Who Will Inherit Your Membership Interest in Your LLC When You Die?

Nightime view of large vessel at dock

Your business assets are owned by, or your beautiful new boat is owned by, an LLC, but who gets the LLC when you die?  The way you determine who inherits your membership interest in an LLC when you die (rather than the state making the determination) is by adopting one of the following methods while you are alive:

  1. Own the LLC jointly with rights of survivorship with one or more joint owners.  If you hold title to property this way, then when one joint owner dies, the ownership interest of the deceased owner goes automatically by operation of law to the surviving joint owners.  The last joint owner alive will own the entire property.  However, if the last survivor does not plan for the transfer of the property on the survivor’s death, a probate will be necessary (unless it is a small estate) and the law of intestate succession will determine who inherits the property.
  2. Own the LLC as Community Property with a Right of Survivorship (CPWROS) if you reside in any of the eight community property states, which include California and Arizona. The CPWROS language should be included in the Operating Agreement.  In fact, in California, Civil Code Section 682.1(a) states: “Community property of spouses, when expressly declared in the transfer document to be community property with right of survivorship, and which may be accepted in writing on the face of the document by a statement signed or initialed by the grantees, shall, upon the death of one of the spouses, pass to the survivor, without administration…”.   In Arizona, A.R.S. Section 29-732.01, Ownership of interest in limited liability company in joint tenancy or community property with right of survivorship, requires the CPWROS language to be included in the operating agreement for a husband and wife owned LLC to be treated as community property.
  3. Prepare a Revocable Trust and transfer the Membership Interest to the Trust. This avoids probate. You can transfer your LLC interest(s) to your Trust, just like you would transfer title to your house, investments, and other property to your Trust.  Here is how you can transfer your LLC to your Trust:
  • Draft and Execute the Transfer Document. First, review your LLC’s Operating Agreement to ensure that you are permitted to transfer (assign) your LLC interest.  If your Operating Agreement will allow such a transfer, but has some limitations or procedures to follow, it will be important to follow those procedures to ensure an effective transfer takes place. Assuming your Operating Agreement permits it, you must prepare and sign an assignment of your LLC interest to your Trust. You must also sign the same document accepting the interest of the LLC as Trustee of your Trust.
  • Next, Draft and File an Amendment to your Articles of Organization with the Secretary of State (if the situs of your LLC is in California). If the LLC is member managed, then you will need to file an amendment to update the member of the LLC.  After the transfer, the new member will be your Trust, not you. Thus, an amendment to the Articles will need to filed to accurately update the LLC’s member.
  • Update your Statement of Information with the Secretary of State to reflect the trust as the new member.  
  • Amend the Operating Agreement. You should amend and update the Operating Agreement to reflect the membership change from you individually, to your Trust.
  • Have LLC Members Sign a Resolution Accepting Transfer. You should have the LLC members sign a resolution to acknowledge and accept transfer of your LLC interest to the Trust.  You are not required to change title of LLC’s assets, such as a boat, or obtain a new EIN.
Michael Wales is a Maritime Law Attorney in San Diego, California. Mike also owns AGL Yacht Sales, Inc., a San Diego Yacht Brokerage, with his wife Leilani Wales. For assistance with any maritime legal matter you may contact Mike at mwales@waleslaw.com or at 619.493.1700. For information on brokerage boats please visit www.aglyachts.com.