The owners of a limited liability company or LLC are called members. The members of an LLC own a membership interest. When you make a will, living trust or other estate planning document, it is important to include provisions on how you want your LLC membership interest to be distributed as part of your estate plan. Keep in mind the LLC operating agreement may contain binding contractual provisions regarding what will happen to your membership interest when you die.Because of the complex legal, tax, and business issues associated with passing ownership in an LLC to heirs and beneficiaries it is essential to consult an attorney about how to include your ownership interest in your estate plan.
LLC Estate Planning Risks
If you fail to execute valid estate planning documents that address your membership interest, it could be very disruptive to the business of the LLC and may result in ownership of the LLC passing to someone you do not want to inherit. If the LLC owner fails to make an estate plan to pass the membership interest, it could be inherited by the owner's legal heirs according to state laws of intestate succession. For an LLC owner, an estate plan should include a will or trust, plus an LLC operating agreement or other LLC agreement with provisions on what happens to membership interests upon death of an owner. Any conflicts between the LLC agreements and the owner's estate planning documents may result in costly litigation among the heirs, beneficiaries, and other LLC members. You may also be able to set up transfer on death registrations for your LLC interest to avoid probate depending on applicable state law.Every state has its own unique LLC statutes. Therefore, the laws regarding what happens to a membership interest upon the death or incapacity of a member are not the same from state to state. Although a lot of information about estate planning for LLC owners is available online, only a licensed attorney with knowledge about the state laws applicable to your LLC can advise how to properly transfer your LLC to your spouse, partner, children or other heirs.
Estate Planning Issues for LLC Owners
List of issues for LLC owners to consider when making a estate plan:1. Does the LLC operating agreement contain clear provisions about transfer of membership interests upon death of an owner. See
estate planning for small business.2. Does the LLC owner have a valid will or living trust that specifies whom should inherit the owner's LLC interest.3. Are there other legal documents, such as a buy-sell agreement or
shareholders agreement that may restrict the owner's right to transfer the membership interest.4. Do the LLC agreements and the owner's estate planning documents contain conflicting provisions.5. Has adequate life insurance been purchased or have other arrangements been made to ensure that operation of the LLC's business can continue upon death of a member, if that is one of the goals of the estate plan.6. Does the owner want the heirs or beneficiaries to have an active role in the LLC business or only receive the income or sales proceeds from the business.7. Has the owner made a durable power of attorney and does the LLC operating agreement contain provisions to deal with the owner's incapacity or disability.8. If the owner wants the business of the LLC to continue after the owner leaves the business, is there a Business Succession Plan in place.
LLC Estate Planning Advantages
If you own a business, real estate, rental property or farm, an LLC offers the advantage of being a flexible way to transfer property as part of your estate plan. If you put your business, real estate, rental property or farm into an LLC, you can execute estate planning documents that specify how you want your membership interest in the LLC to pass to your named beneficiaries. This is often easier than changing title to the individual properties or assets owned by the LLC. The LLC operating agreement should also clearly state what happens to membership interests upon death or incapacity of the owner and should be consistent with the provisions of your will,
living trust, and other estate planning documents.
More on Estate Planning for LLCs
If you are a business owner, partner or stockholder in a privately held company, consider the following:1. Is there a need for liquidity in your estate plan to ensure the business would not have to be sold to pay estate taxes, creditor claims, attorneys' fees, and other expenses of settling your estate?2. Will selling the business be necessary to satisfy bequests to heirs or probate fees?For a comprehensive guide to estate planning for LLC's, refer to
the book, An estate planner's guide to family business entities: family limited partnerships, limited liability companies, and more, by Louis A. Mezzullo.