Ringers Posted September 29, 2017 Report Share Posted September 29, 2017 Hello All, Here is a situation I have with one of my clients and partner deceased on June 30, 2017. Each partner had $800K life policy on other and buyout agreement stated that deceased partner's estate would receive the $800000 in full paykment of capital account and buyout. The way I treated it is outlined below. I would appreciate any comments, critiques, and suggestions from the members of this most-esteemed forum. I really have respect for and trust you guys!!! LLC BUYOUT (2 PARTNER LLC TAXED AS PARTNERSHIP REMAINING PARTNER BUYING OUT DECEASED PARTNER WITH PROCEEDS OF PERSONALLY OWNED LIFE INSURANCE POLICY) DECEASED PARTNER CAPITAL ACCOUNT $500,000.00 DECEASED PARTNER L/T GAIN ON LAND $150,000.00 DECEASED PARTNERS L/T GAIN ON SECURITIES $2,000.00 DECEASED PARTNER ORDINARY GAIN ON RENTAL SALES $75,000.00 (DEPRECIATION RECAPTURE) DECEASED PARTNER L/T GAIN ON RENTAL SALE $3,000.00 TOTAL $730,000.00 BUYOUT PRICE PER AGREEMENT $800,000.00 ($70000 OVER CAPITAL ACCOUNT PLUS ASSET GAIN) THESE ARE THE STEPS I WILL TAKE: 1. Deposit the $800000 form the life insurance proceeds into the partnership bank account - DR bank, CR remaining partners capital account. 2. Pay the $800000 to deceased partner's estate: CR Bank 800,000.00 Dr land 150,000.00 Dr rental prop 3,000.00 Dr accum dep 75,000.00 Dr dec. prtnr cap 500,000.00 Dr securities 2,000.00 Dr ????? 70,000.00 QUESTIONS: 1. Do these postings make sense? And what account will I put the $70000 into--Goodwill? Or divide pro rata to existing asset accounts? 2. Wil deceased partner estate have ordinary income for $75000 dep recapture only and $22500 in cap gain? 3. If the balance of the $70000 goes to goodwill, how will the remaining partner treat this when LLC is disregarded entity or dissolved? Quote Link to comment Share on other sites More sharing options...
Richcpaman Posted October 1, 2017 Report Share Posted October 1, 2017 RIngers: I just want to follow this... Was there only two partners? Since the deceased partner's estate was paid, why are you booking anything into the partnership? The remaining partner (s) may have an amortizable asset... Or its an adjustment to each partners returns and not reflected on the partnership. I want to follow this to see what everyone else has to say. Rich 1 Quote Link to comment Share on other sites More sharing options...
jklcpa Posted October 1, 2017 Report Share Posted October 1, 2017 I'm following also and don't have a clear answer either, and that is why I didn't respond sooner. I did find this article from The Tax Advisor that might provide useful though and get the discussion moving. https://www.thetaxadviser.com/issues/2015/aug/accounting-for-death-of-partner.html Also, this link to the Code that may be useful. After reading this, depending on how the buy-sell agreement is worded for the payout, it sounds like that $70K may well be goodwill. I'm not sure though and hoping others with more experience will weigh in. https://www.law.cornell.edu/cfr/text/26/1.736-1 1 Quote Link to comment Share on other sites More sharing options...
jklcpa Posted October 1, 2017 Report Share Posted October 1, 2017 Rich, it was a 2-person partnership according to the title of the post. I believe the article recommends depositing the proceeds of the life insurance into the partnership and handling the payout to the estate or successor from there. Just some ramblings, but I was thinking that if this were a partnership of more than 2 persons, it would consider making a sec 754 adjustment that basically has the effect of adjusting inside basis of remaining partners to their outside basis, but in this case the partnership is liquidating the deceased partner's interest, and so it has a technical termination. Does this mean that the remaining person has additional basis because of the buyout? And is that in the form of additional basis in all the assets he now owes as a SMLLC or is it still goodwill? Sorry if that's not helpful, and I may be creating more questions than answers.... 1 Quote Link to comment Share on other sites More sharing options...
Ringers Posted October 2, 2017 Author Report Share Posted October 2, 2017 Judy and Rich, thanks for your inputs. Yes, it was a two person partnership with the partnership agreement stating that upon death of either partner, the remaining partner would buy out the deceased partner for $800,000, which wold first be used to pay off the decedent's capital account and the rest would go to buy out the decedent's share. The buyouts were funded by each partner having a personally paid insurance policy for $800K on the other partner. When the partn4r died, the remaining partner put the $800K insurance proceeds into the partnership and incr4eased his capital account. Then the full $800K was used to buy out the deceased partner's capital account of about $500K and the remainder to pay for gains on other assets of the partnership which were in the process of being sold, but not yet closed, on the date of the partner's death. Applying $230 K to these gains would account for a capital gain by the estate of deceased partner and increased basis in these assets for remaining partner to prevent him from having to pay double the gain on the assets in question (his portion and the deceased partner's portion). Can the remaining $70K of the buyout be used to increase the basis of the remaining assets ratable, or would it have to be shown as goodwill? If goodwill, and the LLC becomes a SMLLC and is disregarded, how would remaining partner ever recover that $70K, since he would not ever sell any portion of the SMLLC but only the remaining assets and show gain or loss on his personal return. After remaining assets would be sold, the $70K of goodwill would stand alone in the SMLLC and have no value. Nothing like a tough one to keep the mind sharp!! Thank you very much for you input and links. I have looked at many other links, but I will check the two out that you provided, Judy. 1 Quote Link to comment Share on other sites More sharing options...
Recommended Posts
Join the conversation
You can post now and register later. If you have an account, sign in now to post with your account.