Expressing Inheritance of LLC Membership Interest in Operating Agreement

I sometimes find clients who want to customize their LLC operating agreements to express who will inherit their membership interest upon their death. For instance, a client may ask me to express that if on of the member’s dies the remaining LLC member will inherit the decedent’s interest, or that the decedent’s heirs will automatically take over the LLC membership interest.

An estate plan is expressed in a will or a living trust. The will or trust must be executed in front of two witnesses an a notary. LLC operating agreements are contracts that do not need to be, and are usually not, witnessed or notarized. I do not think a directions for inheritance of an LLC interest expressed in an operating agreement would even be binding.

A member’s LLC interest is one of the member’s personal assets that will pass under Florida’s laws of inheritance. If the interest is owned jointly with rights of survivorship then the co-owner will get the interest by operation of law upon the first death. In the case of an LLC interest owned individually, the interest will pass to the owner’s heirs after probate or living trust administration in the same manner as the decedent’s other intangible personal property. The member’s estate plan appropriate could include a specific bequest of this LLC membership interest to other LLC members or non-member third parties.

It is appropriate to include in an LLC operating agreement paragraphs dealing with the death of one of the members. For example, the agreement should state whether the heirs will become full substitute members with rights to vote and participate in management, The agreement may also provide surviving members the right to buy the decedent’s interest and set forth a valuation formula. But, this does not mean either member should provide in the LLC contract his wishes about the inheritance of this particular financial asset.

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