Although you can decide on your own how your limited liability company (LLC) behaves upon a member’s death, the law always protects the remaining members’ interests, especially from the passing member’s heirs.
Because membership shares of LLCs are considered personal property, those shares will go through estate and probate much the same as the other assets of the deceased. The membership shares will be distributed according to her will or estate plan. Therefore, you can easily end up with a new partner.
The plus side is that, if your operating agreement is worded correctly, the beneficiary of the LLC membership interests has no real power in the company, only an economic interest. So the beneficiary can receive only the portion of profits and losses that her membership shares entitle her to.
When it comes to voting, she has no say. When it comes to managing, she must remain silent. She can only become a full partner if the other partners take a vote and agree.
Here’s a sample provision you can use:
Upon the death of a Member, the deceased Member's legal representative, successors or heirs (collectively “Member's Estate”) will retain the Member's Economic Interest subject to the terms of this Agreement, but will not be entitled to participate in the management of the Company. The Member's death will not release the Member's Estate from any obligations or liabilities incurred before death. The death of a Member will not cause the termination or dissolution of the Company.
Don’t like the idea of having a member’s heirs as partners? You can also add a provision to your operating agreement that states that the LLC has the right to buy back the shares within a certain time frame. Here’s a sample provision that you can edit accordingly:
The Company will have the option to purchase the deceased Member's Membership Interest by delivering written notice to the Member’s estate within 60 calendar days after the death of the Member. The Company will then have 90 days from the date of the notice to pay the Member's estate an amount equal to the fair market value of the deceased Member's interest, to be calculated in good faith by the Company as of the deceased Member's death. If the deceased Member's estate disputes the valuation reached by the Company, the fair market value will be determined by a neutral third party appraiser selected by the Company and approved by the deceased Member's estate. The death of a Member will not cause the termination or dissolution of the Company.
Make sure that all actions on behalf of the members of the company, especially those concerning adding and withdrawing members, are clearly documented in the company minutes. Recording these changes shows a history of the company procedures and will be invaluable if any actions are contested or if the company is taken to court.