If the departed partner is bought out under a cross-purchase agreement, and the remaining owners sell the firm, they generally will pay less income tax than if the agreement was a stock redemption plan. One advantage of a stock redemption arrangement is that the firm, rather than the partners, pays for the insurance policy. Also, if there are a number of partners, a stock redemption is less complicated and may be less costly since fewer policies are required. Your firm is likely to falter if another lawyer is no longer there. You do not have adequate funds to offset any losses until an appropriate replacement for the key person can be found.
Partners seek to establish a fair market value for their business interest.
Surviving partners wish to receive a step-up in basis in acquired interest, possibly resulting in tax savings at a later sale. Avoidance of family attribution concerns is desired. Life insurance cash values and death benefits are not to be subjected to the claims of company creditors. Premiums are to be paid by the firm, through a bonus arrangement, and treated as reasonable compensation to owners. An agreement is needed to continue the business after the death of a partner, free of conflicting interests.