What is a Special Purpose LLC (SPLLC)?

A **Special Purpose LLC (SPLLC)** is a **legal entity** created to manage **specific financial transactions**, such as **asset protection, tax planning, and buy-sell agreements**.

Common uses of SPLLCs include:

• Holding **life insurance policies** for business succession.
• Managing **real estate investments** with tax benefits.
• Protecting business assets **from creditors and legal risks**.

How an SPLLC Works in a Buy-Sell Agreement

When business partners or shareholders need a **buy-sell agreement**, an SPLLC can **hold life insurance policies and manage payouts** tax-efficiently.

1. Formation of the SPLLC

• Business owners create a **jointly owned SPLLC**.
• The SPLLC serves as a **separate legal entity** from the operating business.

2. Ownership and Management

• The SPLLC **owns life insurance policies** on each business owner.
• An **operating agreement** outlines governance, payouts, and management responsibilities.

3. Split-Dollar Life Insurance Arrangement

Under a **split-dollar agreement**, the **C-Corporation funds the premiums** for life insurance policies held by the SPLLC.

• The **corporation’s payments** are treated as loans to the SPLLC.
• Loans are repaid **from the policy’s cash value or death benefit**.
• Benefits are **allocated between the business and the owners’ estates**.

How an SPLLC Eliminates Dividend Tax

Transferring life insurance policies directly from a **C-Corporation to shareholders** can **trigger dividend tax liabilities**. An SPLLC **prevents this issue** by acting as an intermediary.

1. Risks of Direct Transfers

• The IRS may classify **insurance transfers as taxable dividends**.
• Shareholders may be taxed on the **policy’s fair market value**.

2. SPLLC as a Buffer

• The SPLLC **holds policies on behalf of the business owners**.
• Transfers **from the SPLLC to a trust** avoid dividend tax treatment.

3. Legal & Tax Compliance

Proper documentation is crucial for **IRS compliance**.

• All SPLLC transactions **must follow IRS regulations**.
• Independent **policy valuations** ensure fair market compliance.
• Repayment of **corporate loans** must be structured properly.

Handling the Death of a Business Owner

When a **business owner passes away**, the **life insurance policy payout** flows into the SPLLC.

1. Payout & Business Succession

• The SPLLC **receives the insurance proceeds**.
• Funds are used to **buy out the deceased owner’s shares**, ensuring business continuity.

2. Transferring Policies to a Trust

• After the payout, the SPLLC **transfers the surviving owner’s policy** to an **irrevocable trust**.
• The trust **protects the remaining policy** from future creditors.

Relevant Case Law Supporting SPLLC Tax Efficiency

1. Estate of Powell v. Commissioner (2017)

Issue: IRS challenged the valuation and transfer of assets in an estate plan.

Outcome: The court ruled that **proper structuring is crucial** to prevent IRS penalties.

2. Estate of Morrissette v. Commissioner (2021)

Issue: IRS examined **split-dollar life insurance agreements**.

Outcome: The **Tax Court upheld** properly documented split-dollar agreements.

3. Levine v. Commissioner (2005)

Issue: Whether transferring life insurance triggered dividend tax.

Outcome: **Proper SPLLC structuring avoids tax liabilities**.

Key Benefits of Using an SPLLC

• **Tax Efficiency:** Avoids dividend tax on life insurance transfers.
• **Business Continuity:** Ensures surviving owners retain control.
• **Estate Planning:** Facilitates tax-advantaged wealth transfers.
• **Asset Protection:** Shields policies from legal claims.

Get Expert Tax Guidance from Guardian Tax Consultants

Using an SPLLC for **buy-sell agreements, split-dollar insurance, and asset protection** requires **expert tax planning and legal structuring**.

Our team helps with:

• Customized **SPLLC tax planning strategies**.
• Proper **documentation to ensure IRS compliance**.
• Optimized **wealth transfer solutions**.

Take Action: Schedule a consultation today.