By Matt Jamieson | Published April 2026
This article is provided for educational purposes only. It does not constitute legal, tax, or financial advice. BuySell LLC is an administrative services company, not a law firm, CPA firm, or licensed insurance agency. Nothing in this article creates a professional advisory relationship. Consult qualified legal, tax, and insurance professionals before implementing any business succession or buy-sell structure.
BUYSELL LLC | OWNER’S BRIEF
The short answer
What is an Insurance LLC for a buy-sell agreement? An Insurance LLC is a partnership-taxed entity that owns life insurance policies outside the operating company. It is most often used to fund a buy-sell agreement among the owners of a closely-held business. In a properly structured arrangement, it can address the valuation issue the Supreme Court identified in Connelly v. United States (2024), subject to drafting, ownership, and counsel review.
Who this matters to: closely-held business owners and the advisors and CPAs who support them. The structure is most commonly used with three or more owners, where it also reduces the number of required policies, but the valuation issue it addresses can affect two-owner companies as well.
Three things to know:
- The LLC owns the policies; the operating company does not.
- It is a funding mechanism, not a replacement for your buy-sell agreement.
- It creates annual compliance work that must be maintained to hold up.
What to do next: read the Insurance LLC setup and administration workflow.
Read time: 6 minutes
In a properly structured arrangement, moving policy ownership outside the operating company can help address the specific valuation issue highlighted in Connelly v. United States, where life insurance proceeds received by the operating company increased the company’s estate-tax value. Whether that result is achieved in a given case depends on how the LLC is drafted, owned, and maintained over time. Your attorney and CPA should confirm the structure before implementation. The purpose of this post is to define the structure in plain English, not to promise a tax result.
What an Insurance LLC actually is
An Insurance LLC is a separate legal entity, formed under state LLC law, whose sole purpose is to own and hold life insurance policies on the lives of the owners of a connected operating company. Formation requirements, ongoing governance obligations, and any state-specific restrictions vary by state; the choice of state of formation and its interaction with the operating company’s state should be confirmed with the attorney. It files its own federal tax return, typically Form 1065 (partnership return), and issues Schedule K-1s to its members each year.
The structure has three defining features:
- Separate ownership. The Insurance LLC is generally the policy owner and the policy beneficiary. The operating agreement, drafted by counsel, governs how those proceeds are used by the LLC and its members, not the operating company.
- Partnership taxation. By default, a multi-member LLC is taxed as a partnership under Subchapter K of the Internal Revenue Code. Partnership taxation is commonly used in Insurance LLC designs. Whether death benefit proceeds qualify for income-tax exclusion under IRC §101(a)(1), and whether the transfer-for-value rule under §101(a)(2) or the employer-owned life insurance rules under §101(j) affect that outcome, depends on the specific facts of the structure and must be confirmed by your CPA before implementation.
- Buy-sell coordination. The Insurance LLC’s operating agreement is drafted to align with the buy-sell agreement among the operating company’s owners. When a triggering event occurs (typically an owner’s death), the Insurance LLC collects the death benefit, and the proceeds are directed to fund the cross-purchase of the departing owner’s interest in the operating company.
Variations exist. Some advisors call it a Special Purpose Insurance LLC or SPLLC. Some practitioners use “Life Insurance LLC.” Our Insurance LLC hub uses “Insurance LLC” as the primary term and treats the others as synonyms. The name matters less than the structure. Here is what the structure does not do.
What it is not
An Insurance LLC is not a tax-avoidance vehicle. It does not automatically reduce anyone’s tax liability. The structure is a specific design choice that can address a specific valuation issue, nothing more.
It is not a replacement for a buy-sell agreement. The buy-sell agreement between the operating company owners still governs who buys, who sells, at what price, on what triggers. The Insurance LLC is the funding mechanism, not the agreement itself.
It is also not something BuySell LLC sells as an insurance product. We coordinate the administrative workflow. We do not draft the legal documents, sell the insurance policies, give tax advice, or perform the valuation.
Why owners consider it after Connelly
In June 2024, the Supreme Court decided Connelly v. United States, No. 23-146, slip op. (U.S. June 6, 2024). The facts involved two brothers, Michael and Thomas Connelly, who owned Crown C Supply. The buy-sell agreement was funded by life insurance policies owned by the operating company itself. When Michael died, Crown C received the death benefit and used the proceeds to redeem Michael’s shares from his estate. The IRS argued, and the Court agreed, that the death benefit proceeds should be included in the company’s fair market value for estate-tax purposes. That increased Michael’s estate-tax liability by approximately $889,914, according to analysis by ArentFox Schiff. The case illustrates how a structure designed to fund a smooth ownership transition can create an unexpected estate-tax bill when the policies sit inside the operating company.
The Court’s holding addresses a specific structural choice: when the operating company owns the policies and receives the proceeds, the redemption obligation did not offset those proceeds when valuing the decedent’s shares for estate-tax purposes under IRC §2031 and Treasury Regulation §20.2031-2(f)(2).
Business owners and their advisors considering a buy-sell structure after Connelly have several options. The Insurance LLC is one of them. By moving policy ownership out of the operating company and into a separate partnership-taxed entity, the structure can address the specific valuation issue the Court identified. No IRS ruling or Treasury guidance has been issued specifically validating the Insurance LLC design as a resolution of the Connelly valuation issue. This is a practitioner-developed structural response, and its effectiveness depends entirely on how the entity is formed, governed, and maintained. Whether it achieves the intended result in a given case depends on the drafting, ownership alignment, and ongoing compliance posture. For the case facts and the Court’s reasoning in depth, read our Buy-Sell Agreements After Connelly cornerstone. If you are evaluating the Insurance LLC option after Connelly, the setup and administration workflow on our Insurance LLC hub is the right starting point.
What ongoing administration actually involves
Setting up an Insurance LLC is only the first step. Ongoing Insurance LLC administration produces annual compliance obligations that, if missed, can undermine the tax posture the entity was designed to protect.
Typical ongoing obligations include:
- Partnership Form 1065 filing and Schedule K-1 issuance to members each year
- Notice-and-consent documentation for each policy under IRC §101(j), completed before policy issuance; your CPA and attorney must confirm whether this rule applies to the Insurance LLC structure before issuance (the consequences of non-compliance include full income taxation of the death benefit)
- Annual Form 8925 reporting for employer-owned life insurance contracts where applicable, per IRC §6039I
- Premium payment coordination among members
- Policy review and beneficiary confirmation
- Operating agreement review for alignment with the underlying buy-sell
- Annual coordination with the operating company’s independent valuation professional and counsel, where required by the buy-sell documents
That is what ongoing Insurance LLC administration involves. Attorneys draft, brokers place, CPAs file. BuySell LLC coordinates the calendar so each professional stays in their lane. For the full setup and administration workflow, see the Insurance LLC setup and administration workflow.
For advisors: Missed §101(j) notice-and-consent documentation or late Form 8925 filings create compliance exposure for the structure you recommended. BuySell LLC maintains the calendar so your recommendation stays clean. See our For Advisors page.
When an Insurance LLC is (and is not) the right call
An Insurance LLC is most commonly considered by closely-held businesses with multiple owners where life insurance is the intended funding source for the buy-sell agreement, and where the Connelly valuation issue is material. That typically means owners whose estates may be at or above the federal estate and gift tax exemption amount (see IRC §2010 for the current figure, which adjusts annually for inflation). Firms with three or more owners often find the structure more efficient than a direct cross-purchase among individuals because the number of required policies is lower.
The structure is not always the right fit. For very small operating companies with two owners and modest policy amounts, a direct cross-purchase or a trust-based alternative may be simpler and less administrative. For owners with existing policies already in place, transfer-for-value risk under IRC §101(a)(2) can cause the death benefit to become partially or fully taxable as ordinary income if the transfer does not qualify for a statutory exception. The partnership exception under §101(a)(2)(B) is one reason advisors use partnership-taxed LLCs for this structure, but whether it applies to contributed existing policies requires CPA analysis before any restructuring. For scenarios where the trigger is disability rather than death, disability buyout insurance may be worth exploring, subject to underwriting availability and your advisor’s recommendation.
The structure is a tool, not a universal solution. Your attorney should confirm whether it fits your situation. Your CPA should confirm the tax posture before implementation.
Frequently asked questions
What is a Special Purpose Insurance LLC?
A Special Purpose Insurance LLC, also called an Insurance LLC or a Life Insurance LLC, is a partnership-taxed limited liability company formed specifically to own life insurance policies that fund a buy-sell agreement among the owners of a connected operating company. The entity’s sole purpose is to hold the policies, collect death benefit proceeds on a triggering event, and direct those proceeds to fund the cross-purchase of the departing owner’s interest. Your attorney and CPA should confirm the structure and its tax posture before you proceed.
Who owns the Insurance LLC?
Typically, the members of the Insurance LLC are the same individuals who own the operating company, or trusts or estate-planning entities associated with those individuals. The alignment is set by the operating agreement. Ownership percentages can mirror the operating company or can differ based on the planning objective. Your attorney should set the ownership structure in the operating agreement before formation.
How is an Insurance LLC taxed?
By default, a multi-member LLC is taxed as a partnership under Subchapter K of the Internal Revenue Code. The LLC files Form 1065 annually and issues Schedule K-1 to each member. Partnership taxation is commonly used in Insurance LLC designs. Whether death benefit proceeds qualify for income-tax exclusion under IRC §101(a)(1), and whether the transfer-for-value rule under §101(a)(2) or the employer-owned life insurance rules under §101(j) affect that outcome, depends on the specific facts and must be confirmed by your CPA before implementation.
Does the Insurance LLC replace my buy-sell agreement?
The Insurance LLC does not replace the buy-sell agreement. The agreement among the operating company owners still governs who buys, who sells, at what price, on what triggers. The Insurance LLC is the funding mechanism, not the agreement itself. Both documents must be drafted to align. Have your attorney review both together, not separately.
What does BuySell LLC actually do for an Insurance LLC?
We coordinate the administrative workflow. We do not draft the legal documents, sell the insurance policies, give tax advice, or perform the valuation. Our role is to maintain records, coordinate the notice-and-consent calendar under IRC §101(j), organize Form 8925 data for your CPA, prepare administrative support files for the K-1 process, and keep the annual compliance calendar on track. Attorneys draft. Brokers place. CPAs file. We coordinate.
Next step
For the full setup and administration workflow, read the Insurance LLC hub.
Related BuySell LLC resources
Sources and references
- Connelly v. United States, No. 23-146, slip op. (U.S. June 6, 2024). Supreme Court opinion (PDF)
- IRC §101 (income tax exclusion for life insurance proceeds). Cornell LII
- IRC §101(a)(2) (transfer-for-value rule). Cornell LII
- IRC §101(j) (employer-owned life insurance, notice and consent). Cornell LII
- IRC §2031 (estate-tax valuation of property). Cornell LII
- Treasury Regulation §20.2031-2(f)(2) (valuation of stock in closely-held corporations). Cornell LII
- IRC §6039I (annual return for employer-owned life insurance). Cornell LII
- IRS Form 8925 (Report of Employer-Owned Life Insurance Contracts). IRS.gov