If you are a member of one or more LLCs, do you know who will inherit your membership interest if you die? If you do not prepare for your death and designate your heir(s) properly then the state where you live will determine who inherits your LLCs after you die after the LLC membership goes through a costly probate.
Every state has a law called the “law of intestate succession.” This law is the state’s statutory scheme for determining who inherits property when a person dies owning property and the person does not have a valid Will. Arizona’s intestate succession laws are found in Title 14, Chapter 2, Article 1 of the Arizona Revised Statutes. Arizona’s law of intestate succession provides for the following inheritance rules for an Arizona resident who dies without a Will:
- If you die single with no descendants, your estate goes to your parents equally if both survive or to the surviving parent.
- If you die single with no descendants and both of your parents are deceased, your estate goes to the descendants of your parents or either of them by representation.
- If you die while married, your entire estate goes to your spouse if you do not have any descendants or if ALL of your descendants are descendants of you and your spouse.
- If you die while married and have any descendants that are not descendants of you and your spouse, your spouse will inherit one-half of the intestate separate property and none of your community property.
If you are married and have any children with a person who is not your spouse, pay close attention to the last rule listed above because it could create a nightmare for your spouse.
Example: Homer has a son named Bob who is not his wife Marge’s son. Homer and Marge are estranged from Bob. Homer & Marge own 100% of World Wide Widgets Arizona, LLC, as community property. The LLC is worth $500,000. Homer is an Arizona resident and dies without a Will. Homer does not own any separate property. Arizona law provides that Marge inherits nothing, zip, zero, nada other than a spousal homestead allowance of $18,000. Homer’s membership interest in the LLC goes to Bob who now becomes half owner of the LLC with Marge. Not only has Homer’s failure to plan cost Marge $250,000, but Homer left Marge the giant headache of operating a business with Bob who knows nothing about the business and only wants his $250,000.
Arizona law does provide that “The decedent’s surviving spouse and minor children whom the decedent was obligated to support and children who were in fact being supported by the decedent are entitled to a reasonable allowance in money out of the estate for their maintenance during the period of administration. This allowance shall not continue for longer than one year if the estate is inadequate to discharge allowed claims.” This allowance however, does not amount to a lot of money.
If you do not know for a fact that the person or people you want to inherit your ownership interest will actually inherit your LLCs when you die then you need to take action now to protect your loved ones and insure that the LLCs go to your desired heirs. However, if you are happy to do nothing and let the law of intestate succession determine who will inherit your LLCs, your heirs will still be required to open an expensive and public probate proceeding with an Arizona superior court.
Best, but More Expensive Solution
The best solution to make sure that your ownership interest in LLCs goes to your desired heirs is to create a trust and have the trust own the LLC. When the trust owns the LLC there is no need for a probate because the trust owns the LLC interest before and after your death. See “How to Transfer an LLC to a Trust” for more on this topic.
Cheapest and Simplest Solution
The simplest way to make sure your Arizona LLCs go to the right person or people after you die is to sign a Transfer of Membership Interest Testament. This simple document not only specifies who inherits your Arizona LLCs, but it also avoids an expensive probate of your LLC interest. To learn more about this important family protection document read my article called “Who will Inherit Your Membership Interest in Your Arizona LLC When You Die?“