In a cross-purchase buy-sell, the owners buy life insurance on each other and use the proceeds to buy a deceased owner's share personally. In an entity redemption, the business owns one policy per owner and buys back the shares. For 2 or 3 owners, a cross-purchase is often favored today: surviving owners get a higher tax basis in the shares they buy, the proceeds stay out of the company's value after the 2024 Connelly decision, and the policy count is manageable. Entity redemption is simpler to administer, but with 4 or 5 owners the cross-purchase policy count (12 or 20 policies) pushes many groups to an insurance LLC instead.
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We are licensed insurance brokers, not CPAs or attorneys. Treat the tax and legal points on this page as general education, and confirm them with your own CPA or attorney before acting.
On this page
Why a buy-sell needs insurance
A buy-sell agreement is a contract that says what happens to an owner's share when they die, become disabled, retire or leave. The agreement sets the buyer and the price. Without money behind it, the agreement is just a promise: surviving owners rarely have cash sitting around to buy out a deceased partner's family at fair value, and the family usually wants cash, not a minority stake in a company they do not run. Life insurance creates the cash at the moment it is needed.
Side by side
| Cross-purchase | Entity redemption | |
|---|---|---|
| Who owns the policies | Each owner owns a policy on each other owner | The business owns one policy per owner |
| Policies needed | n x (n - 1): 2 owners = 2, 3 = 6, 4 = 12, 5 = 20 | n: one per owner |
| Who buys the shares | The surviving owners | The business |
| Basis for survivors | Survivors' basis rises by what they paid (helps on a later sale) | C corp: survivors' basis does not rise, even though their percentage does |
| Connelly (2024) | Proceeds are not a company asset | Proceeds count toward the company's value for the deceased owner's estate |
| Premium fairness | An older or less healthy owner's policy costs the others more; often balanced with bonuses or split dollar | The business pays all premiums, so costs are shared in proportion to ownership |
| Creditor exposure | Each owner's creditors may reach the policies they own | Business creditors may reach the cash value |
| 101(j) consent | Not needed (business does not own the policies) | Needed for each policy |
The basis advantage, in numbers
Cross-purchase: Owner A dies. Owner B collects $1,000,000 from the policy on A and buys A's shares for $1,000,000. B's basis is now his original basis plus $1,000,000. If B sells the whole company later for $2,000,000, his taxable gain is $1,000,000 less than it would otherwise be.
Entity redemption: The corporation collects $1,000,000 and redeems A's shares. B now owns 100%, but his basis is still his original basis. Selling for $2,000,000 later means paying capital gains tax on nearly all of it, assuming his original basis was low.
S corporations and partnerships have different basis rules (the proceeds can increase basis, with timing issues around the death), so ask your CPA to model your entity specifically.
Connelly changed the entity redemption math
In Connelly v. United States (2024), the Supreme Court unanimously held that a corporation's obligation to redeem a deceased owner's shares does not reduce the company's value for estate tax, so life insurance the corporation collects for the redemption counts as a company asset. That raises the value of the deceased owner's shares. For estates under the current $15 million exemption this may not create tax, but it does for larger estates, and it can distort the buy-sell price. Read After Connelly for the full story.
Which one fits
- 2 owners: a cross-purchase is often the simplest fit. Only two policies, clean basis step-up, no Connelly issue.
- 3 owners: cross-purchase still works (six policies). Some groups use a trusteed cross-purchase or an insurance LLC to hold them.
- 4 or 5 owners: 12 or 20 policies gets unwieldy, and when one owner dies the survivors must sort out who buys the deceased owner's policies on everyone else. An insurance LLC gets back to one policy per owner while keeping cross-purchase treatment.
- Unsure which way to go: a wait-and-see agreement lets you decide at death.
Switching from entity redemption to cross-purchase with existing policies has a transfer-for-value trap in corporations; see the S corp owner guide. Run your numbers in the buy-sell funding calculator, and download the buy-sell funding review (PDF) to take to your attorney.
Frequently asked questions
How many policies does a cross-purchase buy-sell need?
Each owner needs a policy on every other owner, so the count is n times (n minus 1). Two owners need 2 policies, three need 6, four need 12, and five need 20.
Can we change from an entity redemption to a cross-purchase?
Yes, but moving existing corporate-owned policies to co-shareholders can trigger the transfer-for-value rule. Common routes are transferring each policy to its insured, using a partnership or LLC, or buying new policies. Get your attorney's sign-off before moving anything.
Who pays the premiums in a cross-purchase?
Each owner pays for the policies they own, personally. When owners differ in age or health, businesses often pay each owner a bonus to cover premiums so costs feel fair.
Does an LLC taxed as a partnership have the same choice?
Yes. LLCs use the same two structures, often called cross-purchase and redemption (or liquidation). Partnership tax rules treat the redemption differently from a C corporation, so the basis comparison above does not apply directly.
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Written by Erik Moran
Erik co-owns Moran Insurance Group with Amanda Moran and handles the agency's life insurance cases, from key person and buy-sell coverage to trust-owned policies. He works alongside clients' CPAs and attorneys, who make the tax and legal calls. More about Erik.
Sources
Moran Insurance Group is a licensed insurance agency. Our brokers are not CPAs, attorneys or tax advisors, and nothing on this page is tax, legal or investment advice. Tax figures and rules reflect our understanding as of October 2026 and can change. Coverage is subject to carrier underwriting and state availability. Confirm anything tax or legal with a licensed CPA or attorney before you act on it.