When your company is structured as a Limited Liability Company (LLC), its a good idea for the operating agreement to detail what happens with each member’s ownership upon death. Keep in mind that being a business owner or partial owner makes arming your family with an orderly plan for managing your affairs especially important.
Transfer on Death Clause
According to the U.S. Small Business Administration (SBA), a solid operating agreement is vital for LLCs. Specifically, the purpose of an operating agreement “is to govern the internal operations of the business in a way that suits the specific needs of the business owners. Once the document is signed by the members of the limited liability company, it acts as an official contract binding them to its terms.” Examples of what to include in an operating agreement include:
- Percentage of members’ ownership
- Voting rights and responsibilities
- Powers and duties of members and managers
- Distribution of profits and loses
- Holding meetings
- Buyout and buy-sell rules (procedures for transferring interest or in the event of a death)
Though not a must, experts at Phelps LaClair advice that inclusion of instructions about what becomes a member’s share upon death is very helpful:
For instance, all the members can agree to include a transfer-on-death (TOD) clause dictating that after a member passes away, their ownership interest would automatically transfer to the remaining members. Otherwise, the shares would transfer to a family member as part of the deceased member’s estate. If you and the other members of your LLC have not yet determined what happens after a death, make sure to amend your operating agreement to ensure a smooth transfer of shares…What happens to the LLC itself depends on how the operating agreement determines your heirs’ rights regarding the LLC. For instance, the contract may allow the remaining members to buy the ownership interest from the deceased member’s heirs. An operating agreement can also dictate whether or not the heir cannot receive voting or management rights regarding the business.
Complete Your Estate Plan with a Will or Trust
Altough including a transfer on death clause in the operating agreement of an LLC is helpful, an estate plan that includes a will or trust is still essential. As Phelps LaClair explains: Unless the operating agreement says otherwise, a member’s ownership interest in the LLC becomes part of their estate after they pass away. The ownership interest is then considered personal property, which will transfer to the estate owner’s heirs. However, the only way to guarantee who receives some or all of your shares in the LLC is by creating a will or trust and naming beneficiaries.
An estate planning attorney can help you decide whether a will or trust is best based on your circumstances and wishes. Some of the particular advantages of trusts are outlined right here. Whether you decide to create a will or trust, you will make an important decision about naming a loved one, friend or professional to serve as the fiduciary who will ultimately steward your plans in accordance with your wishes, documents and the law. Keep in mind that though sometimes waived, an estate bond can play an important role in wealth transfer.
Essentially, an estate bond protects the interests of the estate and its beneficiaries in accordance with state law. Sometimes these bonds are specifically referred to as fiduciary, executor or trustee bonds. At Colonial, estate and other bonds are available directly and digitally. The steps to obtaining an estate bond are easy: get a quote online, fill out the information, and enter a payment method. Print or e-file the bond right from anywhere—even the law office. Obtain Estate Bond Here
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