Life Insurance for LLC members

[Vernon Chiu]

Hi everyone,

Wasn't sure what category this falls in but financial planning seemed appropriate.

I'm starting a 4 members LLC for CRE purchasing. We are of the mindset of buy, hold, refinance indefinitely. I heard one of the BP podcasts where someone had purchased life insurance on their partner and vice versa. It was a 2 member LLC. This was to make sure that if something unforseen happened to one or the other, the surviving partner will have the means to buyout the shares from the heirs.

I thought this was fairly sound advice. My membership is agreeable to something like this so I have some more questions before following this down the rabbit hole.

1) is there a specific type of insurance one would recommend in this situation? So far, the only one I have come up with is a 20-30 year term life, perhaps for $50-100k death benefit, to purchase for each member. It is likely the most cost effective and gets the job done.

2) what are the tax implications other than payments are not tax deductible as this will be paid by LLC for members, not employees?

3) what are the tax implications IF the policy does take effect? The plan for these benefit payouts would be as buyout funds in case the heir to the disassociated member's shares doesn't want a part of the business or is deemed I'll suited for the position. I suspect the remaining will go to the LLC and distributed to all remaining members as is typical of life insurance policies

We all agree this is not an easy conversation to have. However, I feel it behooves us to make sure our membership and families aren't saddled with a giant "what do we do now" should anything happen down the road.

I like to imagine worst case scenarios where someone may have $50-150k in equity scattered throughout multiple properties and the remaining members would have to buy them out at a time when they may be retired and on fixed incomes.

Thank you for your time.

[Thomas Rutkowski]

Originally posted by @Vernon Chiu:

1) is there a specific type of insurance one would recommend in this situation? So far, the only one I have come up with is a 20-30 year term life, perhaps for $50-100k death benefit, to purchase for each member. It is likely the most cost effective and gets the job done.

You really shouldn't use Term unless you are absolutely confident that the organization will not outlive the insurance. Permanent life insurance may "seem" expensive, but the bulk of the premium is going to the cash value which represents you saving up your own death benefit over your natural life expectancy. If you dissolve the organization, everyone gets their cash value back.

2) what are the tax implications other than payments are not tax deductible as this will be paid by LLC for members, not employees?

3) what are the tax implications IF the policy does take effect? The plan for these benefit payouts would be as buyout funds in case the heir to the disassociated member's shares doesn't want a part of the business or is deemed I'll suited for the position. I suspect the remaining will go to the LLC and distributed to all remaining members as is typical of life insurance policies

Each member will be signing a buy/sell agreement that obligates each member to buy out the deceased member. The life insurance policy is simply the mechanism for funding the buyout. The agreement should be drafted by an attorney. It will need to address the value of the shares and buyout.

Each member will own the policies they hold on the other members (assuming its a "cross purchase" type). Unless otherwise addressed in the buy-sell agreement, the policy owner controls what happens with any "excess" death benefit. The owner determines the beneficiary of the policy.