transfer of membership interest upon death

Using Transfer-On-Death (TOD) Provisions in an LLC Operating Agreement

It's also important to consider the potential tax implications of using a TOD provision in an LLC operating agreement.

Many business owners in Florida choose an LLC for their entity due to its ease of formation, governance, and additional charging order protection (for multi-member LLCs). When drafting an Operating Agreement for the LLC, it is important to consider how each Member (the owners of the LLC equity) will hold title to their membership interest. One of the ways to do so is to create a transfer-on-death (TOD) provision in the Operating Agreement and Membership Interest Certificates (if any), specifying to whom the interest will pass upon that Member’s death.

To begin, it's important to understand what a TOD provision is. A TOD provision is a clause in a contract, document, or other instrument purporting to vest ownership of, or title in some asset to another person or entity immediately upon the death of a decedent. Most importantly, a TOD provision is a probate avoidance tool . An LLC's operating agreement specifies who will receive a member's ownership interest in the company upon their death without having to go through probate.

The validity of TOD provisions in LLC operating agreements has been a somewhat unsettled area of law in Florida. However, the recent Florida case of Blechman v. Estate of Blechman provides some guidance on this issue.

In Blechman , the Florida Supreme Court held that a TOD provision in an LLC's operating agreement was valid and enforceable. The Court found that the provision was specific, clear, and unambiguous and therefore complied with Florida's statute governing TOD designations.

However, it's important to note that the validity of TOD provisions in LLC operating agreements may still be subject to challenge. For example, a poorly drafted provision that is ambiguous or unclear could be challenged and deemed invalid.

It's also important to consider the potential tax implications of using a TOD provision in an LLC operating agreement. Depending on the specifics of the provision and the ownership structure of the LLC, there could be estate and gift tax consequences to transferring ownership interests in this way.

Additionally, it's important to consider how a TOD provision fits within the overall estate plan of the LLC members. Very rarely should an Operating Agreement be drafted without simultaneous consultation of the owners’ estate plan. A TOD provision may not be the best option for every situation, and other estate planning tools, such as a will or trust, may be more appropriate.

When drafting a TOD provision for an LLC operating agreement, it's important to ensure it complies with Florida law. Specifically, Florida Statutes Section 732.703 provides the requirements for a valid TOD designation.

One requirement is that the designation must be in writing and signed by the owner. Additionally, the designation must specifically reference the LLC ownership interest being transferred and must comply with any applicable requirements in the LLC's operating agreement.

It's also important to consider the potential impact of a TOD provision on the LLC's other members. For example, if a member's ownership interest is transferred to a third party through a TOD provision, this could impact the voting and decision-making power of the remaining members.

Another important consideration is the potential for disputes and litigation over a TOD provision. Members who are unhappy with the provision or believe it was improperly executed may challenge it in court, leading to costly and time-consuming litigation.

Overall, while the Blechman case provides some clarity on the validity of TOD provisions in LLC operating agreements, it's still important to consult with an experienced business attorney when drafting these agreements. A knowledgeable attorney can help ensure that the provisions are clear, unambiguous, and legally enforceable while also taking into account potential tax implications and estate planning considerations.

In addition to drafting a TOD provision, an attorney can also assist with other aspects of LLC formation and operation, such as drafting the operating agreement itself, advising on governance and management issues, and handling business transactions and disputes.

An attorney can also help ensure that the LLC is properly registered and compliant with Florida law and can provide ongoing guidance and support as the business grows and evolves.

Overall, a properly drafted and executed TOD provision can provide significant benefits for LLC members, including avoiding probate and ensuring that their ownership interests pass to their chosen beneficiaries. However, it's important to carefully consider the potential legal and tax implications and to work with an experienced business attorney to ensure that the provision is valid and enforceable.

Business owners who are considering using a TOD provision in their LLC operating agreement should consult with an attorney as soon as possible to ensure that their estate planning goals are appropriately addressed.

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Operating Agreement Controls Over Revocable Trust in Estate Battle Over Ownership Interest in Limited Liability Company

January 30, 2015

Jason L. Odom

If you specify a transfer of llc membership interest upon death but promise the same property to someone else in your revocable trust, who wins.

In the case of Blechman v. Estate of Blechman , Bertram Blechman and his sister formed Laura Investments, LLC, a limited liability company. Upon forming the company, Bertram and his sister executed an operating agreement which outlines the business’s basic structure and gave each of them—as an owner—a 50% “Membership Interest” in the company. As defined by the agreement, this “interest” consisted of the “rights to distributions, allocations and information, and the right to vote on matters coming before the Members.”

In addition to providing a managerial framework, the agreement imposed restrictions upon each Member’s ability to convey his interest in the company. In the case of death of a Member, the agreement provided that, unless (i) a Member shall transfer all or a portion of his LLC Membership Interest to a member of his immediate family, (ii) a Member bequeaths the Membership Interest in the Member’s last will and testament to members of the immediate family of the Member, or (iii) all such Membership Interest of a deceased Member are inherited by members of the Member’s immediate family, the LLC Membership Interest shall pass to and immediately vest in the deceased Member’s then living children.

The Bertram Blechman Revocable Living Trust

On December 12, 2000, Bertram executed his last will and testament and The Bertram Blechman Revocable Living Trust. Neither the will, nor the trust, contained any provision relating to Bertram’s 50% ownership interest in the LLC. However, on August 20, 2010, Bertram amended his trust to provide a “specific gift” of his residence and one half of the distributions from the LLC, to a trustee for the benefit of Arlene Roogow—Bertram’s girlfriend since 2003. The trust also required the Estate to pay the expenses associated with maintenance of the home.

Bertram’s Revocable Trust Provision is Nullified

On February 25, 2011, Bertram died. Predictably, Ms. Roogow asked the probate court to award her the residence and to transfer the LLC’s distributions from the Estate account to her own account to pay her expenses associated with the residence, pursuant to the 2010 trust amendment. Bertram’s children, however, took the position that the LLC membership and its distributions were not an estate asset, because upon Bertram’s death his 50% interest in the LLC immediately vested in them, as his children. Ms. Roogow countered that the specific devise in the 2010 trust amendment controlled, and she was therefore entitled to the distributions. The probate court sided with Ms. Roogow and held that the LLC was an estate asset, and as a result, Ms. Roogow was entitled to receive one-half of the distributions from the LLC. The children appealed.

The Florida Fourth District Court of Appeal disagreed with the probate court and reversed. The appellate court held that under Florida law the express language in contracts addressing the disposition of property trumps contrary language in a testamentary instrument, such as a will or trust. In other words, Bertram’s revocable trust provision is nullified to the extent it is contradicted by the LLC’s contractual provisions. The appellate court noted that the express language of the operating agreement provided that, unless the Member’s Interest was transferred or bequeathed to a member of his or her immediate family, the Interest would immediately vest in the Member’s children upon death of the Member. In this case, because Ms. Roogow was not a member of Bertram’s immediate family, Bertram’s 50% interest in the LLC immediately vested in his children upon his death. Furthermore, because Bertram’s 50% interest in the LLC immediately vested in his children, the LLC and distributions from the LLC membership were not a probate asset, which meant the distributions could not be used to pay Estate expenses, such as for the upkeep on the residence that was provided to Ms. Roogow.

The Importance of Proper and Thorough Estate Planning

This case highlights the importance of good, and thorough, estate planning in order to effectuate the client’s intent and avoid litigation. The operating agreement spelled out precisely how a Member could transfer their interest at death; however, for unknown reasons it was obviously not taken into consideration when Bertram amended his trust in 2010. While it seems pretty clear that Bertram intended to provide for Ms. Roogow on his death, he chose the wrong way to go about doing that, which unfortunately resulted in his intent not being carried out.

If you have questions about your revocable trust, or anything to do with Estate Planning, give our experienced attorneys a call to schedule a private consultation .

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WHAT HAPPENS TO YOUR LIMITED LIABILITY COMPANY WHEN YOU DIE?

YOUR LLC MEMBERSHIP INTEREST MAY REQUIRE A PROBATE

A Limited Liability Company may be formed by one person, known as a sole member, or it may consist of multiple members. A membership interest is the member’s share of the LLC, which is often expressed as a percentage. The value of a member’s interest depends upon the value of the company at the time of the member’s death, and different methods of evaluation are available to determine this value. Because many people who form an LLC take a “ Do It Yourself ” approach when they start their company, they fail to plan for the disposition of their membership interest at death, and a probate proceeding is often required in order to pass the interest to the member’s heirs.

HOW TO AVOID PROBATE OF YOUR LLC INTEREST

As an estate planning attorney , I often meet clients who have established an LLC, but they’ve never given any thought to what happens to the company when they die. In some cases, depending upon a person’s circumstances, their membership interest in an LLC may be the only asset they own that would require a probate proceeding. But there are ways to avoid probate.

One common way to plan for the disposition of a person’s LLC membership interest at death is to assign the membership interest to the person’s Revocable Living Trust during his or her lifetime. Since the member who assigned the interest to his or her trust is also typically the trustee of the trust, he or she still retains the same voting rights and financial benefits in the LLC that he or she had prior to the assignment. When the member dies, the membership interest owned by his or her trust passes to the beneficiaries of the trust, without the need for any probate proceedings.

For LLC members who do not create a Revocable Living Trust during their lifetime, another alternative available to members of Wisconsin Limited Liability Companies is to execute a Transfer on Death instrument. This allows the member to specify the beneficiary or beneficiaries who will receive the member’s LLC interest upon his or her death. This method of planning is essentially the equivalent of placing a beneficiary designation on the membership interest. The authority for such planning is found in Wisconsin Statute §705.10, which allows non-testamentary written instruments to be used for non-probate transfers of money or other benefits due upon death.

DON’T FAIL TO PLAN

The above examples are just two of the various planning options available to members of an LLC who wish to avoid probate upon their death. If you presently have an interest in an LLC, or you are thinking of forming an LLC, consult with an attorney who handles both Business Law and Estate Planning , to ensure that you’ve covered your bases. Your LLC planning should include an Operating Agreement that is tailored to fit your business, and an estate plan that provides for a seamless transition upon your death. Contact Attorney Stephen Kosa today to schedule an appointment to discuss your LLC needs.

LLC Death of Member: Everything You Need to Know

An LLC death of member situation results in passing of their company shares to their beneficiaries where it will be distributed according to the member's will. 3 min read updated on February 01, 2023

Updated November 3, 2020:

An LLC death of member situation results in his or her shares of the company passing to their beneficiaries where they will be distributed along with the member's estate according to the member's will or the inheritance law of the state.

About an LLC Operating Agreement

The manner in which an LLC is affected by the death of a member depends on the terms outlined in the operating agreement and the laws of the state where the LLC is registered.

An operating agreement is entered into by most LLCs as a means of regulating the internal operation and affairs of the company. In a well-drafted operating agreement, the effect of how the shares will be handled in the event of a member dying will be clearly stated. For example, the operating agreement may specify that the remaining members may buy out the shares of the deceased at market value. Another option in the operating agreement may call for the dissolution of the LLC if any member dies.

If no operating agreement is in place or if there are no instructions in the operating agreement covering the death of a member, then the laws of the state will determine the steps to take. This will affect the business. In some states, the death of an LLC member can result in several outcomes. These include:

The automatic dissolution of the LLC .
The executor for the deceased takes over the membership.
The executor may share the profits but does not participate in running the business.

In the case of a single-member limited liability company, it is up to the laws of the state whether the LLC will be dissolved automatically or if ownership is transferred to the deceased member's heirs. In Nevada, Chapter NRS 86.491 , for example, the state law says in the event a sole member of an LLC dies, the deceased member's interest will be passed to the heirs according to his or her will or per the state laws. It will then be up to the recipient(s) to choose to continue with the business or apply to have the LLC dissolved under the laws of the state.

One example notes the Ohio Code states if a member dies, the legal representative or executor can exercise the deceased member's membership rights in an effort to settle the deceased person's estate. In another example, the North Dakota Limited Liability Company Act states when a member dies, his or her legal representative will retain the financial rights to the company but will lose all rights to participate in the governing of the LLC.

About the Operating Agreement

The operating agreement governs the affairs and management of the limited liability company. It outlines how the profits, losses, and distributions will be shared, and what events must occur for the LLC to be dissolved. The agreement usually stipulates what will happen when a member dies, resigns, or is unable to function. The agreement is signed by the members.

An LLC will not automatically dissolve or terminate due to the death of a member unless there is a clause stating the LLC is to be dissolved or there is a state law that mandates dissolution. To dissolve an LLC means the company will finish business by paying off any debts and honors or transfers its contracts. Any profits or losses are then distributed among the members prior to the final termination of the LLC.

Transferring LLC Ownership

If you have partners, a clause can be added to the operating agreement that in the event of the death of a member his or her shares can be transferred. If you choose not to add a clause, as a single owner, you may opt to leave instructions in your last will and testament with instructions to your attorney.

If you use a Transfer of Membership, you can name who will receive your shares of the LLC upon your death. You have the option of naming multiple individuals as your beneficiaries. The document will not become effective until your death, which means should you become incapacitated for any reason the individuals you've named as beneficiaries do not have the authority to take over the business.

A revocable living trust allows you to transfer property directly in the event of a medical situation. By having the living trust, your trustee can step in to oversee your affairs.

If you need help with an LLC death of member situation, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.

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Transfer on death of llc membership interests.

Published by: Pam Thomas
April 14, 2016

Business owners who are looking for ways to avoid probate and transfer their business ownership interests and effectively might want to consider making their limited liability company membership interests transferrable on death. While this procedure is not the right move in every situation, in some cases it is an appropriate way to handle the transfer of an LLC membership interest for both estate planning and business succession planning purposes.

Most people are familiar with securities or investment accounts which can be made payable on death and thus avoid probate. Similarly, according to Ohio law, an LLC membership interest owner can designate in the LLC’s operating agreement that a membership interest is transferable on death. The Ohio Uniform Transfer on Death Security Registration Act (Sections 1709.01 through 1709.11 of the Ohio Revised Code) allows securities to be designated as transfer on death and an LLC membership interest is included in the statute’s definition of a security. According to Section 1704.05 a registration in beneficiary form may be shown by the words “transfer-on-death” or the abbreviation “TOD,” after the name of the registered owner and before the name of a beneficiary. Further, Section 1709.09(A) states that “any transfer-on-death resulting from a registration in beneficiary form is effective by reason of the contract regarding the registration between the owner of the security and the registering entity and by reason of sections 1709.01 to 1709.11 of the Revised Code and is not testamentary.” This means that if transfer on death language is properly included in the LLC’s operating agreement that the membership interest will be transferrable upon death and will not be subject to probate.

If you would like further information about whether making your LLC membership interest transferrable on death is right for your specific situation, please get in touch with Fred Hatton ([email protected]) or one of the other business attorneys at Pickrel, Schaeffer & Ebeling.

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What Happens to Your LLC When You Die?

Updated 05/4/2022

Published 10/30/2020

Michael T. Flannery, BA, JD

Attorney, distinguished law professor

Discover what happens to your LLC when you die and how to make sure it ends up in the right hands.

Cake values integrity and transparency. We follow a strict editorial process to provide you with the best content possible. We also may earn commission from purchases made through affiliate links. As an Amazon Associate, we earn from qualifying purchases. Learn more in our affiliate disclosure .

If you own a small business that is registered as a limited liability company (LLC), your death or the death of another member of your LLC can introduce stress and a lot of unanswered questions about the future operation of the business. It also can raise legal issues over how the deceased member’s interests in the business are to be administered.

Jump ahead to these sections:

What happens to single-member llcs when you die, what happens if there are multiple llc owners, how can you make sure your llc is in the right hands when you die.

Often, business interests are viewed as assets to be passed on to a business partner’s heirs when they die. But in some cases, the heirs are not equipped to take on the responsibility of the business. Such a dilemma can easily bring a business to a standstill in its operations or may even cause the company to dissolve entirely.

If your LLC consists of a single member, that member not only has total interest in the financial success of the business, but that member is solely responsible for managing the business. If that sole member dies, there will be no other members with any authority to continue managing the company or with a financial interest in the company. Therefore most states require that when the sole member of an LLC dies, the LLC shall be dissolved.

It is possible that a sole member may provide for the appointment of new members to take over the ownership and management of the business. However, without such authority being transferred, most states require that the LLC be dissolved.

If there are multiple members comprising the LLC, then the operating agreement is a critical tool for defining what happens when a member dies. An operating agreement is a legal document, in essence, a contract between the LLC members that sets out the terms and conditions under which the LLC will operate.

It defines issues such as:

The capital contributions and ownership percentages of each of the members
The rights, powers, and obligations of the members, including voting rights and the right to manage the company
Who owns the company property
The liabilities of the members
What happens upon the death, disability, or resignation of a member
The right of the members to transfer their interests, including upon death
Conditions under which the LLC will terminate

Not only should the operating agreement identify and define the nature of the deceased member’s interests, but it should clearly describe what interests of the deceased member may be retained by the other members of the LLC. These interests include voting and management rights, in addition to any other interests that can be transferred to family members or legal heirs of the deceased member (such as financial interests).

For most LLC companies, the members of the company share in the management, governance, and financial success of the company. When a member of an LLC company dies, the other members work to protect the interests of the deceased member, specifically any financial interests that the deceased member may have in the company that might be transferred to the deceased member’s family. But the surviving members may also want to protect the company and its ability to continue operating with sound management and internal governance.

If all of the interests of a deceased member are transferred to a family member or heir, this may not bode well for the successful continuation of the business. It may put the business in a precarious position if the family member or heir who inherits the deceased member’s management and voting interests does not know how to operate the business.

It is critical, therefore, that the members of the LLC agree upon what interests any member of the LLC may transfer to their heirs upon death and which interests must remain with the company. This agreement should be clearly expressed in the company’s operating agreement.

Execute an operating agreement for the LLC

To best avoid this dilemma when a member of an LLC dies, the LLC members should address the issue of the death of a member in the company’s operating agreement when the business is created. Anticipating the death of LLC members and setting out, in writing, consequences that all members agree upon will clearly define the expectations of the members and inform their families of what will happen to the LLC when one of the members dies.

With regard to the succession of the deceased member’s interests, the operating agreement can provide that the surviving members of the LLC have a right to buy-out the deceased member’s share of the LLC at fair market value before any interests of the deceased member are transferred to the deceased member’s estate.

Even if the LLC is owned by a single member, you should still have an operating agreement detailing how the company will operate and what happens to the company when the sole member dies. The operating agreement might include provisions for taking on future owners upon the death of its member or define the terms of the dissolution of the LLC, including the specific administration of the sole member’s interests upon death.

If you do not have an operating agreement, these issues will be governed by either the deceased member’s estate documents, such as a will or trust, or by the state laws applicable to the LLC.

Make sure the members designate their interests in the LLC in their estate planning documents

If there is no operating agreement, or if the operating agreement is silent about the issue of the succession of a deceased member’s interests, then state law normally will dictate what happens. State laws on this point may vary. Generally, there are three options:

Conclude any outstanding business
Collect outstanding assets
Pay outstanding debts
Distribute profits and losses among its members
Estate plan designation. Some states provide that an executor of the deceased member’s estate or the trustee of any trust of the deceased member may govern the deceased member’s interests and negotiate with the LLC how the deceased member’s interests will be administered.
Intestate succession. If the deceased member has no will or trust , state law provides that the interests of the deceased member will pass to the deceased member’s heirs, through a process called “intestate succession” (“intestate” means that the decedent has no will). Most states provide that if a deceased member’s interests in an LLC are passed to their heirs through intestate succession, only the deceased member’s financial interests, not their voting or management interests in the LLC, will be transferred to their heirs.

Keep in mind that the operating agreement is just a contract between the members of the LLC. So if circumstances warrant it and the members of the LLC agree, the members may amend the operating agreement at any time to address any issues that were not included in the original operating agreement or that require changes.

Executing an Operating Agreement for Your LLC

If a member of an LLC dies, having the issue of succession of a member’s interests in the LLC defined and set out in an operating agreement will clearly define the nature of those interests, how they will be administered, and what effect the member’s death will have on the LLC. Each member, and the families of all the members, will then know with certainty what the interests of each member are and how those interests will be handled upon a member’s death.

Without such clarity in the LLC operating agreement, the succession of the deceased member’s interests — and the very continuation of the LLC — may be left to the application of state law, which usually will either dissolve the LLC altogether or allow the deceased member’s will or trust dictate what happens with their interests in the LLC.

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Does an Operating Agreement Provision that Transfers Membership Upon a Member's Death Govern if the Operating Agreement is Not Executed Like a Will?

December 13, 2021

By: Stephen B. Stern

In Potter v. Potter , 250 Md. App. 569 (2021), the Maryland Court of Special Appeals held that a provision in a limited liability company operating agreement that purports to transfer a member’s economic interest at death is not enforceable if the operating agreement was not executed consistent with the formalities required for the execution of a will. This is a noteworthy decision that has significant ramifications for how membership interests in limited liability companies can be transferred upon the death of a member under Maryland law.

In Potter , James Potter was a member of a company named TR Steak Pasadena, LLC (the “LLC” or “TR Steak”), which was organized under the laws of Maryland. The members of the LLC agreed among themselves who should receive an individual member’s interest upon that member’s death. According to TR Steak’s Third Amended Operating Agreement (the “Operating Agreement”), if a member died, his or her “living trust, estate, legatee or other successor in interest” will “automatically and immediately” become a “Successor Member” as long as the Successor Member is a member of the “Permitted Group,” as defined by the Third Amended Members’ Agreement (“Members Agreement”). The Members Agreement, however, did not include a definition of Permitted Group. According to the Members Agreement, James’s membership interest (i.e., his right to share in the profits) transferred to his wife, Ruby Potter, and his membership voting rights transferred to two of the other members of the LLC (there were eleven members of the LLC prior to James’s death).

Before James’s death, he separated from Ruby, and they signed a separation agreement. The separation agreement included a general assignment and release of “any and all rights or interest which [the releasing party] now has or may hereafter acquire in the real, personal or other property of the other.” The separation agreement also included a provision specific to the LLC, in which Ruby waived “any and all interest” in James’s membership interest in the LLC and further stated that James “shall maintain his shares/membership interest[ ] . . . free and clear of any rights, title or interest” that could be asserted by Ruby. James, however, never changed his designation of Ruby as the transferee of his membership interest. James later married Denise, and he died intestate (i.e., without a will).

As the personal representative of James’s estate, Denise identified James’s membership interest in the LLC as an estate asset. Ruby later filed a declaratory judgment action against Denise, asserting that she was entitled to James’s membership interest because she was identified as the transferee of James’s interest. Denise in turn argued that the Operating Agreement (and Members Agreement) could not govern as a matter of law because they were not executed consistent with the requirements of MD. CODE EST. & TRUSTS § 4-102 (the “Statute of Wills”). The Circuit Court of Maryland for Anne Arundel County granted summary judgment to Ruby and found the operating agreement provision was enforceable. The personal representative (i.e., Denise) appealed.

On appeal, the Court of Special Appeals started its analysis by noting that “property” as that term is defined in the Maryland Estate and Trusts Article includes any interest that a decedent has in real or personal property “which does not pass, at the time of the decedent’s death, to another person by the terms of the instrument under which it is held, or by operation of law.” Denise contended that under Maryland law, with few exceptions, a document that purports to pass title to property at the owner’s death must comply with the Statute of Wills in order to be effective. The Court of Special Appeals agreed with Denise’s contention that what renders a document testamentary is its effect, not its form or the parties’ intent. The Court of Special Appeals found Denise’s argument “straightforward” in that the intended effect of the Operating Agreement and related Members Agreement was to transfer ownership of property upon the death of a member, which necessarily made the Operating Agreement and related Members Agreement testamentary in nature and, therefore, required compliance with the Statute of Wills.

Ruby argued in response that the definition of “property” excluded James’ membership interest in the LLC because it passed to her at the time of his death “by the terms of the instrument under which it was held.” In the alternative, Ruby argued that the Maryland Limited Liability Company Act “expressly permits members . . . to agree that the membership agreement can control the disposition of a member’s interest upon the member’s death.” Ruby contended that adoption of Denise’s position would by contrary to Maryland’s policy that promotes the “freedom to contract” that was expressly authorized in the Limited Liability Act.

The Court of Special Appeals rejected Ruby’s interpretation of the term “property” as being contrary to legislative history and case law. As a result, the court determined that James’s interest in the LLC was an interest in “property” that was subject to the Statute of Wills. The Court of Special Appeals devoted several pages to analyzing the relevant history and case law, but, for the sake of brevity, a summary of that analysis will not be included here.

The Court of Special Appeals also rejected Ruby’s argument that relied on the express provisions of the Limited Liability Company Act. The court noted that the statute provides, “[u]nless otherwise provided in this title, the policy of this title is to give the maximum effect to the principles of freedom of contract and to the enforceability of operating agreements.” The court further noted that another provision of the Limited Liability Company Act provides members of a limited liability company may “[m]ake and alter operating agreements not inconsistent with its articles of organization or with the laws of this State .” (emphasis added by the Court of Special Appeals). The court then noted that Ruby also relied on a provision of the Limited Liability Company Act that provides, “[u]nless otherwise agreed, a person ceases to be a member of a limited liability company upon the occurrence of . . . death.” Although James ceased being a member of the LLC upon the occurrence of his death, by the terms of the Operating Agreement, his membership interest passed at the time of his death to his “living trust, estate, legatee or other successor in interest.” The court explained this contractual provision could not be inconsistent with the laws of Maryland because the laws of Maryland deem a contract that attempts to transfer title to property upon the death of a person to be testamentary in nature unless it is both irrevocable and based on a present legal obligation whose performance is deferred during the decedent’s lifetime. In this case, James had the absolute right to change his designation of his successor at any time and his designation of Ruby did not arise out of any duty that he owed to her. Thus, the court concluded that Ruby did not have the right to enforce the Operating Agreement or Members Agreement, either during his lifetime or after, and, furthermore, the provisions that called for the membership interest to pass to the successor in interest upon James’ death were unenforceable, at least with respect to James, because they were not executed in accordance with the Statute of Wills.

The Court of Special Appeals decision in Potter is noteworthy because it has significant ramifications on how membership interests in limited liability companies can be transferred upon the death of a member under Maryland law. This decision has the potential to affect Maryland limited liability companies as well as limited liability companies organized under the laws of other states if one or more members are subject to Maryland’s Statute of Wills. It also should be noted that the decision may be revisited in the future, as the case was appealed to the Court of Appeals (Maryland’s highest court), but the parties dismissed the appeal before oral argument.

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Transferring LLC Membership Interests Part 1—An Overview

A transfer of LLC membership interests can mean selling, donating, assigning, or gifting—basically one LLC member turning over his or her membership interests to another individual or entity. The transfer can be voluntary or involuntary.

Examples of voluntary transfers include selling membership interests to a third party or to the remaining members, donating membership interests to a charity, or leaving membership interests to a trust upon death.
Examples of involuntary transfers include those prompted by divorce, bankruptcy, and termination of employment.

The transferability of LLC membership interests is subject to competing interests. On the one hand, freely transferable membership interests can be more attractive to members because they are easier to dispose of or cash out of—in other words, the membership interests are more liquid and marketable.

On the other hand, LLC members usually want to maintain the right to “pick their partners.” If membership interests are freely transferable, the remaining members have no control over who comes in as a business partner when a member decides to transfer membership interests. Restricted transferability places limits on transfers and the status of the recipient.

Are Membership Interests Freely Transferable or Restricted?

The members decide. The good news about forming an LLC is how flexible the structure is. At the outset, the founding members can adopt transferability provisions— either in the operating agreement or in a separate buy-sell agreement.

If neither document addresses transferability, the default provisions of state law prevail.

In other words, if the founding members fail to address transferability in the operating agreement or in a buy-sell agreement, they’ve relinquished control and subjected the members and the LLC to the state law default provisions.

Although planning for a member’s departure from the LLC when you’re just forming it may be difficult, thinking through all the possible exit scenarios—and planning for them—is essential.

If your LLC is already up and running and you don’t have transferability provisions in place, the members can amend the operating agreement or adopt a buy-sell agreement. Look to the operating agreement for directions on how to amend the LLC’s terms.

How are Membership Interest Transfers Restricted?

While membership interests are freely transferable in the sense that any member generally can transfer his or her economic rights in the LLC (subject to the operating agreement, a stand-alone buy-sell agreement, and state law), the management or voting rights in the LLC are usually what are restricted—otherwise, other members would be forced to become “partners” with someone not of their choosing. Typically, a recipient of restricted membership interests can receive economic and management rights—a full membership interest—only with unanimous member consent.

In the next two articles in this series, we’ll look at voluntary and involuntary transfers of LLC interests.

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Complete Guide: How to Transfer LLC After Death

As a professional journalist, I understand the importance of proper planning and adherence to the legal process when transferring an LLC after the death of the owner. In this comprehensive guide, I will walk you through the steps and considerations involved in transferring the ownership of an LLC after the owner has passed away.

Table of Contents

Key Takeaways

LLC transfer process after death involves following a specific legal process.
Proper estate planning plays a crucial role in ensuring a smooth transfer of LLC ownership.
Certain documents and paperwork are required to successfully transfer the ownership of an LLC after the death of the owner.
A step-by-step guide on the process of transferring the LLC after death is necessary.
The executor plays an important role in facilitating the LLC transfer process .

Understanding the LLC Transfer Process

When an LLC owner passes away, their ownership interest in the company needs to be transferred to someone else. This process is known as an LLC transfer after death. It’s essential to follow the correct steps and procedures to ensure a legally valid transfer of ownership.

The LLC transfer process can be complex and involves several important considerations. Here are the key steps involved:

Notify the LLC Members: The first step is to inform the LLC members of the owner’s death. This is typically done by the executor of the estate or the surviving members of the LLC.
Review the Operating Agreement: The LLC’s operating agreement should outline the process for transferring ownership. Review the document to determine the necessary steps and procedures.
Appraise the LLC: To determine the value of the LLC, it’s essential to get an appraisal from a professional business appraiser.
Distribute the Ownership: Once the LLC’s value has been determined, distribute the ownership interest to the new owner according to the terms outlined in the operating agreement.
Update Legal Documents: Update all relevant legal documents to reflect the change in ownership. These may include the LLC’s articles of organization, tax returns, and other legal filings.

During the LLC transfer process, it’s essential to keep meticulous records of all actions taken and decisions made. This will help ensure that the transfer is legally valid and that all parties involved are protected.

Overall, the LLC transfer process after death can be complex, but by following the necessary steps and procedures, it’s possible to ensure a smooth and efficient transfer of ownership. Consulting with legal and financial professionals can also be helpful for navigating this process.

Estate Planning for LLC Transfer

Proper estate planning is of the utmost importance when considering the transfer of LLC ownership after the death of the owner. As an executor or personal representative of the estate, it is crucial to handle the LLC transfer process efficiently and effectively.

The first step in estate planning for LLC transfer is to review the LLC operating agreement to determine the company’s protocols for the transfer of ownership. This agreement outlines the company’s governing rules and regulations, including any specific requirements for the transfer of ownership.

Once the operating agreement has been reviewed, it is essential to gather all relevant documents, including the owner’s will, trust agreement, and any other estate planning documents. These documents will guide the transfer process and ensure that all necessary legal requirements are met.

It is also important to consider the tax implications of the transfer and to plan accordingly. The transfer of LLC ownership may trigger state or federal tax obligations, and it is crucial to seek professional legal and tax advice to navigate this process properly.

In addition to estate planning, it is also important to ensure that all necessary parties are notified of the LLC transfer. This includes the LLC’s bank, creditors, vendors, and employees. It is essential to provide them with written notice of the transfer and any changes in ownership or management.

Proper estate planning and adherence to the legal process are critical when handling the transfer of LLC ownership after the owner’s death. As an executor or personal representative, it is essential to understand the company’s governing documents, gather all relevant paperwork, consider tax implications, and notify all necessary parties. By following these steps, you can ensure a smooth and efficient transfer of LLC ownership.

Legal Process for Transferring LLC Ownership

Transferring ownership of an LLC in case of death involves following a specific legal process that can vary depending on the state in which the LLC is formed. However, there are some common legal requirements and procedures that need to be followed to ensure a legally valid transfer of LLC ownership. In this section, I will discuss the legal process for transferring LLC ownership after the death of the owner.

Filing a Certificate of Death

The first step in the legal process of transferring LLC ownership after the death of the owner is to file a certificate of death with the state. This certificate declares the death of the LLC owner and provides the necessary documentation for the transfer process to begin. The certificate of death should be filed with the Secretary of State’s office in the state where the LLC is formed.

Reviewing the Operating Agreement

Next, it’s important to review the LLC’s operating agreement to determine the process for transferring ownership after the death of the owner. The operating agreement should outline the specific procedures and requirements for transferring ownership, including the role of the executor and the approval of the remaining members.

Obtaining the Consent of the Remaining Members

In most cases, LLC ownership cannot be transferred without the consent of the remaining members. The executor or personal representative of the deceased owner’s estate should obtain this consent to proceed with the LLC transfer process.

Assigning LLC Membership Interests

Once the necessary consent has been obtained, the next step is to assign the LLC membership interests to the new owner. This can be done through an assignment document or by amending the LLC’s articles of organization. It’s important to ensure that all legal requirements are met during this process to avoid any legal disputes in the future.

Updating Legal Documents

Finally, it’s crucial to update all legal documents related to the LLC, including tax forms and business licenses, to reflect the new ownership structure. This will ensure that the new owner is recognized as the legal owner of the LLC and can continue to operate the business without any legal issues.

In conclusion , transferring ownership of an LLC after the death of the owner involves following a specific legal process that can vary depending on the state and the LLC’s operating agreement. By understanding the legal requirements and procedures involved, the executor or personal representative of the estate can ensure a smooth and legally valid transfer of LLC ownership.

Necessary Documents for LLC Transfer After Death

Transferring the ownership of an LLC after the death of the owner requires specific documents to ensure a legally valid transfer. These documents provide evidence of ownership and proof of the transfer, protecting the interests of all parties involved.

The executor of the estate will play a crucial role in facilitating the transfer process. As the appointed representative, they will be responsible for gathering the necessary documents and ensuring that the transfer follows the legal requirements.

1. Operating Agreement

The LLC’s operating agreement outlines the structure and management of the company, including the distribution of ownership among members. The operating agreement will often include provisions for the transfer of ownership, such as buyout options or restrictions on transfer to third parties. It is essential to review the operating agreement and follow its guidelines to ensure a smooth transfer process.

2. Death Certificate

A certified copy of the death certificate of the LLC’s owner is required to initiate the transfer process. This document serves as proof of the owner’s death and may be required by banks, government agencies, and other entities when transferring ownership. It is essential to obtain multiple copies of the death certificate as some parties may require an original copy.

3. Transfer Documents

Once the transfer of ownership has been authorized, transfer documents must be prepared and filed with the appropriate government agencies, including the Secretary of State’s office in the state where the LLC is located. These documents typically include a certificate of transfer, an amended operating agreement reflecting the new ownership structure, and a statement of acceptance of transfer.

4. Tax Forms

The transfer of ownership of an LLC after death may have tax implications. The executor of the estate will need to file final tax returns for the LLC and the deceased owner and pay any outstanding taxes owed. Depending on the state and the LLC’s structure, additional tax forms may be required as part of the transfer process.

Overall, transferring ownership of an LLC after the death of the owner requires strict adherence to legal requirements and proper documentation. It is essential to seek legal advice and guidance to ensure a smooth and legally valid transfer process.

Steps for Transferring an LLC After Death

Transferring the ownership of an LLC after the death of the owner can be a complicated and involved process, but by following these steps, you can ensure a smooth and efficient transfer:

Notify all relevant parties: The first step in transferring an LLC after the death of the owner is to notify all relevant parties, including business partners, investors, and clients. This can be done by sending out a formal notice and updating the LLC’s website and social media pages.
Designate an executor: The executor of the owner’s estate will oversee the transfer of the LLC ownership. It’s important to choose someone trustworthy and knowledgeable about the business to ensure a proper transfer.
Obtain the necessary documents: The executor will need to obtain the necessary documents to transfer the ownership of the LLC, including the owner’s will and the LLC’s operating agreement. These documents will outline the transfer process and the new ownership structure.
Update legal documents: Once the necessary documents are obtained, the executor must update the legal documents to reflect the new ownership structure. This may include filing a transfer of ownership certificate with the state where the LLC is registered.
Notify the IRS: The executor must notify the IRS of the transfer of ownership and ensure all taxes and legal obligations are taken care of before finalizing the transfer process.
Transfer business licenses and permits: The new owner of the LLC must obtain the necessary licenses and permits to continue operating the business legally. This may include transferring any existing licenses and permits from the previous owner.
Update accounts and contracts: Finally, the new owner must update all accounts and contracts associated with the LLC, including bank accounts, insurance policies, and vendor contracts.

By following these steps and working with an experienced legal professional, you can ensure a legally valid and smooth transfer of LLC ownership after the death of the owner.

Transferring LLC ownership after the death of an owner is a complex process that requires careful planning and adherence to legal requirements. In this article, I provided a comprehensive guide on the necessary steps and considerations involved in transferring an LLC after death.

It’s important to understand that proper estate planning plays a crucial role in ensuring a smooth transfer of ownership. By preparing in advance and having all necessary paperwork in order, you can prevent delays and complications during the transfer process.

Remember that transferring an LLC after death involves following a specific legal process, and it’s essential to work with an experienced attorney to ensure compliance with all legal requirements.

By following the steps and considerations outlined in this guide, you can ensure a successful transfer of LLC ownership after the death of the owner. Always be prepared and seek professional advice to make the process as smooth and efficient as possible.

What is the process of transferring an LLC after the death of the owner?

The process of transferring an LLC after the death of the owner involves several steps, including notifying relevant parties, updating legal documents, and transferring the ownership to the designated successor or beneficiary. It is important to follow the legal requirements and procedures to ensure a valid transfer of LLC ownership.

Why is estate planning important for LLC transfer after death?

Estate planning is important for LLC transfer after death because it allows the owner to designate the intended successor or beneficiary who will take over the ownership of the LLC. Proper estate planning ensures a smooth transition and minimizes potential disputes or complications during the transfer process.

What are the necessary documents for LLC transfer after death?

The necessary documents for LLC transfer after death typically include the owner’s will or trust document, the LLC operating agreement, the death certificate of the owner, and any other relevant legal documents. These documents are essential for proving the ownership transfer and ensuring the legality of the process.

What are the key steps involved in transferring an LLC after death?

The key steps involved in transferring an LLC after death include notifying the LLC’s members and creditors, updating the LLC’s legal documents to reflect the change in ownership, obtaining necessary approvals or consents, and transferring the ownership to the designated successor or beneficiary. Each step should be carefully followed to ensure a successful transfer.

What is the role of the executor in the LLC transfer process after death?

The executor, appointed by the deceased owner or the court, plays a crucial role in the LLC transfer process after death. The executor is responsible for managing the deceased owner’s estate, including facilitating the transfer of LLC ownership, ensuring compliance with legal requirements, and distributing assets according to the owner’s wishes or applicable laws.

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Transferring LLC Membership Interests Part 1 — An Overview

If you are a member of a limited liability company (LLC) or believe you may become a member of an LLC, or you just wonder how flexible an LLC may be with ownership, please read on. This article applies to an LLC formed under Florida law; however, the topic and its importance apply to LLCs formed under any state’s law. This article is the first of a three-part series of articles about transferring an LLC membership interest.

Consider for discussion you are, or will become, the owner of a membership interest in an LLC. You think there is an agreement about members’ rights and responsibilities, but you are not sure. What do you do?

The best place to start when you have a question about transferring your LLC membership interest is the LLC’s operating agreement . You ask questions and look for answers in the LLC’s operating agreement. You ask: What if you want to leave the LLC? What if you get a divorce? What if you have creditors seeking immediate repayment? What can you do with your LLC membership interest? That answer depends on how transferable those membership interests are. Transferring an LLC membership interest can mean selling, donating, assigning, or gifting. Basically, one LLC member turning over his or her membership interests to another individual or legal entity. That transfer can be voluntary or involuntary.

Examples of voluntary transfers: Selling your membership interest to a third party or to the remaining members, donating your membership interest to a charity, or leaving membership interests to a trust upon your death.

Examples of involuntary transfers: Those prompted by divorce, bankruptcy, and termination of employment.

The transferability of an LLC membership interest is subject to competing interests. On the one hand, freely transferable membership interests can be more attractive to members because they are easier to dispose of or cash out. The membership interests are more liquid and marketable. But LLC members usually want to maintain the right to “pick their partners.” If membership interests are freely transferable, the remaining members have no control over who comes in as a business partner when a member transfers their membership interests.

Restricted transferability places limits on transfers and the status of the recipient. Are membership interests freely transferable or restricted? The LLC members decide. The good news about forming an LLC is the flexibility of its structure. The founding members may adopt transferability provisions in the operating agreement or have a separate buy-sell agreement.

If your operating agreement does not address transferability and you do not address the transferability of LLC membership interests in a buy-sell agreement, the LLC members have relinquished control and subjected themselves and the LLC to the Florida law default provisions for LLCs.

Although planning for a member’s departure from the LLC when you are just forming it may be difficult, if you are not thinking through all the possible exit scenarios, you are not planning for them. If your LLC is already up and running and you do not have transferability provisions documented, the members may create or amend the operating agreement or adopt a buy-sell agreement. Look to the existing operating agreement, if any, for directions on how to amend it.

How are membership interest transfers restricted? While membership interests may be freely transferable in the sense that any member generally may transfer his or her economic rights in the LLC (subject to the operating agreement, a stand – alone buy-sell agreement, and Florida law), the management or voting rights in the LLC are usually what are restricted, otherwise the members would be forced to become “partners” with someone not of their choosing.

It is not unusual for an LLC’s operating agreement to provide that a recipient of a restricted membership interest may receive economic and management rights only with unanimous consent of the members.

In Part 2 and Part 3 in this series, voluntary and involuntary transfers of LLC interests will be further discussed.

If you would like to discuss your LLC membership or transfer of membership with one of our business attorneys , please contact us at 813-852-6500.

“Sweetheart Estate Planning” – Separate Trusts or a Joint Trust?

“Sweetheart Estate Planning” – Separate Trusts or a Joint Trust?

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If Santa and Mrs. Claus were U.S. citizens, how would they create an estate plan? Although they may be great clients, their estate plans might include the pieces mentioned below. Estate Tax Concerns. In 2024, the federal estate tax exemption will increase to...

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Death of a Single Member (Part 3 of 3): Transferring LLC Interest To Someone other than Surviving Spouse

This is the final Part of a three part series on the legal issues surrounding the death of a single member of an LLC in Arizona.

Most single member LLC owners who are married are usually agreeable to having their spouse inherit their LLC ownership interest in case the member unexpectedly dies. However, every so often our Phoenix business law firm sees a situation where a relative or outside third-party has deep reservations about the surviving spouse taking over the LLC or has a vested interest in not being in business with the surviving spouse.

In Part 1 , we were introduced to “SM”, a married owner of a single member LLC operating a growing and highly profitable business here in Arizona. Like most young business owners I see, SM had no estate plan and no business succession plan for the LLC. What made SM’s situation unique though is that his LLC’s operations (and, to a large degree, success) were intertwined with an out-of-state corporation owned by one of SM’s immediate relative, “Relative”.

Relative was very concerned about what might happen to LLC if something happened to SM. Aside from the prospect of SM’s death, Relative was troubled by the possibility of having to be in business with SM’s spouse, “Spouse” (who had little to no experience in the LLC’s rather specialized line of business). Relative’s solution? Have a “side agreement” between SM and Relative by which the LLC membership interest would “pass” to Relative in case of SM’s death.

In Part 1, I explained what generally happens when the owner of a single member passes away with either a Last Will or, worse yet, no Last Will. In Part 2, I covered why Relative’s grand plan of a written “side agreement” with SM would probably not work to keep the company out of the hands of Spouse.

Until such time as my client could sit down with a qualified estate or business succession planner, I recommended he take a number of steps.

First, if it had not already been done, the LLC should be changed from its current presumably member managed status to that of Manager-managed, with the appropriate paperwork filed with the Corporation Commission.

Next, the operating agreement of the LLC would need to be amended to reflect (a) the change in managerial structure (b) identification of SM as the initial Manager, and (c) designating Relative as the successor manager in the event of the initial Manager’s death or incapacity, and (d) perhaps designate another person as the alternate-successor manager, just in case.

The new operating agreement would also contain formal transfer-on-death (TOD) registration language, identifying Relative (as opposed to Spouse) as the beneficiary of the LLC membership interest.

By doing these things, we accomplished SM’s and Relative’s goals in the short term, until a comprehensive business succession plan could be worked through and put into place. The succession of the LLC management would pass to the successor manager under the terms of the operating agreement, and the interest of the LLC itself would pass directly to Relative without the need for probate or any potential legally justifiable interference or delay by the PR (presumably the Spouse) of the estate.

The best news is that all of these things could be handled in a matter of a few days to a week or so (depending on how fast the ACC gets back).

*For purposes of these articles, we will assume the deceased had not created a trust and funded the trust with their LLC membership interest.

Ben Bhandhusavee is the Managing Attorney for BhandLaw, PLLC, a Phoenix business and technology law firm working with start-up companies, creative intellectual property, Internet and digital media matters, and complex corporate M&A and technology transactions. Ben can be reached at (602) 678-2970 or by e-mail at [email protected]

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A Simple Succession Planning Tool For Single-Member LLCs

Jun 6, 2019 | Business & Corporate

BY MATTHEW J. LAPOINTE, ESQ. and ANTHONY D. BARTIROME, ESQ.

It is very common for a small business to be organized as a single-member limited liability company. The LLC affords liability protection to the owner without the formalities required by a corporation, such as annual minutes of shareholder and director meetings.

The owner of a single-member LLC owns 100% of the membership interests of the LLC. Membership interests of an LLC are a type of security, like stock in a corporation. Sometimes, LLC membership interests are represented by physical certificates, like stock certificates, but most of the time LLC membership interests are un-certificated.

MATTHEW J. LAPOINTE, ESQ

When the owner of a single-member LLC dies, his or her membership interest, like any other security, may be transferred by his or her will. But relying on a will to transfer the LLC membership interest is not very efficient. It may take several months to navigate the probate process and then distribute the LLC membership interest to the heirs. Furthermore, the LLC’s business operations may be on hold during the probate proceeding, which is administered through the local court.

One way to avoid probate and to facilitate uninterrupted business operations is to utilize a “transfer on death” clause in the LLC operating agreement or on the LLC membership interest certificate.

The Florida Uniform Transfer-On-Death Security Registration Act (Florida Statutes Chapter 711) allows an individual to name a beneficiary of his or her LLC membership interest upon death in the same manner as an individual can name a “pay-on-death” beneficiary of a bank account.

For a single-member LLC, the operating agreement could state that the member’s LLC membership interest is to be transferred immediately upon death to a spouse, son or daughter, or other person. If there is no operating agreement, the membership interest could be certificated and the certificate issued to “X, transfer on death to Y.” The transfer-on-death beneficiary will own the business immediately upon death and will have the immediate right to control the affairs of the business.

In the case of a small owner-operated business, the ability to have a quick transition to a new owner can be of vital importance. Most of the value in an owner-operated business is in goodwill. If the business cannot be transferred quickly this goodwill tends to dissipate and the longer it takes the less valuable the business becomes. If the goal is to sell the business upon the death of the owner-operator, a transfer-on-death clause will greatly increase the chances of doing so for the best possible price.

ANTHONY D. BARTIROME, ESQ.

The transfer-on-death clause would also be useful in a family business where a son or daughter works alongside a mother or father. The business owner could name the child as the transfer-on-death beneficiary. The parent would retain ownership and control of the business while alive and instantaneously upon the parent’s death ownership and control would vest in the child in a seamless transfer that avoids probate court.

The business attorneys and estate planning attorneys at Blalock Walters often collaborate to find the most efficient means of transferring business assets in the event of the business owner’s death. If you have questions about succession planning for your business, please call Matt Lapointe or Tony Bartirome at 941. 748.0100.

Operating Agreement Can Avoid Probate of Florida LLC Membership Interests

From time to time we receive inquiries about using limit liability companies to avoid probate of business interests and real estate. Some people believe that they can write terms and conditions in an LLC operating agreement that control the transfer of a member’s LLC interest after the member’s death. They believe that the deceased member’s interest would immediately transfer to the designated heir because of contractual terms in the operating agreement , and that the LLC interests would not be included in a probate proceeding dealing with other assets titled in the decedent’s name.

The law on this issue was unclear. For may years I had advised clients that regardless of what is written in an LLC agreement a LLC interest must be included in the probate estate. The LLC interest would be an asset available to pay creditors of the state through a charging lien. The value of the decedent’s LLC interest is part of the “gross estate” used to calculate estate tax liability. ZI had suggested to clients the option of the LLC member to own the LLC interest during his lifetime as a joint tenant with rights of survivorship which would pass the interest to the surviving joint tenant outside of probate.

My advise to current clients about post-death transfers of LLC interests is different because of a 2015 Florida appellate court decision . The decision held that an LLC operating agreement could legally direct the transfer and recipients of a deceased LLC member. The transfer immediately vests in the name of the recipient upon the member’s death, and the membership interest passes outside of the decedent’s probate estate. Further, transfer directions in the operating agreement take precedence over conflicting dispositions in the decedent’s will. The general rule in Florida applicable to LLCs and to shareholder agreements in the case of a corporation is that dispositions of property in a contractual agreement will defeat a conflicting testamentary disposition.

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About the Author

I’m a nationally recognized attorney specializing in asset protection planning. I graduated with honors from the University of Florida Law School and have practiced law for almost 50 years.

I have been recognized as a legal expert by media outlets such as the New York Times and the Wall Street Journal . I have helped thousands of clients protect their assets from creditors.

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Should I Transfer Florida LLC Membership Interest to a Florida Trust?

How to transfer florida llc membership interest in florida.

Florida LLC owners need to know how placing their company into the ownership of a revocable living trust can help protect their business’s succession and continuity in the event of death or incapacitation. Not accounting for this in an estate plan can be a major misstep, as interest in the company will be tied up in probate court before it can be passed on to any potential heirs. However, a Florida revocable living trust can help avoid these problems and more.

You may already know that trusts are a cornerstone of estate planning . Still, too many Florida LLC owners overlook how they can be used to ensure their business’s succession and survival should anything unfortunate happen.

What is a Trust?

There are many different kinds of trusts available to Florida LLC owners, but for the purposes of this article we’ll be focusing on revocable living trusts . This type of trust can be used as a way to transfer Florida LLC membership interest upon death or incapacitation while avoiding probate. It’s popular among many business owners because it can be changed and updated while the grantor is still alive.

What are the Benefits of Transferring a Florida LLC to a Trust?

Transferring a Florida LLC to a revocable living trust can be beneficial in three main ways:

Probate Avoidance – Probate is an often expensive and time-consuming process that should be avoided when possible. Placing your Florida LLC into a trust can make that happen. This can be helpful for business owners, as the company could be left leaderless while the court settles the estate.
Privacy – Probate is a matter of public record, which is another reason that it should be avoided by those with privacy concerns relating to their Florida businesses. If an LLC is owned by a trust, however, it will bypass probate, allowing succession to continue without privacy violations or delays from the court.
Incapacity Planning – Deciding on what should happen with a Florida LLC if its owner or owners are incapacitated by illness or injury, whether permanently or otherwise, is just as vital to the future of the business as planning for their passing. A revocable living trust trust can help by, for example, creating procedures for a substitute to step in during their absence.

How Do I Transfer Florida LLC Membership Interest to a Trust?

Review and Amend the Florida LLC’s Operating Agreement

If a Florida LLC has an operating agreement ( and it absolutely should ), then it must first be reviewed to see if it contains any clauses that either restrict the ability to transfer Florida LLC membership interest or require certain conditions for it to happen. This is especially important for multi-member LLCs, as the interest transfer could be invalidated if those conditions aren’t met.

Next, the operating agreement should be updated to reflect that the LLC is now owned by the chosen trust. This can be done by filing an amendment with the State of Florida’s Division of Corporations . Don’t forget to remove anyone who will no longer be listed as having interest in the company, too.

Assignment of Membership Interest Agreement

To transfer Florida LLC membership interest from an individual member to a trust, the first thing that you’ll need is called an Assignment of Membership Interest Agreement. This is a document for reallocating a given member’s level of ownership in a company. In this instance, it will be used to transfer Florida LLC membership interest to your chosen trust, rather than to another member or individual.

How to Automatically Transfer Florida LLC Membership Interest

Interest in a Florida LLC can also automatically reassigned to a designated individual under certain circumstances. In other words, these situations transfer Florida LLC membership interest while bypassing probate without using a Florida trust as an intermediary. Still, they’re no substitution for a comprehensive estate plan set up with an attorney.

Transfer on Death Designation

Florida LLC membership interest will also be transferred without passing through probate court if the company has a signed Transfer on Death Form. As the name suggests, this document nominates the individual or entity that will inherit the LLC upon the death of its owning member or members.

Operating Agreement Provisions

A beneficiary can also be named using the Florida LLC’s operating agreement. A clause along these lines can also transfer Florida LLC membership interest to a designated individual while bypassing probate. If no such provision exists, you can amend the operating agreement to include it. However, if the LLC has members, then their consent will be needed as well.

While the potential benefits are clear, setting up a revocable living trust to transfer your LLC interest to can come with certain complications if you don’t know what you’re doing. That’s why it’s often advisable to hire professionals, such as ourselves, to manage your estate planning needs. For more, call us at (727) 279-5037 or schedule an appointment with us online .

Image by Ernesto Eslava from Pixabay .

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2022 Indiana Code Title 23. Business and Other Associations Article 18. Limited Liability Companies Chapter 6. Membership 23-18-6-2.5. Member Interest Designated as Transfer on Death Property or Held in Joint Tenancy

Sec. 2.5. (a) Unless otherwise limited or prohibited in a written operating agreement, any member interest in a limited liability company:

(1) may be designated as a transfer on death property under IC 32-17-14, with:

(A) the member as the owner of the interest; and

(B) one (1) or more transfer on death beneficiaries designated; or

(2) may be titled and held in joint tenancy with right of survivorship between two (2) or more individuals.

(b) The following apply upon the death of a person who is the owner of a member interest designated as a transfer on death property:

(1) Each surviving transfer on death beneficiary has the status of an assignee of all or a fractional or percentage portion of the entire member interest owned by the deceased owner, depending on the number of surviving transfer on death beneficiaries, consistent with the transfer on death beneficiary designation, until that transfer on death beneficiary is admitted as a member of the limited liability company.

(2) The rights and obligations of each surviving transfer on death beneficiary with respect to the member interest are subject to all:

(A) transfer restrictions;

(B) redemption options; or

that apply to the member's interest or member interests generally under a written operating agreement.

(1) Each surviving joint tenant has the status of an assignee of all or a fractional or percentage portion of the entire member interest, depending on the number of surviving joint tenants, until the surviving joint tenant is admitted as a member of the limited liability company unless the surviving joint tenant was already a member under subsection (d) before the death of each other joint tenant.

(2) The rights and obligations of each surviving joint tenant with respect to the member interest are subject to all:

that apply to the member interest generally under a written operating agreement.

(d) If a member interest in a limited liability company is originally and initially issued in joint tenancy form to two (2) or more individuals, each joint tenant has the voting rights of a member unless otherwise provided in the written operating agreement. If an individual member:

(1) receives and holds a member interest as the sole owner; and

(2) at a later date, makes a lawful transfer of the member interest to be held in joint tenancy between the member and one (1) or more other persons;

then, unless otherwise provided in a written operating agreement, each other person, while all joint tenants are alive, has the status of an assignee of a fractional part of the member interest until the other person is admitted as a member of the limited liability company.

As added by P.L.40-2013, SEC.10. Amended by P.L.63-2014, SEC.33.

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Virginia Supreme Court Limits Transfers of LLC Membership Interest

Jan 1, 2012

In Virginia, the elements of ownership of a limited liability company include “control interest,” which is the right to participate in the LLC’s administration, and “financial interest,” which is the right to share in the LLC’s profits and losses. A decision handed down by the Virginia Supreme Court on November 4, 2011, highlighted the legal distinctions between the two elements, before digressing into an analysis of transferability of control, which now calls into question the ability to provide in operating agreements for unrestricted transfers of control interest.

Ott v. Monroe arose from the formation of L&J Holdings by Dewey Monroe and his wife Lou Ann. As originally structured, Dewey owned 80 percent of the entity, Lou Ann 20 percent and Lou Ann was the managing member. Paragraph 2 of the operating agreement stated that except as otherwise provided in the agreement, “no Member shall transfer his membership … to any non-Member… without the written consent of all other members, except by death, intestacy, devise or otherwise by operation of law.”

Dewey died in 2004 and his will bequeathed his entire estate to his daughter Janet. Janet, asserting the authority to control the LLC through the bequest of her father’s 80 percent interest, terminated Lou Ann as managing member and elected herself in Lou Ann’s place. Lou Ann contested Janet’s actions, arguing that Janet had inherited only her father’s financial interest. Janet filed suit for a judicial declaration that she inherited both the financial and control interest.

The Circuit Court of Stafford County concluded that under the Virginia Limited Liability Act, all of Dewey’s right and authority to control the company terminated by operation of law upon his death (a “dissociation” under the LLC Act), leaving only his financial interest to be transferred by will. Therefore Janet did not become a member of the LLC, did not have authority to exercise control over the LLC, and could not remove Lou Ann as managing member.

Janet appealed, arguing that paragraph 2 of the operating agreement (cited above) superseded the default dissociation provisions of Section 13.1-1040.1(7)(a) of the LLC Act, by virtue of the statute containing the qualification language “except as otherwise provided in the articles of organization or an operating agreement.” The Supreme Court disagreed and affirmed the trial court’s decision.

In disagreeing with Janet, the high court found that all paragraph 2 of the operating agreement did was prohibit a member from transferring any part of his interest except “upon death” (among the other enumerated events), and did not specifically state an intention to supersede the statutory dissociation provision. Therefore the statutory qualification language was not applicable (i.e., paragraph 2 did not otherwise provide for a transfer of interest that differed from the statutory terms), and only the financial interest passed to Janet under Dewey’s will in accordance with the operating agreement.

That might have been the end of the opinion and the case, as this reasoning fully decided the legal issues presented. Instead, the court embarked on a review of the statutory and tax regulatory history underlying restrictions on partnership (and LLC) ownership transfers (since made obsolete by the 1997 “check the box” regulations), leading it to an additional conclusion which was not only unnecessary to the determination of the case, but likely to cause controversy and future uncertainty in the Virginia business community, announcing that “[u]nder the statute, only the financial interest in an LLC is alienable” and the control interest cannot be bestowed on another by the transferor’s unilateral act.

The court observed that even if the L&J Holdings operating agreement was construed to supersede the statutory consequences of dissociation under Section 13.1-1040.1 of the LLC Act, “it is not possible for a member unilaterally to alienate his personal control interest in a limited liability company.” And then the Court summed up: “Thus it was not within Dewey’s power under the Agreement unilaterally to convey to Janet his control interest and make her a member of the Company upon his death because the Agreement could not confer that power upon him.” (emphasis added).

What was the problem with the court’s gratuitous observations? Section 13.1-1038.1 of the LLC Act provides that an assignee of interest may become a member as provided in Section 13.1-1040, which in turn states that “[e]xcept as otherwise provided in … an operating agreement,” an assignee may become a member only as provided in the statute, and that “[a]n assignee who has become a member has … the rights and powers … of a member …”

The court acknowledged Section 13.1-1040 as providing the means by which the assignee of a financial interest could become a member, but failed to recognize that the operating agreement could provide that an assignee of interest might become a member automatically, or by a process far less restrictive than that set out in the statute.

Unless the court is taking the position that an operating agreement cannot permit admission of an assignee as a member in a manner that is unrestricted or less restrictive than as provided in Section 13.1-1040, its bald pronouncement that control interest cannot be alienated by a member unilaterally simply fails to account for the right to provide in an operating agreement for the free transferability of control interest. While the L&J Holdings operating agreement may not have provided for an assignor’s right to have its assignee admitted as a member without any consent or approval of other members or managers, under the contract flexibility afforded by Section 13.1-1040, it could have. The court’s statements indicate otherwise, however.

In suggesting that the transfer of control interest cannot be accomplished by admission of an assignee as a member except by the means specifically prescribed in Section 13.1-1040 (or on more restrictive terms), the court lost sight of the overarching rule of construction for the LLC Act set forth in Section 13.1-1001.1: “This chapter shall be construed in furtherance of the policies of giving maximum effect to the principle of freedom of contract and of enforcing operating agreements.”

On this issue, the Ott decision seems destined to unsettle far more LLC operating agreement drafting issues than it resolved, an unnecessary and unfortunate consequence.

James V. Irving

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Transferring LLC Membership Interests Part 1—An Overview

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Complete Guide: How to Transfer LLC After Death

Key Takeaways

Understanding the LLC Transfer Process

Estate Planning for LLC Transfer

Legal Process for Transferring LLC Ownership

Filing a Certificate of Death

Reviewing the Operating Agreement

Obtaining the Consent of the Remaining Members

Assigning LLC Membership Interests

Updating Legal Documents

Necessary Documents for LLC Transfer After Death

1. Operating Agreement

2. Death Certificate

3. Transfer Documents

4. Tax Forms

Steps for Transferring an LLC After Death

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