in funding the buy sell Cross Purchase.
2. There is a STEP UP IN BASIS for each remaining shareholder. This results in lower captial gains.
3. No Alternative Minimum Tax or Attribution rules apply in the Cross Purchase Plan.
4. When funding occurs, the cash value of the funding plan is NOT subject to the claims of corporate creditors.
Let’s briefly describe some DISADVANTAGES.
1. If there are more than two owners, it can become more complicated. For example, if there are three owners, there would be SIX (6) agreements. Each owner would have an agreement on the other two owners.
2. Such a plan could limit or even prohibit each owner from pledging his or her interest in the business as collateral for outside credit.
3. When a triggering event occurs under this plan, a TRANSFER FOR VALUE could occur. This results in a taxable event.
PLANNING TIP: There are several ways that these disavantages can be legally circumvented.
There you have an overview of a CROSS PURCHASE BUY SELL PLAN. This plan along with the ENTITY Buy Sell represent the two major forms of Business Succession Plans. Again it’s critical to have your team of professionals talking with each other to develop the most comprehensive succession plan for you and your business.