The Problem Unique to Business Partners — Involuntary Co-Ownership
When one partner in a Georgia multi-member LLC dies without a plan, the surviving partner does not automatically become the sole owner of the business. The deceased partner’s membership interest passes into their estate. Their spouse, children, or other heirs become the legal successor — not as a full member, but as an assignee under O.C.G.A. § 14-11-503. They receive economic distributions but have no management authority, no voting rights, and no right to participate in business decisions.
That sounds contained. It is not. The surviving partner now has a co-owner who cannot participate but also cannot be removed — at least not without a buy-sell agreement that compels a buyout. If there is no buy-sell, the deceased partner’s family can hold the assignee interest indefinitely, collecting distributions while the surviving partner runs the business alone and carries the operational risk.
Without a buy-sell agreement and coordinated estate plans, every Georgia multi-member LLC is one partner death away from this outcome.
What the Buy-Sell Agreement Must Do — and the 2024 Connelly Problem
A buy-sell agreement is the mechanism that controls what happens to a partner’s ownership interest when they exit — at death, disability, departure, or retirement. For business partners, it is mandatory. It determines whether the surviving partner can buy out the deceased partner’s estate, at what price, and on what timeline.
Two structures exist: entity-purchase (redemption) and cross-purchase.
Entity-purchase means the LLC buys back the deceased partner’s interest using company funds or life insurance held by the company. In June 2024, the U.S. Supreme Court ruled in Connelly v. United States that life insurance proceeds held by the company to fund a buyout increase the company’s fair market value for estate tax purposes. In the actual Connelly case, this created a $889,914 estate tax problem that the family did not anticipate. Entity-purchase buy-sell structures are now a significant estate tax liability for any company with substantial life insurance.
Cross-purchase means each partner holds a policy on the other partner’s life. Proceeds go directly to the surviving partner — not the company — and are used to buy the deceased partner’s interest from their estate. Cross-purchase structures avoid the Connelly problem entirely because the insurance proceeds are never held by the company. For a Georgia multi-member LLC with two or more partners, the cross-purchase structure is the correct post-Connelly approach.
How Each Partner’s Personal Estate Plan Must Coordinate With the Buy-Sell
The buy-sell agreement and each partner’s personal estate plan are not independent documents. They reference each other and must be consistent. Three coordination failures are common.
Trust ownership and buy-sell triggering events. If a partner holds their LLC interest through a revocable living trust (which they should, to avoid probate), the buy-sell agreement must address what happens when the trustee — not the individual — is the member of record. The buy-sell must define whether the partner’s death triggers the buyout even when the interest is held in trust, and it must specify that the successor trustee has authority to execute the sale on behalf of the estate.
Valuation method consistency. The buy-sell agreement sets a method for valuing the partner’s interest at the triggering event — fixed price, formula, or agreed appraisal. The partner’s personal estate plan (and federal estate tax return) must use the same valuation. A buy-sell agreement that sets a price below fair market value can be challenged by the IRS under IRC § 2703, which disregards transfer restrictions that are not bona fide business arrangements. A below-market price in a buy-sell agreement does not cap the estate tax value unless the agreement meets specific IRC § 2703 requirements.
Disability coverage. Death is addressed by life insurance. Disability is addressed separately — most buy-sell agreements include a disability trigger, but it requires disability insurance funding. The disability trigger must also define who determines incapacity and how long the disability period must last before the buyout obligation activates. A buy-sell agreement that defines disability inconsistently with the partner’s durable power of attorney creates a gap: two documents say two different things about when the partner is legally unable to act.
What Each Partner’s Personal Estate Plan Needs
Each partner in a Georgia multi-member LLC needs a personal estate plan that works alongside the operating agreement and buy-sell — not in isolation from them.
Revocable living trust — holds the partner’s LLC interest and names a successor trustee who can participate in the buy-sell transaction at death. The trust must be named in the operating agreement as an authorized member, and the successor trustee must have explicit authority to execute a buyout on the estate’s behalf.
Updated operating agreement — authorizes trust ownership and grants the successor trustee full membership rights until the buyout closes. Without this, the successor trustee cannot legally agree to the sale because they hold only assignee status under O.C.G.A. § 14-11-503.
Durable financial power of attorney — covers incapacity. The operating agreement must authorize the attorney-in-fact to act on behalf of the partner in business matters. The buy-sell must define incapacity consistently with the POA so the same event that activates the POA also activates the buy-sell’s disability trigger.
Pour-over will — safety net for any assets not titled in the trust at death. Does not control the LLC interest directly if the trust is properly funded, but ensures nothing is left outside the plan permanently.
What Happens if the Plans Are Not Coordinated
Uncoordinated plans do not fail obviously. They fail at the worst possible moment — when the plan is actually needed.
The trust holds the interest but the operating agreement has not been updated. The successor trustee is an assignee, not a full member. They cannot approve the buyout. The surviving partner cannot force the sale. The deceased partner’s family holds an economic interest in the business for years while the surviving partner carries all operational responsibility.
The buy-sell is funded with entity-purchase life insurance post-Connelly. The company receives the insurance proceeds, which inflate the company’s estate tax value. The deceased partner’s estate owes estate tax on a business value that includes the same insurance that was supposed to fund the buyout. The family receives the buyout proceeds but simultaneously owes additional estate tax on a value they cannot reclaim.
The buy-sell valuation is below market and does not meet IRC § 2703 requirements. The IRS challenges the valuation. The estate tax return uses the buy-sell price; the IRS assessment uses fair market value. The family pays both the estate tax on the higher value and the legal cost of contesting the assessment.
For a full review of what goes wrong when plans are not coordinated, see problems with buy-sell agreements in Georgia.
How to Build a Coordinated Plan With Your Business Partner
1
Draft or update the buy-sell agreement with a cross-purchase structure
Use a cross-purchase structure — each partner holds a policy on the other. Define the triggering events (death, disability, departure, retirement), the valuation method (and confirm it meets IRC § 2703 requirements), and the disability definition. Confirm the disability definition matches what your durable POA says about incapacity.
2
Each partner builds a revocable living trust
Each partner’s trust names a successor trustee with explicit authority to participate in the buy-sell transaction at the partner’s death. The trust must identify the LLC interest as a trust asset and authorize the successor trustee to approve a sale at the buy-sell price without a court order.
3
Update the operating agreement for both partners
The operating agreement must authorize trust ownership for both partners’ interests, grant each successor trustee full membership rights at the triggering event, authorize each partner’s POA agent to act in business matters during incapacity, and cross-reference the buy-sell agreement’s triggering events so both documents activate the same outcome simultaneously.
4
Fund and retitle
Each partner retitles their LLC interest into their trust. Each partner’s cross-purchase life insurance policy is put in force — each partner owns the policy on the other, pays the premium, and is the beneficiary. Disability policies are similarly structured. The operating agreement is updated to reflect trust ownership for both members.
5
Review every 2 to 3 years — or after any major change
The buy-sell valuation method must be reviewed when the business value changes materially. The trust beneficiary designations must be reviewed after any personal life change (marriage, divorce, new children). The operating agreement must be updated if a new partner joins or a partner’s ownership percentage changes. Review all three documents together — a change to one often requires a change to the others.
