transfer of membership interest upon death

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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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Transfer Upon Death Sample Clauses

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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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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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. 

What Happens When an LLC Member Dies? (In-Depth Guide)

Quick summary, what happens when an llc member dies, how do you transfer an llc after death, how do you inherit an llc, can you inherit a single-member llc, who inherits an llc when there is no will, does an llc go through probate, what happens to an llc after the death of a member.

Businesses are not exempt from unlucky or unanticipated circumstances. Losing a loved one brings shock, amplified by their business's fate.

We've done extensive research and offered our own experiences as legal consultants and attorneys with more than 10 years of experience in the area to assist you grasp the nuances of the procedure. While an LLC will go through probate, but it will be a very short process, although there are variables.

• When a limited liability company (LLC) member dies, the LLC will continue to operate as long as there are surviving members. 
• The deceased member's representative must file documents with the state to change the membership records of the LLC.
• On the other hand, if the deceased member was the only person and owner of the LLC and had no significant family members, the LLC can be dissolved.

If the LLC is operating with two or more members, then under state law, the interest of a deceased member will be purchased by the living members.

If only two LLC members are left alive, they must buy the deceased member's entire limited liability company interest. The LLC's operating agreement may have different terms.

A member's interest in an LLC may also pass to their heirs, legatees, or estate in accordance with the operating agreement and applicable law of intestate succession.

Transfering an LLC after death requires reaching a unanimous consent of all other members and following the provision indicated in the operating agreement.

To make it clear for the people who remain how to proceed if operating under a written operating agreement, you should include explicit language about the transfer of interest or membership following death, disability, or incapacity.

State law will dictate how membership interests are transferred upon death when operating without a written agreement.

The operating agreement should include the member's operating responsibilities to keep the business running and their rights in the context of passing away.

An operating agreement including terms for transferring interest/membership upon death will make a smooth transition and avoid confusion.

If operating without an operating agreement and the member's operating responsibilities and rights go unaddressed, then chances are we'll be operating under state law.

You can inherit an LLC if your deceased loved one was operating as a sole proprietor , then what you're inheriting is that business itself.

However, if they were operating as something else, like an LLC or partnership, then what's getting passed on to you is the ownership of the operating company.

In that case, you'll need to consult the operating agreement of the LLC .

Does it state the formula for how the interest of a deceased member is supposed to pass?

If not, then the default method of distributing ownership is according to state law.

Similar Article: How to Remove a Member From Your LLC

Whether you can inherit a single-member LLC depends on whether you can inherit a member interest in an LLC when there is no will.

It also depends on the operating agreement of the single-member LLC (SMLLC) since it can be designed to prevent member interest inheritance.

The member's next of kin may not inherit the member's interest if they are not listed as a member or as a member's beneficiary in the LLC operating agreement.

The member should consider adding these beneficiaries to the LLC and creating an estate plan that identifies their desire for future beneficiaries to receive members' membership interest.

If there is no will, the deceased member's interest passes to the deceased member's heirs.

However, if there is no will specifying how an inheritance should be distributed among potential beneficiaries, investors can control how assets are divided up in the LLC.

To avoid this situation where they have to relinquish inherited member's interest in the LLC, the member should draft a will.

Though a member may want to keep their assets private, their death can be announced through public records.

An LLC will go through probate, but it will be a very short process, although there are variables. Suppose an LLC member dies with no designated beneficiary. In that case, the member will leave behind a probated estate.

Their member ownership interest in the LLC will be transferred down to others using the laws of intestacy (the state's rules for passing property when someone died without a valid will.)

If a member does leave a will, the member may clearly state how they would like their member ownership interest to be passed on.

This can avoid probate. It may also prevent any member ownership interest from passing down to the member's next of kin.

It states that they are not heirs to the member's property or member's member ownership interest.

Does LLC Have a Right to Survivorship?

An LLC does not have the right to survivorship. However, it can be provided in the operating agreement or if all members agree to.

Who Are the Beneficiaries of an LLC?

The primary beneficiaries of an LLC are its members, although this can vary. Beneficiaries might not be members themselves, often being spouses, children, or other designees, including charities, friends, and family.

Does the Death of a Member Trigger Dissolution of an LLC?

The death of a member does not automatically trigger the dissolution of an LLC. The LLC operating agreement typically outlines procedures for such situations. The surviving members usually have the right to buy the deceased's LLC and membership interests.

The actions outlined above are carried out when an LLC member dies, at which point they become "dissociated". Some stages may vary depending on the state in which an LLC was established.

Although it's not something people frequently consider when starting a business, it's nevertheless important to be aware of these processes.

Because of this, talking to legal professionals who can help you get ready for a variety of business issues could be helpful.

About The Author

Jon Morgan is the CEO, Co-Founder, and Editor-in-Chief of Venture Smarter, a leading consulting firm that helps startups scale and grows.

With over 9 years of consulting experience, Jon is an expert in developing and running successful enterprises.

He has partnered with several LLCs and Registered Agent services, helping clients achieve their desired results, after acquiring a degree in business management and various certifications.

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What Happens to Your Ownership Interest in an LLC When You Die?

By Lane V. Erickson , Idaho Business Attorney

In previous articles on our website, we have spent a good deal of time talking about the importance of creating a structure for your business. For most small businesses, the best choice is to create an LLC as the entity that operates the business. If you have questions about why we recommend an LLC for your small business, please go back and read our previous articles where we explain the main reasons, we recommend an LLC over most other entities. 

The purpose of today’s article is to focus on what happens to your ownership interest in an LLC when you die. Please keep in mind that this article is just a summary of the things that you should know. If you have questions that this article does not answer, we encourage you to contact us for a free 30-minute consultation where we can answer your specific questions. 

Most people are surprised to learn that their ownership interest in an LLC is property just the same as any other property they own. However, unlike tangible things like cars, jewelry, or a coin collection, your ownership interest in an LLC is intangible. This just means that you cannot really touch or hold your ownership interest in an LLC like you can those other items. Nevertheless, your ownership interest is still property that is part of your estate. 

Every adult has an estate. An estate consists of all the things that are “owned” by the individual which are assets, and all the things that are “owed” by the individual which are debts. Because of this, even though you cannot touch or hold it, your ownership interest in an LLC is an asset of your estate. 

When a person passes away the assets in their estate must be transferred to some person(s) who is alive. This is usually surviving family members such as a spouse or children. These are the deceased person’s heirs. If you do not have a written last will and testament then the statutes in the state of Idaho decide who your heirs will be. If you do have a written will then this document declares who your heirs are. In this instance, upon your death, your written will declares who is going to receive the assets of your estate including your ownership interest in an LLC. 

While there is nothing wrong with a person transferring their ownership interest in an LLC to their heirs when they die, this does create a problem for the original owners of the LLC. These people may never have contemplated being in business with your spouse or children. Because of this, all the owners of the LLC have an opportunity to use the operating agreement to control transfers of an ownership interest in an LLC when a member of the LLC dies. 

The operating agreement is a contract between the owners of the LLC that controls several things such as identifying who the owners of the LLC are, identifying the percentage of ownership each owner holds, and declaring how the LLC will be managed. In addition to this, because it is a contract, the operating agreement can also have language in it that controls transfer of an ownership interest in an LLC. 

To be clear, the operating agreement cannot strip an owner of their interest in the LLC, even if that owner is deceased. What the operating agreement can do is provide a way for the remaining owners to purchase the ownership interest from the heirs of the deceased owner. The operating agreement can create a formula for how that ownership interest will be priced. Additionally, the operating agreement can describe the terms for how that ownership interest will be purchased. 

For example, suppose there is a carwash business that is operating through an LLC and there are three owners in that business with each owning an equal share of the business. Now suppose that one of those owners passes away and their last will and testament says that everything they own goes to their spouse. In this instance, the deceased owner’s share of the business goes to their spouse who now becomes an equal owner with the other owners. 

If the operating agreement has terms and conditions about how ownership interest is transferred and whether it can be purchased by the business or the remaining owners, this will control the ownership interest of the deceased member. The remaining owners can elect to follow the terms in the operating agreement and buy the ownership interest from the deceased member’s spouse. If the operating agreement says they can make payments over five years to purchase the ownership interest this is what they can do. 

Another important way that the operating agreement can help the business to continue is by limiting the ability of someone who inherits an ownership interest in an LLC. In other words, the operating agreement can state that if an ownership interest is transferred by reason of death, the person who inherits the ownership interest has no management authority or voting rights concerning the operations of the LLC business. In fact, the operating agreement can state that an inherited ownership interest in the LLC acts as a silent partner who is only entitled to receive a portion of distributions when they are made. 

As you can see, the operating agreement is vitally important in controlling both the management and the ownership interests in an LLC business. If you do not have an operating agreement, or if your operating agreement was not created by a qualified and experienced business attorney, we encourage you to contact us today. We have assisted numerous business owners in creating well thought-out and helpful operating agreements for the operation of their LLC businesses. We are confident that we could help you too! 

Our team of Idaho business lawyers can help you with any of your business structure or operation needs. Whether you are seeking to create a new business or review a current business, we are available to discuss your options and answer your questions at an initial free 30-minute consultation. Call us toll free at 877-232-6101 or 208.232.6101 for a free consultation. You can also email us directly at [email protected] or stop by our office at 201 East Center Street, Pocatello, Idaho 83201 . We will answer your questions and help you solve your Idaho business problems.

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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 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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Content Approved by UpCounsel

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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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