Question

1 Jay, Nirav, and Gian are the three shareholders of a drapery manufacturing company. Each of them own 100 shares and each share's current value is $20,000. They recently implemented a cross-purchase buy-sell agreement funded by a criss-cross insurance. While Jay is young and healthy, Nirav and Gian are older than Jay and have some health issues. Which of the following statements about the criss-cross insurance implemented in this scenario is true?

a. Nirav and Gian need not purchase life insurance on Jay as he is young and healthy.
b. If Gian dies, Jay and Nirav can use the death benefit for investment purposes.
c. O Jay is more likely to pay higher premiums than Nirav and Gian.
d. O If Nirav dies, the death benefit received by Jay and Gian will be taxed.​

Answer 1

The death benefit from a criss-cross insurance in a buy-sell agreement is not taxed as income when used to buy out the deceased shareholder's shares, thus making statement d the correct answer.

Step-by-step explanation:

The correct statement about the criss-cross insurance implemented in this scenario is: If Nirav dies, the death benefit received by Jay and Gian will be taxed. This means that when the insurance pays out after a shareholder's death, the proceeds are typically not taxed as income for the beneficiaries, which in this case would be the surviving shareholders, Jay and Gian. Contrary to option a, Nirav and Gian would still need to purchase life insurance on Jay regardless of his health because the purpose of cross-purchase buy-sell agreements is to ensure that each shareholder has the means to buy out the shares of the deceased shareholder. Option b is incorrect because insurance benefits should not be used for investment purposes but to purchase the deceased's shares. Option c is inaccurate because typically, younger and healthier individuals, like Jay, would often pay lower premiums compared to older individuals with health issues like Nirav and Gian.