Who Will Inherit Your Membership Interest in Your Arizona LLC When You Die?

Who Will Inherit Your Membership Interest in Your Arizona LLC When You Die?2016-11-16T08:23:30+00:00

by Richard Keyt, Arizona LLC and estate planning lawyer

If you own an interest in an Arizona limited liability company in your name (rather than through a trust), you owe it to your family and loved ones to prepare now for your death.  If you do not, then in addition to leaving them your Arizona LLC, you may also be leaving them an expensive, lengthy and public probate to legally transfer the company from your estate to your heir(s).  Please plan now and save your loved ones the costs and headaches of a probate.

You must understand what will happen to your membership interest in your LLC you die so you cannot minimize the consequences of your death on your loved ones. Ask yourself these very important questions:

1. Do you care who inherits your interest in the Company when you die? If the answer is no, skip the rest of this article.

2. Who will inherit your membership interest in the company when you die?  Will you pick who inherits your LLCs or will it be the state of your residence?  Each state has laws called the law of intestate succession.  These laws are the rules for determining who inherits property when the owner of the property fails to make the selection.  The way you determine who inherits your property when you die (rather than the state making the determination) is by adopting one of the following methods while you are alive:

a.  Own property jointly with rights of survivorship with one or more joint owners.  If you hold title to property this way, then when one joint owner dies, the ownership interest of the deceased owner goes automatically by operation of law to the surviving joint owners.  The last joint owner alive will own the entire property.  However, if the last survivor does not plan for the transfer of the property on the survivor’s death, a probate will be necessary (unless it is a small estate) and the law of intestate succession will determine who inherits the property.

b. Prepare and sign a valid Last Will & Testament.  Property left by a Will will have to go through probate unless your estate qualifies as a small estate.

c.  Prepare and sign a Trust and transfer the Membership Interest to the Trust. This avoids probate, but is the most expensive option.

d.  Prepare and sign a Transfer of Membership Interest Testament.  The least expensive option.

These options are discussed in more detail below.

3.  You must know the answer to question 2 above because if you do not, your membership interest in your LLC may not be inherited by your desired heir(s) or it may go to your desired heir(s) only after an expensive and public probate court proceeding.

4. If you are married and your spouse will inherit your membership interest in the Company, who will inherit your spouse’s membership interest in the company when your spouse dies? If your spouse will inherit your membership interest on your death, you must know the answer to this question because if you do not, your membership interest inherited by your spouse may not go to your desired heir(s) after your spouse’s death or it may go to your desired heir(s) only after an expensive and public probate.

You Must Have a Death Plan

Do you have a plan in place by which you pick who inherits your interest in the company or will the State of Arizona decide who inherits your membership interest in your Arizona LLC? If you have a plan that picks your heir(s) does it avoid probate or does the transfer on death happen automatically, which is what occurs when your membership interest is owned by a Trust or if you have signed a Transfer of Membership Interest Testament.

What You Must Do to Insure that When You Die Your Membership Interest Will be Inherited by the Person(s) You Chose as Quickly and Inexpensively as Possible

If you own a membership interest in one or more Arizona LLCs and want to protect your loved ones from the major problems caused by the failure to plan for your death, do your loved ones a favor and adopt one of the following death plans:

1.  Cheapest & Easiest Solution: Create a Transfer of Membership Interest Testament by which you specify who inherits your membership interest when you die. Pros: A relatively inexpensive and simple solution. I charge $247 (one document) or $347 (two documents for a married couple) to prepare a document called a Transfer of Membership Interest Testament. This is a relatively small amount considering my typical fee to do a simple uncontested probate is $2,000 – $2,500 and it takes five to six months.

In the Transfer of Membership Interest Testament you specify who inherits your membership interest in one or more Arizona LLCs when you die. You can name a single heir, multiple heirs, a trust or a company or a charity. You may name alternate heirs if your first choice(s) of heirs were to die before you. The Transfer of Membership Interest Testament is signed by the owner of the LLC interest, witnessed by two witnesses who are not your heirs and acknowledged before a notary public.  Limitations: The Transfer of Membership Interest Testament is not effective until your death so if you become incapacitated, it has no effect. You cannot use a Transfer of Membership Interest Testament to control ownership of the membership interest after your death. If that is your goal, you must create a Trust and transfer ownership of your membership interest to the Trust. The Transfer of Membership Interest Testament cannot be used to transfer other assets. It is expressly limited to transferring membership interests in Arizona limited liability companies.

To hire me to prepare a Transfer of Membership Interest Testament, complete my online

2.  More Expensive, but All Encompassing Solution: Create a valid Will that specifies who inherits all of your property when you die. Pros: A Will can dispose of all of your assets, not just a membership interest in an Arizona limited liability company. Limitations: A Will is only effective at your death. A Will does not avoid probate.  It does require an expensive and public probate unless your estate qualifies for the small estate exemption to probate.

3.  Most Expensive, but Best All Encompassing Solution: Create a Trust that holds all of your assets, including all membership interests in LLCs. Pros: Not only does a Trust avoid probate and provide for the disposition of all of your assets, it can provide for the management of your assets if you are alive, but unable to manage your affairs. A well drafted Trust can also provide lifetime asset protection for your loved ones who inherit your property. Limitations: You must name one or more people or institutions to act as successor trustee if you become incapacitated or die. The Trust is the best solution to passing your assets to your loved ones with the least hassle and expense, but of these three solutions, it is the most expensive. I charge $1,500 for prepare a basic Revocable Living Trust, but if I also prepare all the other documents for a complete estate plan, the cost for the Trust decreased by $500.

For more information about Wills, Trusts and what is included in an estate plan and the costs, read “Arizona Estate Plan Contents.”

To learn more  about estate planning, I recommend you read my article called “Why You Need an Estate Plan to Protect Your Family and the High Cost of Procrastination and Neglect.” Another informative article of mine is called “Arizona Estate Planning FAQ.”