Why would a company favor a cross-purchase plan over an entity plan?

Question

Quizplus · Accepted Answer

A company may favor a cross-purchase plan over an entity plan because of the tax benefits. In a cross-purchase plan, each owner purchases life insurance policies on the lives of the other owners. When one owner dies, the death benefit is paid to the surviving owners who use it to buy the deceased owner's share of the business. The death benefit is generally tax-free, and the cost of the premiums is not tax-deductible. On the other hand, in an entity plan, the company purchases life insurance policies on the lives of the owners. When one owner dies, the death benefit is paid to the company, which uses it to buy the deceased owner's share of the business. The death benefit is generally tax-free, and the cost of the premiums is tax-deductible. However, if the company is a C corporation, the death benefit may be subject to alternative minimum tax.

Why Would a Company Favor a Cross-Purchase Plan Over an Entity