Strategically using insured cross-purchase buy/sell agreements and stock redemptions, a surviving stockholder can receive a higher basis in his interest in the corporation without increasing the corporation’s E&P.

To achieve these results, stockholders initially purchase life insurance policies on the other stockholders. At a stockholder’s death, the corporation issues a short-term interest-bearing note to the decedent’s estate and then implements a stock redemption arrangement in order to terminate the deceased stockholder’s amount of capital and accumulated E&P so the remaining stockholders are not burdened with an increase in E&P from a buy/sell. The surviving stockholders make a capital contribution with the life insurance proceeds which increases his/her stock basis similar to a cross-purchase situation and the corporation uses the funds to pay off the note to the deceased stockholder’s estate.

See Frank Rainaldi, William Rainaldi, and Patrick Deo, “Insured Buy/Sell Agreement for a C Corporation,” WealthManagement.com (August 22, 2014).

Posted by Ryan Moore, Associate Editor, Wealth Strategies Journal