How to Transfer an LLC Upon the Death of the Owner

By Ari Mushell, J.D.

How to Transfer an LLC Upon the Death of the Owner

By Ari Mushell, J.D.

Imagine someone operates a single-member LLC. The owner, also referred to as a member, provides expertise so that the business can flourish. Such a business could hit an obstacle if the business continues to succeed but the single member dies. Some states mandate that a single-member LLC dissolves upon the death of the member if there are no succession plans.

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There are four practical avenues for ownership succession upon the death of the owner of a single-member LLC. They include providing for transfer upon death in the operating agreement, drafting a joint tenancy membership, setting up a revocable trust, and probating the business.

Providing for Transfer in the Operating Agreement

The LLC member can draft initial language or amend the current operating agreement to include language for succession in the event of her death. For example, the language might state that upon the member's passing, the business will go to the member's spouse.

Similarly, the operating agreement can list a procedure for succession. For instance, it can provide how heirs should conduct a sale of the business or rights of certain heirs to operate the business in exchange for buying out other heirs.

Joint Tenancy Membership

The member and spouse can hold the LLC in joint tenancy with the member as the sole manager of the LLC. In this scenario, the LLC structure allows both spouses to hold the member slot jointly. The operating agreement should state that one spouse will manage the business until death or retirement. This way, the LLC seamlessly transfers to the surviving spouse upon the death of the managing spouse.

The wording of the operating agreement does need to be specific here, as joint tenancy passes to the specific member listed and not to any of the deceased owner's heirs or beneficiaries.

Revocable Trust

With a revocable trust, the member would create a trust that holds the LLC membership. The trust would be in benefit for the member's survivors and the LLC would pass automatically to the beneficiaries upon death. Although there is a cost involved in setting up a revocable trust, it's advisable to do so if the member has significant assets.

When a revocable trust holds the membership, it is prudent to word the LLC's operating agreement carefully so that the member in his individual capacity, not as trustee of the trust, manages the LLC. This avoids possible confusion when the member is a signatory to LLC contracts.

Probating the Business

Upon the member's death, the LLC can pass through a probate court, which would consider how transfer of the LLC should occur. As mentioned, some states have laws that require a dissolution of an LLC upon the member's death if the business does not have a clear succession plan.

In the states that require a dissolution, the LLC would likely go into receivership, where the receiver would wind up the business and, after taking administrative fees, pass the proceeds to the heirs. In the other states, the LLC would pass through probate, where possible heirs could present their claims as to why they should succeed the deceased in owning and operating the LLC.

An LLC member should create a concrete succession plan for transferring ownership of the business upon death. Having a clear plan eliminates any potential wrangling over the LLC's management and assets.

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