Cross-purchase vs. entity buy-sell: which structure is right for my business?

A cross-purchase buy-sell agreement and an entity (redemption) buy-sell agreement do the same job — they make sure that when a co-owner dies, retires, becomes disabled, or leaves, the remaining owners end up with the business and the departing owner (or their family) gets paid a fair price. The difference is who owns the Life Insurance that funds the buyout. In a cross-purchase, each owner personally owns a policy on the other owners. In an entity purchase, the business itself owns one policy on each owner and buys back — “redeems” — the departing owner's shares. For most closely held North Carolina businesses with two or three owners, a cross-purchase is usually the cleaner long-term structure, and a 2024 Supreme Court decision made that even more true. But the right choice genuinely depends on how many owners you have, the size of the company, and your tax situation.

This page walks through both structures, the “wait-and-see” hybrid, the court ruling that changed the math, when each one is used, and how you actually pay for it. It pairs naturally with our overview of how a buy-sell agreement funded with Life Insurance works.

The two structures in plain English

Cross-purchase: the owners own the policies

In a cross-purchase buy-sell agreement, each owner personally buys and owns a Life Insurance policy on every other owner, and personally pays those premiums. When one owner dies, the surviving owners collect the death benefit — income-tax-free in the ordinary case — and use that cash to buy the deceased owner's interest directly from the estate. The purchase happens between individuals; the business is not a party to the money changing hands.

The big advantage is basis. When a surviving owner buys the departed owner's share, they get a cost-basis increase in the interest they just purchased. If they later sell the business, that higher basis means a smaller taxable gain. And because the insurance proceeds are paid to the owners personally, the money never sits on the company's balance sheet.

Entity purchase (redemption): the company owns the policies

In an entity purchase — also called a stock-redemption agreement — the business itself owns one Life Insurance policy on each owner and pays the premiums. When an owner dies, the company collects the death benefit and uses it to redeem (buy back) the deceased owner's shares. The surviving owners don't write personal checks; the company handles the buyout.

The appeal is administrative simplicity, especially when there are several owners. There is one policy per owner instead of a web of policies, one premium payer, and one set of paperwork. The trade-offs are that the surviving owners generally get no basis step-up from a redemption, and — as explained below — the insurance money the company collects can increase the company's value for estate-tax purposes.

Wait-and-see: the hybrid

A wait-and-see buy-sell agreement doesn't lock in the choice up front. It typically gives the surviving owners the first option to buy the departing owner's interest personally, and lets the entity redeem whatever the owners decline. The idea is flexibility — you decide at the time of the triggering event which route is most favorable. One important caution: the wait-and-see structure does not automatically dodge the estate-tax problem below. In the very case that changed the rules, the owners' agreement functioned as a wait-and-see that defaulted to redemption when the survivor declined to buy — and the redemption is exactly what caused the problem.

Cross-purchase vs. entity buy-sell at a glance

Life Insurance premiums for a buy-sell are never tax-deductible, no matter which structure you use — the tax code disallows a deduction for premiums when the payer is directly or indirectly a beneficiary of the policy. The trade-off is that the death benefit is generally received income-tax-free, which is what makes the whole arrangement work.

The Connelly decision changed the math (2024)

On June 6, 2024, in Connelly v. United States, the U.S. Supreme Court ruled unanimously (opinion by Justice Thomas) on a question that reaches straight into how you fund an entity buy-sell. Two brothers owned a building-supply company and held about $3.5 million of company-owned Life Insurance on each brother to fund a redemption. When one brother died, the company collected the insurance and bought back his shares.

The Court held that a company's obligation to redeem a deceased owner's shares is not a liability that reduces the company's value for federal estate-tax purposes, and that the Life Insurance proceeds earmarked for the redemption count as a corporate asset that increases the company's fair-market value — with no offset for the buyout obligation. In plain terms: the insurance money the company collected made the deceased owner's shares worth more for estate-tax purposes, not less.

Notably, the Court itself pointed to the fix. The opinion observes that the brothers “could have used a cross-purchase agreement” — with the shareholders, not the corporation, owning the policies — to avoid this result. That single line is why many advisors have shifted clients away from corporate-owned redemption funding since 2024.

Two practical consequences follow. First, redemption-style agreements funded with corporate-owned life insurance can now produce higher date-of-death valuations, which can raise estate tax for owner estates near or above the exemption. Second, even below the exemption, the same valuation logic can distort the buyout price itself, so existing redemption agreements are worth reviewing regardless of size.

Does this affect me? The 2026 estate-tax reality

For most small businesses the answer is: probably no federal estate tax, but possibly a valuation headache. The 2026 federal estate-tax exclusion is $15 million per person (made permanent under 2025 legislation, with inflation indexing resuming in 2027), the top federal estate-tax rate is 40%, and with spousal portability a married couple can shelter roughly $30 million. North Carolina repealed its state estate tax in 2013 and has no inheritance tax, so only the federal estate tax applies to NC residents.

Connelly therefore bites hardest when the business value plus the insurance proceeds pushes an owner's estate toward the $15 million line. If you're comfortably below it, the estate-tax exposure may be minor — but the pricing distortion and the missing basis step-up are still reasons many owners prefer a cross-purchase.

When is a cross-purchase buy-sell agreement used?

A cross-purchase buy-sell agreement plan is typically used when:

• There are only two or three owners. The policy count stays manageable, and the benefits (basis step-up, proceeds off the company books) come without much added complexity.
• The owners want a cost-basis step-up. If a future sale of the business is likely, the higher basis a buyer receives can meaningfully reduce their eventual capital-gains tax.
• Estate value is a concern. Keeping the insurance proceeds out of the company avoids the Connelly valuation problem for owners near the exemption.
• Owners want the money protected from the company's creditors. Because the policies and proceeds belong to the owners personally, they generally aren't exposed to claims against the business.
• The business is a pass-through (S corporation, partnership, or LLC) where a basis step-up flows through and actually matters to the owners.

When entity purchase still makes sense

Entity purchase isn't dead — it's just no longer the automatic default. It can still be the practical choice when:

• There are many owners. Redemption keeps the number of policies and premium payers low.
• Owners have very different ages or health. With a cross-purchase, a young, healthy owner may end up paying much higher premiums to insure an older co-owner; a company-paid structure can spread that more evenly.
• Estate tax is clearly not in play and simplicity wins. If every owner is far below the exemption and a step-up isn't a priority, the administrative ease can outweigh the drawbacks — provided the agreement is drafted with the Connelly valuation issue in mind.

One compliance note for the entity route: a policy the business owns on an owner-employee is a form of employer-owned life insurance, which carries its own IRS paperwork — a written notice-and-consent step that must be completed before the policy is issued, plus an annual information form. Miss the notice-and-consent and part of the death benefit can become taxable to the business. Our page on corporate-owned life insurance covers those rules in detail.

The policy-count problem — and the insurance LLC fix

The math is what makes cross-purchase awkward as owners multiply. Each owner needs a policy on every other owner, so n owners need n × (n − 1) policies:

Twenty policies for five owners is a real administrative and premium-equity headache. There's a well-established fix that keeps the cross-purchase benefits without the policy explosion: a special-purpose insurance LLC taxed as a partnership. The LLC owns a single policy on each owner (so you're back to n policies), keeps the proceeds off the operating company's books, and — because the owners are partners in that LLC — fits inside a key exception to the “transfer-for-value” rule while still delivering a basis step-up like a cross-purchase.

That transfer-for-value rule is worth understanding, because it's a hidden trap in multi-owner cross-purchase plans. Normally, if a Life Insurance policy is transferred to someone for valuable consideration, the death benefit can lose its income-tax-free status. In a plain cross-purchase, when one owner dies the survivors often want to acquire the policies the deceased owned on them — and that reshuffling can trip the transfer-for-value rule and make future benefits taxable. The tax code carves out exceptions, including transfers to a partner of the insured or to a partnership in which the insured is a partner. A partnership-taxed insurance LLC is the clean way to land inside that exception. This is squarely “talk to your CPA and attorney” territory, but it's the reason the insurance LLC has become a popular post-Connelly structure.

How you fund it: term vs. permanent Life Insurance

Whichever structure you choose, the agreement is only as good as the money behind it. Life Insurance is the standard funding vehicle because it delivers the exact dollars needed at the exact moment they're needed — the owner's death.

• Term life is the low-cost choice when the buyout obligation has a defined horizon — for example, partners who plan to sell or wind down within 10 to 20 years. It supports large death benefits at the lowest premium, with no cash value.
• Permanent life (whole life or universal life) fits when the obligation is lifelong, when a retirement or lifetime buyout is contemplated, or when you want cash value that can help fund a living buyout — a departure that isn't triggered by death. Permanent coverage costs more but doesn't expire while the need remains.

Many owners use a blend: term to cover the bulk of the obligation cheaply while the business grows, layered with some permanent coverage for the portion of the buyout that will always exist. Because we work with multiple carriers, we can compare where a given owner's age, health, and business size price out best rather than being limited to one company's rates.

Getting the details right

A funded buy-sell only protects you if the agreement, the ownership of the policies, and the funding all line up. Common failure points we see:

• Policies owned by the wrong party for the structure the attorney drafted.
• Coverage amounts that no longer match the company's value after a few good years.
• Entity-owned policies with no notice-and-consent paperwork on file.
• An agreement written before June 2024 that still assumes redemption funding is estate-tax-neutral.
• A valuation method in the agreement that the IRS could disregard, leaving the price to be argued after a death.

Buy-sell planning also sits alongside the other coverage owners tend to need — see our overviews of key person (key man) insurance and what kind of Life Insurance small business owners need.

This page is educational and not tax or legal advice. The estate-tax, basis, and transfer-for-value rules described here are technical — confirm your specific structure with your CPA and attorney before you sign or fund an agreement.

Talk it through with The Jordan Insurance Agency

Choosing between a cross-purchase and an entity buy-sell isn't really an insurance question first — it's a tax and structure question that insurance then funds. The Jordan Insurance Agency helps North Carolina business owners in Charlotte and across the state get the funding side right: sizing the coverage to the buyout, matching term or permanent Life Insurance to how long the obligation lasts, and shopping the policies across multiple carriers so the premiums make sense for every owner. We're happy to coordinate with your CPA and attorney so the policy ownership matches the agreement they draft. There's no charge to talk it through and no pressure — reach out and we'll help you build a buy-sell that actually pays out the way you intend.