I am an estate planning lawyer who prepares will and trusts. I am also an Arizona limited liability company attorney who has formed 8,900+ Arizona LLCs. When people create a trust for estate planning purposes, it is very important that the creator(s) of the trust transfer assets to the trust.
One of the reasons to create a trust is to avoid probate. If you do not transfer your assets to your trust and you die, the assets owned in your name will have to go through probate unless title is held in a way that transfers your ownership automatically on death. The general rule of Arizona property law is that if a person owns an interest in an Arizona LLC and that person dies, his or her ownership interest in the LLC must be transferred to the heirs through a probate.
Three Ways to Automatically Transfer Ownership of an AZ LLC on Death of a Member
An interest in an Arizona LLC owned by a person will transfer automatically on the person’s death if one of the following scenarios applies:
1. Joint Tenancy Ownership: The membership interest in the LLC is owned by two or more people as joint tenants with right of survivorship. This type of LLC ownership is rare because few people understand joint tenancy ownership and even fewer know how to make joint tenancy ownership of a membership interest in an LLC happen. Joint tenancy ownership is not created in the LLC’s Articles of Organization. It is created one of two ways:
A. By having the required joint tenancy language in an Operating Agreement that is signed by all of the people who jointly own the membership interest.
B. By having the required joint tenancy language in a membership certificate that is signed by all of the people who jointly own the membership interest.
2. Community Property with Right of Survivorship: The membership interest in the LLC is owned by a married couple as community property with right of survivorship. This is not the same as a married couple owning their LLC interest as community property. Arizona law provides for two types of community property – community property (CP) and community property with right of survivorship (CPWROS). Arizona law contains a presumption that all property acquired by a spouse during marriage is community property (not CPWROS). The difference between these two types of holding title to property is that if property is held as CPWROS then when one spouse dies the interest of the deceased spouse transfers automatically by law to the surviving spouse. If property is owned as mere CP, then when one spouse dies the interest of the deceased spouse does not transfer automatically, Instead, the ownership of property owned as CP must be transferred to the heirs through a probate. CPWROS is not created in the LLC’s Articles of Organization. It is created one of two ways:
A. By having the required CPWROS language in an Operating Agreement that is signed by all of the people who jointly own the membership interest.
B. By having the required CPWROS language in a membership certificate that is signed by the married couple that owns the membership interest.
3. A Trust: The owner/member signs a trust that provides who inherits the LLC interest when the owner dies. This document is the equivalent of a life insurance policy beneficiary designation. We prepare trusts. See the contents and prices of our estate plan with a trust.
LLC’s Owned by a Trust Avoid Probate
The best way to avoid probate following the death of a member is for the member to create a revocable living trust and transfer ownership of the LLC to the trust. When the trust owns the LLC, the death or incapacity of the trust’s creator does not affect ownership of the LLC, i.e., the trust owns the LLC before and after the death or incapacity of the member.
This method only works, however, if the LLC membership interest is transferred to the trust before the death or incapacity of the member. If you have a trust, but fail to transfer your membership interest in the LLC to the trust then a probate will be necessary when you die. I do simple uncontested Arizona probates for approximately $2,500 – $3,500. For more about Arizona probates see my Arizona Probate Law website.
If an LLC member loses his or her capacity to handle his or her financial affairs then the family will have to file a petition with the Arizona Superior Court asking the court to appoint a conservator of the incapacitated person who will have the legal power to transfer the LLC to the trust. This can cost $2,000 – $5,000 depending on whether a family member contests the appointment.
How to Transfer an LLC Membership Interest to a Trust
What follows are the steps necessary to transfer ownership of all or a portion of an Arizona LLC to a trust:
1. Prepare & Sign a Transfer Document: The member signs a document by which the member assigns the membership interest to the member’s trust. I call this document an Assignment of Membership Interest Agreement. It’s equivalent to a deed or a bill of sale. It shows that as of a specified date the membership interest was transferred from the member to the trustee(s) of the member’s trust.
2. Prepare & File and Amendment to the Articles of Organization with the ACC: If the company is member managed, the company must file an Articles of Amendment to the Articles of Organization with the Arizona Corporation Commission to remove the person as a member and replace him or her with the trust as a member. If a company is manager managed, the company needs to file an Articles of Amendment to the Articles of Organization with the ACC only if the membership interest being transferred is 20% or more of the company. For example, if Homer Simpson owns 18% of an LLC that is manager managed and he transfers his membership interest to his trust he does not need to amend the Articles of Organization because the membership interest is less than 20% of the company.
3. Members Should Prepare & Sign an Amendment the Operating Agreement (optional, but recommended): The Operating Agreement of the company should be amended to remove the person as a party and replace the person with the trust as a party and member.
4. Members Prepare & Sign Resolutions (optional, but recommended): It is good business practice to document the transfer of ownership with a resolution signed by all of the members of the LLC that includes a adopted resolution approving the change of ownership to the trust.
Change of Member Document Preparation Service
I assist people in transferring their ownership of an Arizona LLC to a trust. To hire me to document your transfer, complete my online LLC Member Change Questionnaire.
Do It Yourself
If you would rather prepare the documents yourself do the following: