Bad Consequences of the Death of a Member of an LLC
If a member of an Arizona LLC dies and the member did not take action to protect the member’s loved ones bad things will happen. The failure to plan creates the following problems:
1. The membership interest of the deceased member may not be inherited by the person or people the deceased member would want to inherit the membership interest.
2. A person who inherits the membership interest of a deceased member of a multi-member LLC will not be a member of the LLC. Instead, the heir will acquire only an economic interest in the LLC, which means the heir(s) will not be able to vote on any issue or receive records that all members have a right to receive.
Problem 1: The Wrong Person or People May Inherit the Interest of the Deceased Member
If you do not have a will or an Operating Agreement that states who inherits your interest in the LLC if you die it will go to the person or people selected by the intestate succession law of your state of residence. If you are an Arizona resident see “Who Inherits Property of an Arizona Resident Who Dies without a Will or a Trust?“
If you don’t have a will then to insure your LLC is inherited by the person or people you want you need our Operating Agreement in which you designate your heir(s). Few, if any, Operating Agreements you get from another source have language that states who inherits the interest of a deceased member. To hire us to prepare an Operating Agreement that has language that states who inherits your membership interest on your death complete our Operating Agreement Questionnaire.
Example 1: Bob Jones invests $90,000 in J&F LLC and owns a 90% membership interest. Ned Flanders invests $10,000 and owns 10%. Bob dies without a Will or Operating Agreement that designates who inherits Bob’s 90% of the LLC. Instead of the 90% interest in the LLC going to Jane, Bob’s significant other of 20 years, the law of intestate succession of Bob’s state of residence caused Bob’s son Andy who Bob hasn’t heard from in 25 years to inherit the interest.
Solution: Bob should have purchased our Operating Agreement with language that would have named Jane as the heir of his interest in the LLC.
Problem 2: Your Heir Will Not be a Member of the LLC
Arizona Revised Statutes Section 29-3502 states:
A. A transfer, in whole or in part, of a transferable interest does not entitle the transferee to either of the following:
(a) participate in the management or conduct of the company’s activities and affairs.
(b) . . . have access to records or other information concerning the company’s activities and affairs.
B. A transferee has the right to receive, in accordance with the transfer, distributions to which the transferor would otherwise be entitled.
This statute prevents an heir from voting on LLC matters and getting information about the LLC.
Example 2: Same facts as Example 1, but Bob’s will left the 90% interest in the LLC to Jane. Because of Section 29-3502 Jane does not have any voting rights and can’t get any information about the LLC. This means that Ned Flanders who owns 10% of the LLC is the only voting member and now has total control of the LLC.
Solution: The Operating Agreement of the LLC signed by Bob and Ned should have had a clause that stated that Bob’s heir Jane would automatically become a member entitled to all rights of membership on Bob’s death. Our Operating Agreements contain this language.
Bottom Line
You must act now to protect your loved ones before it is too late. Eliminate both of these problems by purchasing our Operating Agreement that names your heir(s) and states that your heir(s) automatically become members of the LLC. To hire us to prepare an Operating Agreement complete our Operating Agreement Questionnaire.
