by Richard Keyt and Richard C. Keyt, Arizona LLC attorneys who have formed 8,900+ Arizona LLCs and have 349 five star reviews on Google, Facebook & Birdeye

Exciting Developments in Buy-Sell Planning

This article examines the use of LLCs to own life insurance for buy-sell planning purposes. Such a structure obtains the advantages of cross-purchase and membership interest redemption buy-sell agreements without many of the disadvantages of either traditional structure. This development is significant to all small business owners.


For many business owners, the business itself is their primary source of income both during working years and in retirement. Thus, buy-sell planning is critical for not only death planning but also disability and retirement planning during lifetime.

Unfortunately, the two traditional types of buy-sell agreements, entity purchase and cross-purchase agreements, have significant limitations and disadvantages that often prevent business owners from adequately preparing for many business succession issues.

Entity Purchase

With a redemption arrangement, the entity owns the life insurance and agrees to redeem the interest of a deceased owner at that owner’s death. The owner in turn agrees that his or her estate will transfer the interest in the entity back to the entity for an agreed-upon price.

The advantages of this arrangement are:

1. The simplicity of only one life insurance policy per owner;

2. The owners allocate all premium costs according to their percentage ownership in the entity; and

3. This arrangement ensures compliance with the terms of the buy-sell agreement.

The disadvantages of redemption arrangements are many:

1. There is no change to the surviving owners’ basis at the owner’s death so the surviving owners will incur larger capital gain tax upon a lifetime disposition;

2. The insurance policies are subject to attachment by the corporation’s creditors;

3. If the corporation is a C corporation, the death proceeds may also be subject to the alternative minimum tax (AMT);

4. If corporate-owned buy-sell policies are over-funded to provide non-qualified retirement benefits to the owners, the benefits are generally subject to income tax; and

5. Potential taxation on redemption of the stock to the extent of earnings and profits where the attribution rules of IRC Sec. 318 apply.

If the LLC is taxed as an S corporation, the results of a membership interest redemption arrangement are better, because the AMT and attribution rules do not apply where the business has always been taxed as an S corporation. Also, the life insurance cash value and death proceeds give the member some membership interest basis adjustment, reducing the amount of capital gain tax that may be triggered on a sale during life or at death.

Planning Tip: Membership interest redemption arrangements require only one policy per member and thus cost less to implement, but have significant disadvantages as compared to cross-purchase arrangements.


Under a cross-purchase arrangement, each owner/member owns a policy on every other owner, and each surviving owner agrees to buy the deceased owner’s interest directly from the deceased owner’s estate.

The advantages of this structure are:

1. The survivors use income-tax-free death benefit to buy membership interests directly from the decedent’s estate, thereby increasing their average membership interest basis;

2. Use of the “wait and see” approach allows surviving members to keep the insurance proceeds for themselves to the extent that retained company earnings are available to effectuate a redemption; and

3. Policies are protected from the company’s creditors.

The disadvantages of cross-purchase arrangements are:

1. The number of policies required to accomplish funding (each owner must own a policy on each other owner) quickly becomes unwieldy as the number of members increases;

2. Policies are subject to attachment by the owner’s creditors;

3. An owner may fail to pay premiums or refuse to pay death benefits pursuant to the buy-sell agreement;

4. The premium burden is allocated based on the cost of insurance of each other owner; and

5. Application of the transfer-for-value rule (when surviving owners purchase from the deceased owner’s estate the policies on the other survivors) or need to buy new policies to cover increased values.

Planning Tip: Cross-purchase arrangements also have significant disadvantages. For many owners, the number of policies required for funding and the unequal cost burden are simply too big of a hurdle for implementation.

Use of LLCs to Structure and Fund Buy-Sell Agreements

In an IRS Private Letter Ruling, PLR 200747002, the IRS accepted a strategy that has the advantages of both cross-purchase and redemption agreements without the disadvantages of either. With this structure, the members sign a cross-purchase agreement and form an LLC, taxed as a partnership, to own the life insurance. The cross-purchase agreement and LLC operating agreement have provisions that reference each other.

Special provisions of the LLC include:

1. The LLC manager is a corporate trustee, and any replacement must be a corporate trustee;

2. Members cannot vote on life insurance matters;

3. The manager must use life insurance proceeds as required in the buy-sell agreement; and

4. The LLC must maintain a capital account for each member, with special allocations of premiums and proceeds.

Upon examination of this structure, the IRS ruled that the life insurance death proceeds would not be includible in the estate of the deceased LLC member. Thus, this structure contains the advantage of the traditional buy-sell structures without the disadvantages.

Planning Tip: Using an LLC to own life insurance for buy-sell funding purposes accomplishes the buy-sell objectives without causing many of the adverse income tax consequences and without causing estate tax inclusion.

“LifeCycle” Buy-Sells

This ruling adopts an approach similar to the “LifeCycle” Buy-Sell Agreement, first written about in “Using a General Partnership to Structure and Fund Buy-Sell Arrangements,” by James C. Peterson and William S. White, from the January 2000 issue of the Journal of Financial Service Professionals.

There are some differences, however, between the PLR and “LifeCycle” structures, in particular:

1. The PLR uses term insurance – LifeCycle uses cash value insurance to also accomplish retirement planning objectives;

2. The PLR limited its ruling to funding a death buyout – LifeCycle can also be used for non-qualified retirement benefits; and

3. The PLR LLC has a more restrictive operating agreement – for example, LifeCycle does not require a corporate trustee as manager (only requires an independent trustee) and restricts a member against voting only on policies on that member’s life. Counsel who submitted the PLR believes that these more restrictive provisions are only necessary for those seeking a letter ruling.

Planning Tip: Using an LLC or partnership to own insurance for buy-sell funding purposes eliminates the tax and other disadvantages of both cross-purchase and membership interest redemption agreements. Further, this structure requires only one policy per owner, making it a more attractive structure from the business owners’ perspective.


Buy-sell planning is critical for business owners, but many defer implementation of a business succession agreement because of either the cost or tax disadvantages, or both, of the traditional buy-sell structures and common alternative. Use of an LLC to own the life insurance for a buy-sell arrangement eliminates both of these impediments and thus is much more attractive to business owners.

Hire the Keyts to Prepare a Buy Sell Agreement for Your Arizona LLC

We prepare Buy Sell Agreements custom drafted specifically to meet the desires of the members of Arizona LLCs.  Our Buy Sell Agreement is the end result of Richard Keyt preparing this type of business agreement many times since practicing law in Arizona since 1980.

We have two prices for our custom drafted Buy Sell Agreement.  The prices are:
  • $1,294 if we formed the LLC within the last 90 days or you are also buying an Operating Agreement for $797.
  • $1,994 if we formed the LLC more than 90 days ago or if we did not form the LLC.
Here’s the sequence of events when somebody hires us to prepare a Buy Sell Agreement for their Arizona LLC:

1. The purchaser completes and submits our online Buy Sell Agreement Questionnaire.

2. The purchaser pays for the Buy Sell Agreement with a credit card in our secure online store at one of the following links:

a. $1,294 Buy Sell Agreement Order Form if we formed the LLC within the last 90 days.

b. $1,994 Buy Sell Agreement Order Form if we formed the LLC more than 90 days ago or if we did not form the LLC.

c. $2,091 Buy Sell Agreement & Operating Agreement Order Form if we did not form the LLC and you are purchasing a Buy Sell Agreement and an Operating Agreement for $797.

You can also pay by calling my legal assistant Amanda Duran - 480-664-7846 and giving your credit card information over the phone or by sending a check payable to KEYTLaw, LLC, 7373 E. Doubletree Ranch Road, Suite 135, Scottsdale, Arizona 85258.

3. After paying and completing our Questionnaire Richard Keyt will prepare the Buy Sell Agreement within 3 – 5 business days and email it to the LLC’s contact person along with a letter of explanation. These documents are in digital (pdf) format for distribution to all members for their review and input.

4. Members review the Buy Sell Agreement, mark text to be changed and make a list of questions about provisions and additional issues to ask KEYTLaw business and contracts attorney and former CPA Richard C Keyt. The members can email their changes to Richard or call Richard at 480-664-7472 and schedule a phone conference or a conference at our office for Ricky to answer questions about the BSA and determine what changes, if any, the members want to make to the BSA.  The BSA comes with one hour of attorney time to discuss the agreement with the members and modify it per the members’ instructions at the meeting. Attorney time incurred beyond one hour will be charged at $295/hour.

5.  Richard C. Keyt will revise the Buy Sell Agreement and send it to the contact person as an Adobe pdf file for the signatures of the members. Ricky will also send a pdf version of the agreement that shows the changes we made to the first draft of the BSA.

6. Members can sign the agreement the old fashioned way or we can arrange for digital signatures for no additional cost.

We constantly tell members of multi-member LLCs that the most important company document is the company’s Buy Sell Agreement because it is the only way to plan for the orderly future “divorce” of a member. Without a Buy Sell Agreement, the members are stuck with each other forever unless they are fortunate to agree on who will go, who will stay and how much, if any, the remaining members will pay the selling member.

Our Fee Includes Attorney Consultation & Revision Time

Our fee includes one hour of attorney time conferring with members, modifying the agreement and drafting custom provisions. Few of our LLCs exceed the allotted attorney time to finalize their Buy Sell Agreement. We want the final agreement to contain all of the provisions desired by the members of each LLC. Some LLCs need more custom drafting of provisions for the Operating Agreement or need more conference time with members to discuss the agreement and make changes. We bill the LLC for any excess attorney time at $295 per hour.

How to Hire the Keyts to Form Your New LLC

To hire us to form your Arizona LLC compare the contents of our three LLC packages ($497 Bronze, $797 Silver & $1,297 Gold [the confidential LLC]) and complete our LLC Formation Questionnaire.  See the six reasons Why You Should Buy a Gold LLC with a Confidential Trust. This article includes a list of people who won’t inherit your assets unless you provide for them in a will or a trust.