What Happens to an LLC Interest When a Member Dies?
While an LLC can live forever because it is an artificial person, the same cannot be said for its Members, who are mortal. The LLC Operating Agreement specifies who are the Members and Managers of the LLC, but not often do Members (nor should they) name beneficiaries of who is to inherit the LLC interest upon their death. Instead, individual Members should have estate plans that include a Last Will and Testament and a Revocable Trust Agreement that names death beneficiaries. So, what happens to an LLC interest when a Member dies? We break it down below.
What Happens to a Single-Member LLC If the Sole Owner Dies?
The Single Member LLC Operating Agreement often provides for the LLC to be liquidated upon the death of the Member. Death is often listed as an event of dissolution. However, the executor and trustee of the Member may decide that the LLC is more valuable if it is to continue and may enter into an Amended and Restated LLC Operating Agreement to transfer the LLC Member’s interest to a new Member or Members, who are the beneficiaries of the decedent’s estate and trust. Then, after this period of estate and trust administration, the new Member or Members take over the LLC. Without a new Member, the executor and trustee would serve as liquidation trustee to sell the LLC’s assets.
What Happens to a Multi-Member LLC If One of the Members Dies?
Similar to the Single-Member LLC situation above, a Multi-Member LLC should have an Operating Agreement that specifies what happens when an LLC Member dies and whether the beneficiaries of that LLC Member are permitted transferees to be assigned both economic rights and voting privileges. Often without permitted transferee language, the deceased LLC Member’s interest would be first offered to the company as a buy-back based on a formula or fair market valuation and if the company does not exercise its right, secondly, the interest would be offered to the other Members to buy-out the deceased Member’s interest. For assignees of an LLC Member to be admitted as Members of the LLC, if not pre-approved as transferees, the other LLC Members would need to vote to admit the new Members as full-Members and not just assignees of the economic interests.
What If an LLC Member Dies and Has a Will?
If an LLC Member has a Last Will and Testament or Revocable Trust, then the beneficiaries named pursuant to the testator’s intent would receive the LLC interest, provided those beneficiaries are allowed to become LLC Members either “pre-approved” as permitted transferees or admitted by consent of the other LLC Members. In LLC law, like partnership law, every LLC Member has a presumption that they can decide who they want to do business with and who they refuse to “pick-as-partners.” This legal doctrine known as “pick-your-partner” ensures your worst enemy does not become an LLC Member. For example, your partners may not want to enter into a business with your widow and can refuse her admission as a voting Member, leaving her with just an economic interest without voting rights. To get around this, the LLC Agreement may list spouses as permitted transferees.
What If an LLC Member Dies and Has No Will?
If an LLC Member has not named beneficiaries through a “transfer on death” designation in the LLC Operating Agreement, then the LLC interest becomes an asset of the estate and trust of the decedent. Should the decedent not have a Last Will and Testament or a Revocable Trust, then the laws of the intestacy would determine “next of kin” who are the beneficiaries. This would often be 50% to spouse and 50% to children per stirpes. If the decedent had no spouse or children, then parents would be 100% beneficiaries. Without parents, then often the sibling of the deceased LLC Member would be next in line. And so on. If the decedent had no siblings or nephews and nieces, then first cousins. Eventually the government would take as abandoned properties before second cousins become laughing heirs.
