In a cross-purchase agreement, each co-owner agrees to purchase the departing owner’s interest directly from the estate or from the departing owner. The obligation runs between the individual owners — not the business entity itself.

Cross-purchase agreements work well with two or three owners. They are typically funded with life insurance: each owner purchases a life insurance policy on each other owner, with the death benefit sized to cover the purchase price. At death, the surviving owner uses the insurance proceeds to buy the deceased owner’s interest from the estate at the pre-agreed price.

• Tax advantage: surviving owners get a stepped-up cost basis in the purchased interest equal to the purchase price — reducing capital gains on a future sale
• Clean structure: the business itself is not involved in the transaction; the transfer is directly between individuals
• Works with most entity types: LLCs, S-corporations, and partnerships can all use cross-purchase structures
• Insurance funding: with multiple owners, each owner must carry policies on all others — can become complex with 4+ owners

In an entity redemption agreement, the business entity — the LLC, corporation, or partnership — agrees to purchase the departing owner’s interest from their estate or from the departing owner directly. The entity holds and pays premiums on the life insurance, and uses the proceeds to fund the redemption at the triggering event.

• Simpler with many owners: only one set of policies (entity insures each owner), regardless of how many owners exist — avoids the proliferation of cross-policies
• Tax consideration: surviving owners do not receive a stepped-up basis in their existing interests; this reduces the tax advantage on a future sale compared to cross-purchase
• S-corporation caution: entity redemption agreements require careful drafting to avoid unintentionally terminating S-corporation election — certain shareholder limitations apply
• Proceeds stay in the business: insurance proceeds pass through the entity, which can affect income and estate tax treatment

A hybrid (or “wait-and-see”) buy-sell agreement gives both the entity and the surviving owners the right — but not the obligation — to purchase the departing owner’s interest, with the decision made at the time of the triggering event based on the most tax-advantaged structure available at that moment.

This structure is increasingly common because it builds in flexibility to respond to tax law changes and the specific circumstances of the triggering event without requiring the agreement to be renegotiated in advance.

• Entity gets the first right to redeem the interest
• If entity declines (in whole or part), surviving owners have the right to purchase their proportional share
• Any remaining interest not purchased by either is then redeemed by the entity
• Requires careful coordination with insurance funding to ensure full coverage regardless of which path is taken

An LLC membership interest, corporate shares, or partnership interest held in your individual name at death requires probate — regardless of what your will says or what your buy-sell agreement provides. If your business interest is in your name rather than your trust when you die, your co-owners and your family will be dealing with a court-supervised estate administration before anyone can act on the buy-sell agreement.

The solution is a formal written assignment transferring your business interest from your individual name to your revocable living trust. For LLCs, this is a Assignment of Membership Interest. For corporations, it requires endorsing and reissuing stock certificates to the trust. For partnerships, a Assignment of Partnership Interest is required.

• Review the operating agreement first: many LLC operating agreements contain transfer restrictions or right-of-first-refusal provisions that apply to trust assignments — these must be addressed before the assignment is made
• Consent of co-owners: depending on the operating agreement, co-owner consent may be required for a trust assignment — this is typically handled by an amendment or consent agreement
• Buy-sell agreement coordination: the trust assignment must be consistent with the buy-sell agreement — the trust becomes the owner, but the buy-sell agreement’s purchase rights and restrictions continue to apply
• Tax continuity: for S-corporations, the trust must qualify as an eligible S-corporation shareholder (most revocable trusts do during the grantor’s lifetime; post-death treatment requires careful attention)

Death is not the only risk succession planning must address. Incapacity — a stroke, a serious accident, a cognitive decline — can remove a key owner from operations without triggering the buy-sell agreement. If no one has authority to act for the incapacitated owner, the business may be unable to sign contracts, make payroll, or manage operations until a court appoints a conservator.

A complete business succession plan includes:

• Durable financial power of attorney with specific business management authority — authorizing the named agent to manage business accounts, sign contracts, make operational decisions, and represent the owner’s interests as an LLC member or shareholder
• Operating agreement provisions addressing how member incapacity is treated — who steps into the management role, for how long, and under what conditions the buy-sell agreement’s disability trigger activates
• Successor manager designation within the LLC operating agreement — naming who serves as manager if the current manager-member becomes incapacitated or dies, without requiring an amendment or court appointment