What happens in a Cross-purchase Plan when a partner dies?

In a Cross-purchase Plan, when one partner dies, the surviving partners are empowered to buy the deceased partner’s business interest through the life insurance policy that has been set up specifically for this purpose. This arrangement allows the remaining partners to maintain control over the business and ensures a smooth transition after a partner's death.

The life insurance policy serves as a funding mechanism, providing the necessary cash to the surviving partners to purchase the deceased partner’s share of the business from their estate. This not only provides liquidity to the deceased partner's family but also helps avoid potential disputes or disruptions in the business continuity.

In contrast, the other scenarios described do not accurately reflect the nature of a Cross-purchase Plan. Dissolving the partnership immediately could lead to complications and does not align with the intent of such agreements. Automatic inheritance of assets by remaining partners does not typically occur without the formal purchase of the deceased's share. Lastly, while the policy does pay out to the family, it specifically facilitates the purchase of the deceased partner's interest, which is not the primary outcome highlighted in that option.