diff --git a/hindsight-all/hindsight/embedded.py b/hindsight-all/hindsight/embedded.py
index 64df55d042..b891550bb2 100644
--- a/hindsight-all/hindsight/embedded.py
+++ b/hindsight-all/hindsight/embedded.py
@@ -67,7 +67,7 @@ class HindsightEmbedded:
     Args:
         profile: Profile name for data isolation (default: "default")
         llm_provider: LLM provider ("groq", "openai", "ollama", "gemini", "anthropic", "lmstudio")
-        llm_api_key: API key for the LLM provider
+        llm_api_key: API key for the LLM provider. Omit to inherit parent env / profile .env.
         llm_model: Model name to use
         llm_base_url: Optional custom base URL for LLM API
         database_url: Optional database URL override (default: profile-specific pg0)
@@ -82,7 +82,7 @@ def __init__(
         self,
         profile: str = "default",
         llm_provider: str = "groq",
-        llm_api_key: str = "",
+        llm_api_key: Optional[str] = None,
         llm_model: str = "openai/gpt-oss-120b",
         llm_base_url: Optional[str] = None,
         database_url: Optional[str] = None,
@@ -98,7 +98,8 @@ def __init__(
         Args:
             profile: Profile name for data isolation
             llm_provider: LLM provider
-            llm_api_key: API key for the LLM provider
+            llm_api_key: API key for the LLM provider. Omit to inherit parent env / profile .env;
+                pass "" to explicitly use no key.
             llm_model: Model name to use
             llm_base_url: Optional custom base URL for LLM API
             database_url: Optional database URL override
@@ -110,15 +111,18 @@ def __init__(
         """
         self.profile = profile
 
-        # Build config dict for daemon (matches CLI format)
+        # Omit an unspecified key so the daemon can inherit it from the profile
+        # or parent environment (#3253). An explicit empty string remains an override.
         self.config = {
             "HINDSIGHT_API_LLM_PROVIDER": llm_provider,
-            "HINDSIGHT_API_LLM_API_KEY": llm_api_key,
             "HINDSIGHT_API_LLM_MODEL": llm_model,
             "HINDSIGHT_API_LOG_LEVEL": log_level,
             "HINDSIGHT_EMBED_DAEMON_IDLE_TIMEOUT": str(idle_timeout),
         }
 
+        if llm_api_key is not None:
+            self.config["HINDSIGHT_API_LLM_API_KEY"] = llm_api_key
+
         if llm_base_url:
             self.config["HINDSIGHT_API_LLM_BASE_URL"] = llm_base_url
 
diff --git a/hindsight-all/tests/test_embedded_namespaces.py b/hindsight-all/tests/test_embedded_namespaces.py
index 66e29795d5..9235c0c2f0 100644
--- a/hindsight-all/tests/test_embedded_namespaces.py
+++ b/hindsight-all/tests/test_embedded_namespaces.py
@@ -17,6 +17,26 @@ def embedded_client():
     )
 
 
+def test_llm_api_key_three_state_config():
+    """llm_api_key uses three-state semantics (#3253).
+
+    None/omitted → key absent (inherit parent env / profile .env)
+    ""           → present as empty string (explicit clear)
+    non-empty    → present as override
+    """
+    omitted = HindsightEmbedded(profile="test", llm_provider="openai")
+    assert "HINDSIGHT_API_LLM_API_KEY" not in omitted.config
+    assert omitted.config["HINDSIGHT_API_LLM_PROVIDER"] == "openai"
+
+    empty = HindsightEmbedded(profile="test", llm_provider="openai", llm_api_key="")
+    assert empty.config["HINDSIGHT_API_LLM_API_KEY"] == ""
+
+    provided = HindsightEmbedded(
+        profile="test", llm_provider="openai", llm_api_key="sk-real"
+    )
+    assert provided.config["HINDSIGHT_API_LLM_API_KEY"] == "sk-real"
+
+
 def test_banks_create_ensures_daemon_started(embedded_client):
     """Test that banks.create() calls _ensure_started()."""
     # Mock _ensure_started to track calls