What Happens to an LLC When a Member Dies?
Upon the death of a member of an LLC in Florida, the handling of the deceased member’s interest will largely depend on the terms set out in the operating agreement of the LLC, if one exists. An LLC operating agreement is a legal document that outlines the operating procedures and expectations of an LLC. The agreement can include provisions for what happens to a member’s interest upon their death.
If the operating agreement contains specific provisions for what happens when a member dies, then the LLC must follow those procedures. This could involve a buyout of the deceased member’s interest, transferring the interest to a specific person, or another method outlined in the agreement.
If the operating agreement does not specify what happens upon a member’s death, the membership interest will be treated as part of the deceased member’s estate and would be transferred to their heirs. However, the transferee (the person who receives the interest) would only receive the right to share in the distributions of the LLC, not any management or voting rights.
Probate can be time-consuming and expensive. Probating of the deceased member’s interest can slow down continued business operations. In LLCs with multiple members, the probate process can distract the surviving members from operating the business.
Making an LLC Transfer on Death
In Florida, an LLC membership interest can transfer on death to either the surviving members or to a designated beneficiary. When an asset transfers on death, it becomes property of the transferee immediately upon the death of the deceased person by operation of law. In this way, the asset is not subject to probate.
Joint Tenants with Right of Survivorship
The simplest way to have an LLC membership interest transfer on death to surviving members is for all members to own the membership interest as joint tenants with the right of survivorship (JTWROS). When an asset is owned by more than one person as joint tenants with right of survivorship, the ownership interest of the deceased owner immediately transfers upon death to the surviving owners. This survivorship feature applies to ownership of LLC interests as well.
One downside to relying on JTWROS ownership for transfer-on-death treatment is that it requires equal membership interests. All members holding LLC interests as joint tenants with right of survivorship must share equal ownership in the LLC interests.
Suppose, for example, an LLC has two owners. One owner owns 60% of the company, while the other owner owns 40%. Because the members own a different amount of the company, the members could not apply JTWROS treatment to the membership interests.
Operating Agreement Provisions
In Florida, LLC members can make their LLC interests transfer on death to a surviving member or to a third party by registering their membership interest in beneficiary form. Both a single-member LLC and a multi-member LLC can have their membership interests registered in beneficiary form.
Section 711.506 of the Florida Statutes statues that “on death of a sole owner or the last to die of all multiple owners, ownership of securities registered in beneficiary form passes to the beneficiary or beneficiaries who survive all owners.” A security can include a membership interest in an LLC under Chapter 711.
An LLC interest can be registered in beneficiary form by having the operating agreement for the LLC state that the membership interest transfers on death to a designated person and that the LLC interest does not become part of the deceased member’s probate estate. Alternatively, an LLC that issues membership certificates can include the transfer-on-death provisions on the individual certificates.
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