Carrie and Kelly are in business together and each own 50% of the stock of the firm, which they acquired at formation of the business in 2003. Each shareholder has a basis of $250,000 in the business and each has purchased a life insurance policy on the life of her business partner in the amount of $1 MM, sufficient to acquire the stock of the deceased partner in the event of death per a Cross Purchase Agreement. If Kelly were to die this year, what would the implications be of her passing?

	Carrie would receive a basis step-up in her stock equal to the total value of the company on Kelly's date of death.
	Kelly's estate would have to pay capital gains taxes on the difference between the face value of the policy ad Kelly's basis in the firm immediately prior to death
	The life insurance company would refund all the premiums paid on the policy & Carrie would have to come up with sufficient cash to buy-out Kelly's interest in the business because Carrie does not have an insurable interest in Kelly.
	Kelly's stock would be acquired by Carrie using the proceeds of the policy owned by Carrie on Kelly's life. Kelly's estate will not incur any gain or loss on the exchange of stock. Carrie will receive a partial basis step-up on Kelly's acquired shares.