In a partnership, which agreement is used when each partner buys a policy on the other?

In a partnership, which agreement is used when each partner buys a policy on the other?

• A. Cross purchase
• B. Buy-sell agreement
• C. Entity purchase
• D. Stock purchase

Answer: (B)

The concept being tested is how a partnership handles buying out a partner’s interest when events like death or withdrawal occur. A buy-sell agreement lays out the plan for transferring ownership, including how the purchase will be funded and what triggers the buyout. When each partner buys a policy on the other, the life insurance proceeds fund that buyout, which is a common funding method within the buy-sell framework. So, the buy-sell agreement is the best fit because it governs the entire buyout arrangement and the funding mechanism, whereas other terms describe specific funding setups but not the overarching agreement itself.

The concept being tested is how a partnership handles buying out a partner’s interest when events like death or withdrawal occur. A buy-sell agreement lays out the plan for transferring ownership, including how the purchase will be funded and what triggers the buyout. When each partner buys a policy on the other, the life insurance proceeds fund that buyout, which is a common funding method within the buy-sell framework. So, the buy-sell agreement is the best fit because it governs the entire buyout arrangement and the funding mechanism, whereas other terms describe specific funding setups but not the overarching agreement itself.