Hello All,

My client is a 2 person LLC taxed as a partnership with mutual buyout agreements between each of the two partners.
One partner dies June 30. Here are the details of the partnership as of date of death:
All gains are based on appraised values as of date of death.

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 $3000 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?
4. Should I have the remaining partner buyout the deceased partner's share as an outside transaction and then do a 754 election?

The big question is how to handle the extra $70000 of the buyout so that the remaining partner gets a step up in the basis of the property for that $70000. Since the
LLC will terminate on the partner's death (or if it is allowed to remain as an LLC will be a SMLLC with only one partner and thus a disregarded entity).

All suggestions will be considereed and appreciated!!!