What will happen under this agreement if Alana dies today?

Alana, Meaghan, and Beatrice are equal shareholders of Advanced Tech Inc. They each own 100 shares of the company. Each share is currently worth $5,000. They recently signed a cross-purchase buy-sell agreement that is funded by life insurance.

What will happen under this agreement if Alana dies today?
A . Meaghan and Beatrice would each still own 100 shares of the company.
B . There would now be 200 outstanding shares of the company.
C . Each share would now be worth $7,500.
D . Alana’s estate would receive a total of $500,000.

View Answer

Answer: D

Explanation:

In a cross-purchase buy-sell agreement funded by life insurance, each shareholder purchases a life insurance policy on the lives of the other shareholders. Upon the death of a shareholder, the surviving shareholders use the proceeds from the insurance to buy out the deceased shareholder’s shares at the agreed value. Since each share is valued at $5,000, Alana’s 100 shares would be worth: 100​shares×5,000=500,000100 text{ shares} times 5,000 = 500,000100​shares×5,000=500,000 Thus, Meaghan and Beatrice would collectively purchase Alana’s shares from her estate, providing her estate with a total of $500,000. Each surviving shareholder will then own an additional 50 shares, resulting in each now holding 150 shares of Advanced Tech Inc. This option aligns with the principles of cross-purchase agreements discussed in the LLQP.