What Happens to an LLC Interest Upon Death?

06 Feb What Happens to an LLC Interest Upon Death?

An LLC is a Limited Liability Company which as discussed in the past is a legal entity having 1 or more members doing business together. Last month we discussed the basics of a limited liability company.

For example, John owns a dog grooming business through the entity known as an LLC. He is the only member of the LLC.

Liability protection is one of the reasons why people decide to set up LLCs to run a business. As I mentioned last month, to receive the benefits of the liability protection your LLC has to be established correctly with the required operating agreement provisions to address these concerns. It is not a matter of simply filing to establish an LLC with the secretary of state.

So, what happens to John’s interest in Dog Grooming LLC at his death?

Let us assume for this example that John is married with kids. John is the sole member of the Dog Grooming LLC business. John has not done any type of estate planning.  Upon John’s death, his interest in that LLC will HAVE to go through probate court system.

His business interest is valuable and his family wants the value it has to be passed onto them. In order to gain control of the business, be able to access the business bank account, and sign contracts on behalf of the business, John’s family has to probate the LLC first.  This will likely take a year to two years to complete and cost the family thousands depending on the value of the business. The higher the value of the business, the higher the statutory probate fees will be.

In our example, John’s wife wants to take charge of the LLC and continue operating. She will need to wait until the court has given her legal powers to administer John’s estate and take control of the company. This wait will likely cause an interruption in the business because it will take some time for the court to put John’s wife in charge of the company so that she is able to write checks from the bank account to pay bills, withdraw profits to pay her bills, or the myriad of other business related tasks that need to be completed.

Thus, an LLC interest is like any other asset (home, cash in a bank account, investment account, stocks) and must be planned for properly.  As mentioned before, probate is EXPENSIVE & LENGTHY, not to mention a PUBLIC process. To avoid it, John can set up an estate plan and make sure that the proper planning is done with respect to his LLC interest to ensure that his estate plan is all encompassing and takes into consideration the LLC interest.

So, if you have an LLC or thinking about establishing an LLC, be sure your LLC membership interest is integrated and accounted for in your personal estate plan to avoid probate.  Feel free to contact our office for a free consultation.