In a cross-purchase buy-sell agreement funded with life insurance for a corporation with four equal shareholders, how many life insurance policies are required?

Why this is the answer

In a cross-purchase plan, each shareholder personally buys insurance on every other shareholder, so the formula is n(n−1): four shareholders need 12 policies. Death proceeds pass to the surviving owners income-tax-free under §101(a) and supply the cash to buy the decedent's shares at a stepped-up §1014 basis. In an entity (stock-redemption) plan, the corporation owns n policies (one per shareholder) and redeems the decedent's shares directly; surviving shareholders keep their original basis. Each structure has trade-offs: cross-purchase delivers basis step-up but is administratively heavy with many shareholders; entity plans are simpler but can raise accumulated-earnings-tax (§531) questions for C corporations.