Cross Endorsement Buy-Sell Plan
THE PROBLEM
Many closely-held businesses do not make formal plans for transitioning the business. A
comprehensive business succession plan should contemplate the premature death or disability of the
owners as well as retirement or a lifetime transfer or sale of the business. Because closely-held
business owners often do not plan for the transition of their business, many closely held businesses
are not successfully transferred to a second generation. Even fewer closely-held businesses survive
transfer to a third generation.
THE SOLUTION
By utilizing a cross endorsement buy-sell arrangement (“CEBS” Arrangement) funded with a
permanent life insurance policy, the funds required to transfer the business efficiently as a result of
one of these triggering events can be available.
A cross endorsement buy-sell arrangement is a buy-sell plan that provides the owner and his or her
family the liquidity needed to transfer the business when one of the business owners dies
prematurely. However, since the business owner purchases a life insurance policy on his or her own
life under this type of arrangement, the business owner can use the policy’s cash values to
supplement retirement income on a tax-favorable basis 1. By purchasing a permanent life insurance
policy with a long term care or chronic illness rider, the business owner can protect himself or herself,
as well as the owner’s own family, against the devastating costs of long term care or chronic illness
costs. It is estimated that as many of 50% of Americans will one day need long term care. A
permanent life insurance policy is a flexible financial tool that can address your changing needs over
the life of the business.
HOW IT WORKS
Under a cross endorsement buy-sell arrangement, the business owner purchases and owns a life
insurance policy on his or her life while the other shareholders or partners purchase and own a policy
on each of their respective lives. The value of each policy will be based on the projected value of the
business and each business owner’s proportional interest in the business. To minimize the owners' outof-pocket costs to pay premiums, the company may make annual bonus payments to each business
owner in the amount of the premium.
Each business partner will endorse2 or “rent out” all or a portion of the death benefit on their policy to
each of the other partners. Each of the business partners will pay a rental charge to each other for the
amount of annual term death benefit being endorsed. Consequently, each business owner will
recognize “rental income” in the amount of the rental charge.
1
Loans and withdrawals will reduce the death benefit, cash surrender value, and may cause the policy to lapse. Lapse or surrender of
a policy with a loan may cause the recognition of taxable income. Policies classified as modified endowment contracts may be
subject to tax when a loan or withdrawal is made. A federal tax penalty of 10% may also apply if the loan or withdrawal is taken prior
to age 591/2. Cash value available for loans and withdrawals may be more or less than originally invested.
2
Each owner may desire to endorse some, or as much as one hundred percent (100%), of the death benefit to the other owners
during the buy-sell period. Clients should consult their tax advisors to determine the appropriateness of this, or any, planning
strategy.
Cross Endorsement Buy-Sell Plan
HOW IT WORKS (Continued)
The value of the rental charge is based on the economic benefit cost of the death benefit which
ordinarily, at least initially, represents only a small fraction of the total premium. The economic benefit
cost is measured annually using either a government or insurance company rate table. Essentially,
each owner will pay a rental charge based on the attained age of the other owner(s) and the amount
of the death benefit being endorsed. When the cross endorsement buy-sell plan is terminated, the
rental charges stop and each business owner retains their respective policy.
While the buy-sell plan is in place, the life insurance proceeds are to be paid to each surviving owner
to fund the buy-sell obligation. However, if the plan is terminated, each owner can continue to own
his or her policy and use the policy cash values to supplement retirement income, pay long term care
or chronic illness costs (assuming a long term care or chronic illness rider is purchased), or cover the
owner’s state or federal estate tax liability.
BENEFITS
 Buy-Sell – Cash is available for the efficient transfer of the business due to an owner’s death,
retirement, or sale.
 Flexibility of permanent insurance – Permanent insurance provides the flexibility needed to transition
the business as well as the potential for policy cash surrender values for supplemental retirement
income and/or estate liquidity.
CONSIDERATIONS
 Cash flow – Cash flow to fund premiums is required.
 Increasing economic benefit cost – The economic benefit costs increase with age and may be
significant in later years.
 Split Dollar Final Regulations – Under the split dollar final regulations, the economic benefit amounts
received by each owner will be treated as rental income and taxed at ordinary income tax rates.
 Potential Transfer For Value – The owners may want to consider a partnership (if one does not already
exist) between the owners to avoid any transfer for value issues with respect to the cross
endorsements of the policy death benefits.
 Long Term Care Rider – If you are considering creating a policy with a long-term care or chronic illness
rider where the owner is not the insured (such as when an owner creates an irrevocable trust to own
his or her policy), there may be adverse consequences - both tax and contractual in nature. You
should review the particulars of your intended ownership arrangement with your legal and tax
counsels in light of the income, gift, and estate tax provisions of the Internal Revenue Code
PLANNING OPTIONS
The following flowcharts and ledger pages illustrate the plan mechanics and the costs and benefits of
the private split dollar cross-endorsement buy-sell plan to the business and each business owner.
Cross Endorsement Buy-Sell Plan
Renting Death Benefit to Fund a Cross Endorsement Buy-Sell Plan
Ron Davis
(40.00% Owner)
Ron Endorses Death
Benefit to Jim
$4,000,000
Ron Pays Rental
Charge to Jim
$21,900
Jim Endorses Death
Benefit to Ron
$6,000,000
Jim Pays Rental
Charge to Ron $7,320
Jim Smith
(60.00% Owner)
Shareholders rent a portion of their death
benefit to each other equal to the each
shareholder ownership in the company
For illustrative purposes only. Not indicative of past or future performance. All guarantees subject to the claims paying ability of the
issuing insurance company.
Cross Endorsement Buy-Sell Plan
Assumptions
Value of Business
$10,000,000
Release Endorsement Year
15
Age
Ownership in
Company
Annual
Premium
Premium
Years
Face
Amount
Amount
Endorsed
1) Jim Smith
54
60.00%
$126,000
10
$6,000,000
$6,000,000
2) Ron Davis
47
40.00%
$61,000
10
$4,000,000
$4,000,000
100.00%
$187,000
Shareholder Name
Total
$10,000,000 $10,000,000
Breakdown of Life Insurance Endorsed
Existing Allocation
Death Benefit
Share
New Allocation
1) If Jim Smith Dies
Ron Davis
New Allocation
40.00%
100.00%
$6,000,000
Ron
100.00%
100.00%
$6,000,000
100.00%
$4,000,000
2) If Ron Davis Dies
Jim Smith
60.00%
Jim
100.00%
100.00%
$4,000,000
For illustrative purposes only. Not indicative of past or future performance. All guarantees subject to the claims paying ability of the
issuing insurance company.
Cross Endorsement Buy-Sell Plan Details for Jim Smith
Year
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
Age
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
Annual
Premium
126,000
126,000
126,000
126,000
126,000
126,000
126,000
126,000
126,000
126,000
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
Jim Smith
(60.00% Owner)
Total
Rental
Charges
Death
Collected
Benefit
6,000,000
21,900
6,000,000
24,900
6,000,000
28,080
6,000,000
31,200
6,000,000
33,960
6,000,000
36,360
6,000,000
39,060
6,000,000
42,660
6,000,000
47,760
6,000,000
54,480
6,000,000
62,460
6,000,000
71,400
6,000,000
81,060
6,000,000
91,200
6,000,000
101,520
6,000,000
0
6,000,000
0
6,000,000
0
6,000,000
0
6,000,000
0
6,000,000
0
6,000,000
0
6,000,000
0
6,000,000
0
6,000,000
0
Ron Davis
(40.00% Owner)
Total
Rental
Charges
Paid
7,320
7,920
8,520
9,200
10,080
11,240
12,800
14,600
16,600
18,720
20,800
22,640
24,240
26,040
28,440
0
0
0
0
0
0
0
0
0
0
Net Outlay
111,420
109,020
106,440
104,000
102,120
100,880
99,740
97,940
94,840
90,240
(41,660)
(48,760)
(56,820)
(65,160)
(73,080)
0
0
0
0
0
0
0
0
0
0
Rental
Charge
7,320
7,920
8,520
9,200
10,080
11,240
12,800
14,600
16,600
18,720
20,800
22,640
24,240
26,040
28,440
Death
Benefit
4,000,000
4,000,000
4,000,000
4,000,000
4,000,000
4,000,000
4,000,000
4,000,000
4,000,000
4,000,000
4,000,000
4,000,000
4,000,000
4,000,000
4,000,000
For illustrative purposes only. Not indicative of past or future performance. All guarantees subject to the claims paying ability of the issuing insurance company.
Cross Endorsement Buy-Sell Plan Details for Ron Davis
Year
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
Age
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
Ron Davis
(40.00% Owner)
Total
Rental
Charges
Annual
Death
Collected
Premium
Benefit
61,000
4,000,000
7,320
61,000
4,000,000
7,920
61,000
4,000,000
8,520
61,000
4,000,000
9,200
61,000
4,000,000
10,080
61,000
4,000,000
11,240
61,000
4,000,000
12,800
61,000
4,000,000
14,600
61,000
4,000,000
16,600
61,000
4,000,000
18,720
0
4,000,000
20,800
0
4,000,000
22,640
0
4,000,000
24,240
0
4,000,000
26,040
0
4,000,000
28,440
0
4,000,000
0
0
4,000,000
0
0
4,000,000
0
0
4,000,000
0
0
4,000,000
0
0
4,000,000
0
0
4,000,000
0
0
4,000,000
0
0
4,000,000
0
0
4,000,000
0
Jim Smith
(60.00% Owner)
Total
Rental
Charges
Paid
21,900
24,900
28,080
31,200
33,960
36,360
39,060
42,660
47,760
54,480
62,460
71,400
81,060
91,200
101,520
0
0
0
0
0
0
0
0
0
0
Net Outlay
75,580
77,980
80,560
83,000
84,880
86,120
87,260
89,060
92,160
96,760
41,660
48,760
56,820
65,160
73,080
0
0
0
0
0
0
0
0
0
0
Rental
Charge
21,900
24,900
28,080
31,200
33,960
36,360
39,060
42,660
47,760
54,480
62,460
71,400
81,060
91,200
101,520
Death
Benefit
6,000,000
6,000,000
6,000,000
6,000,000
6,000,000
6,000,000
6,000,000
6,000,000
6,000,000
6,000,000
6,000,000
6,000,000
6,000,000
6,000,000
6,000,000
The hypothetical case study results are for illustrative purposes only and should not be deemed a representation of past or future results. This example does not represent any specific product, nor does it
reflect sales charges or other expenses that may be required for some investments. No representation is made as to the accurateness of the analysis.
This material is for informational purposes only and is not meant as Tax or Legal advice. Please consult with your tax or legal advisor regarding your personal situation.
Revised 1/15/16 HCBLC060