Cross-Purchase Life Insurance Policy

A “cross-purchase” life insurance policy set up allows each owner of a business the ability to take out reciprocal life insurance policies on their counterparts. Therefore, in the event of an owner’s death, the surviving owner(s) would buy out the deceased owner’s estate without the company receiving any life insurance proceeds. Owners that elect to set up a “cross-purchase” policy approach will be able to offset the negative impact of a 2024 case called Connelly v. United States. The ruling in that case holds significant estate tax planning implications for small companies with more than one owner. The Court ruled that if a company is the beneficiary of a key person life insurance policy, then the payout on that policy is included in the value of the company when calculating federal estate taxes related to the shares transferred on death. This means that the life insurance proceeds increase the value of the deceased owner’s shares, which increases the deceased owner’s estate tax liability. In other words, listing a company as the beneficiary of a life insurance policy now inflates the value of the company for federal estate tax purposes