Tax-Efficient C-Corporation Buy/Sell Arrangements: Using SPLLC and Split Dollar

Tax-Efficient C-Corporation Buy/Sell Arrangements: Using SPLLC and Split Dollar

Introduction: What is a Special Purpose LLC?

A Special Purpose LLC (SPLLC) is a legal entity created to manage specific transactions or series of transactions, often for asset protection, tax planning, or other strategic business purposes. These LLCs are tailored to achieve particular financial or operational goals, such as holding life insurance policies, managing real estate investments, or facilitating complex financial arrangements. SPLLCs have been in use since the early 2000s, gaining popularity as businesses and legal advisors recognized their flexibility and utility in various planning strategies.

History and Prevalence

Special Purpose LLCs have been used for over two decades, with their application becoming more widespread as business owners seek sophisticated methods to manage assets, mitigate risks, and plan for succession. The strategy of using SPLLCs, particularly in buy-sell agreements and estate planning, has grown steadily. While not every business adopts this approach, it is a common practice among medium to large enterprises, especially those structured as C-corporations that face significant tax and succession planning challenges.

Structuring the SPLLC and Buy-Sell Agreement

*Note – C Corporation in this example is structured as a MSO (Management Service Organization)
  1. Formation of SPLLC:
    – The two business owners form a Special Purpose LLC specifically for the purpose of holding life insurance policies.
    – The SPLLC is created as a separate legal entity, distinct from the business they own together.
  2. Ownership and Management:
    – The SPLLC is jointly owned by the business owners. Its sole purpose is to manage and hold the life insurance policies.
    – An operating agreement outlines the SPLLC’s governance, including decision-making processes, management responsibilities, and how the proceeds from the policies will be used.
  3. Life Insurance Policies:
    – The SPLLC purchases life insurance policies on each owner’s life, with the SPLLC named as the beneficiary.
    – The funding of these policies is handled through a split dollar arrangement with the C-corporation that the owners manage.

Split Dollar Arrangement

  1. Premium Payments:
    – The C-corporation pays the premiums for the life insurance policies held by the SPLLC.
    – The split dollar agreement specifies how the premiums are allocated and reimbursed. Typically, the corporation’s contributions are treated as loans to the SPLLC, to be repaid from the policy proceeds.
  2. Allocation of Benefits:
    – The agreement also details how death benefits and any policy cash values are to be divided between the SPLLC and the business owners or their respective estates.
  1. Special Purpose LLC
  2. Buy-Sell Agreements
  3. Dividend Tax Elimination
  4. C-Corporation Tax Planning
  5. Business Succession Planning
  6. Asset Protection Strategies
  7. Tax-Efficient Business Structures
  8. Split Dollar Life Insurance
  9. Life Insurance for Business Owners
  10. Tax Savings for C-Corporations
  11. Estate Planning for Business Owners
  12. IRS Compliance for SPLLCs
  13. Business Continuity Planning
  14. Irrevocable Trusts and Life Insurance
  15. Avoiding Dividend Tax
  16. Financial Planning for Businesses
  17. Legal Structuring for Businesses
  18. Business Risk Mitigation
  19. Tax-Advantaged Business Strategies
  20. Corporate Tax Efficiency
  21. Business Owner Financial Management
  22. Innovative Tax Planning
  23. Business Asset Management
  24. Succession Planning Techniques
  25. Guardian Tax Consultants

Handling the Death of a Business Owner

  1. Triggering Event:
    – Upon the death of one of the business owners, the life insurance policy on the deceased owner pays out to the SPLLC.
  2. Use of Proceeds:
    – The SPLLC uses the insurance proceeds according to the terms of the buy-sell agreement. Typically, the proceeds are used to buy out the deceased owner’s share of the business.
    – This ensures that the surviving owner retains control of the business without financial strain.
  3. Policy Transfer to Trusts:
    – After the payout, the SPLLC transfers the ownership of the life insurance policy on the surviving owner to an irrevocable trust established by the surviving owner.
    – The trust now holds the policy, providing a level of estate planning and asset protection.

Avoiding Dividend Tax on Policy Transfers

  1. Tax Implications of Direct Transfers:
    – Direct transfers of life insurance policies from a corporation to individual shareholders can be considered as dividends, triggering dividend tax.
    – The IRS may treat the fair market value of the transferred policy as taxable income.
  2. Role of the SPLLC:
    – The SPLLC, being a separate entity, provides a buffer in this transaction.
    – The transfer of the policy from the SPLLC to an irrevocable trust avoids this taxable event because the SPLLC is not distributing the policy directly to an individual owner.
  3. Legal and Tax Compliance:
    – To ensure compliance, the structure and transactions must be carefully documented and adhere to IRS guidelines.
    – It is critical to consult with legal and tax professionals to structure the SPLLC and split dollar arrangement properly, minimizing the risk of triggering dividend tax.

Detailed Steps to Avoid Dividend Tax

To avoid dividend tax when transferring the life insurance policy from the SPLLC to the trust, the following steps must be meticulously followed:

  1. Proper Documentation: Ensure all transactions, agreements, and the formation of the SPLLC are thoroughly documented.
  2. Compliance with IRS Regulations: The SPLLC and split dollar arrangement must adhere to IRS guidelines to prevent the transfer from being treated as a dividend.
  3. Legal Structuring: Work with legal and tax professionals to structure the SPLLC and the transfer in a manner that qualifies for exceptions to dividend treatment.
  4. Independent Valuation: Obtain an independent valuation of the life insurance policy to establish its fair market value at the time of transfer.
  5. Loan Repayment: Ensure that any loans made by the C-corporation to pay premiums are appropriately repaid or accounted for in the split dollar arrangement.

Benefits of This Strategy

  1. Tax Efficiency: By using an SPLLC, the transfer of life insurance policies to trusts avoids dividend tax, resulting in significant tax savings.
  2. Continuity and Control: The surviving owner gains control of the business without financial burden, ensuring business continuity.
  3. Estate Planning: Transferring the policies to irrevocable trusts provides estate planning benefits, such as avoiding probate and providing for heirs according to the deceased owner’s wishes.
  4. Asset Protection: The SPLLC structure, combined with trust ownership, adds layers of protection against creditors and ensures that the insurance proceeds are used as intended.


Using a Special Purpose LLC for holding insurance in a buy-sell agreement, funded through a split dollar arrangement, and subsequently transferring policies to trusts, offers a tax-efficient and strategic method for business succession planning. This approach provides significant benefits in terms of tax savings, business continuity, and estate planning, ensuring a smooth transition and protection of assets for business owners and their heirs.

Relevant Case Law

1. Estate of Powell v. Commissioner, 148 T.C. No. 18 (2017)

Fact Pattern: This case involved the IRS challenging the valuation and transfer of assets in an estate planning context.

Summary: The court ruled on the proper inclusion of assets in the decedent’s gross estate, emphasizing the importance of correctly structured transactions.

Relevance: Highlights the necessity of proper structuring and documentation in estate planning, crucial for SPLLCs and insurance transfers to avoid tax pitfalls.

2. Estate of Morrissette v. Commissioner, T.C. Memo 2021-60

Fact Pattern: The case involved the valuation and tax implications of split dollar life insurance arrangements used in an estate plan.

Summary: The Tax Court upheld the use of split dollar agreements in estate planning, provided they are properly documented and structured.

Relevance: This case supports the use of split dollar arrangements within SPLLCs, reinforcing the need for meticulous documentation and adherence to IRS rules.

3. Levine v. Commissioner, T.C. Memo 2005-86

Fact Pattern: This case dealt with the transfer of life insurance policies and the associated tax implications.

Summary: The court examined whether the transfer of a life insurance policy constituted a taxable event, focusing on compliance with IRS guidelines.

Relevance: Illustrates the importance of structuring insurance policy transfers correctly to avoid dividend treatment and tax liabilities, pertinent to SPLLC strategy.

For more detailed advice and customized strategies for your business, visit

Guardian Tax Consultants.

We specialize in innovative tax planning and business structuring to help you achieve your financial goals.

This material is for educational purposes and does not constitute tax or legal advice. Any strategy should be reviewed with your tax and legal professionals


Tax-Efficient C-Corporation Buy/Sell Arrangements: Using SPLLC and Split Dollar


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