What is the major difference between a Stock Redemption Plan and a Cross Purchase Plan?

The major difference between a Stock Redemption Plan and a Cross Purchase Plan lies in who holds the ownership of the life insurance policies related to the business. In a Stock Redemption Plan, the business entity itself owns the policies, and upon the death of a shareholder, the company uses the policy proceeds to buy back the deceased's shares from their estate or beneficiaries. This structure provides a clear and organized method for the business to ensure that the remaining shareholders can maintain control over the company by consolidating ownership.

Conversely, in a Cross Purchase Plan, individual shareholders own the life insurance policies on each other. When one shareholder passes away, the surviving shareholders use the policy benefits to buy the deceased's shares directly from their estate. This approach allows each shareholder to manage their investment in the company more personally and directly while also facilitating a smoother transition of ownership.

Understanding this distinction is crucial for business owners when determining the best plan for their partnership or corporate structure, especially as it relates to succession planning and the financial implications of passing ownership after a shareholder's death.