Limited Liability Companies (LLC’s) are great ways to protect assets. Owners of rental properties often form LLCs to limit their liability if a tenant sues them. The tenant would be limited to going after the asset in the LLC versus all personal assets. In some cases, LLC members will be other LLCs rather than an individual person. Some states will allow single member LLCs like Arizona. What a lot of people forget is whenever anyone forms an LLC, they should decide, among other things, what should happen to their LLC membership when they die. With proper documentation the membership can transfer to the owner’s heirs and the dreaded probate action can be avoided.
There are four ways to avoid probate. 1) Create an LLC operating agreement stating who the membership will transfer to upon death. 2) Put the membership into a revocable trust. The LLC operating agreement should provide the owner the capacity as an individual, not as a trustee, as the LLC’s manager. This avoids confusion when the owner signs LLC contracts. 3) Joint-tenancy single membership is stated in the operating agreement that the owner holds membership jointly with another person, but the owner is the manager until he or she resigns or dies. The membership can transfer but management is not shared until death or resignation. 4) Create a joint tenancy membership by adding an additional member and automatically transferring the membership to the other party if something happens. However, if both members die probate would be required. Please consult with your attorney to make sure your LLC is structured correctly.
Unfortunately, one of my clients missed putting a sole member LLC into the family trust. The member passed away. When the heirs tried to sell the property, they were forced to probate the LLC to clear the chain of ownership. This was an expensive and time-consuming process that could have easily been avoided. Moral of the story is review all assets periodically and put the proper documentation in place to avoid headaches and expenses down the road. And as always consult with an attorney to make sure the documentation is correct.