If a member of an Arizona LLC dies and the member did not take action to protect the member’s loved one(s) bad things will happen.  The failure to plan for death 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.

3. The person who inherits the LLC interest may have to do an expensive and time consuming court probate to change ownership of the LLC.

Click on the blue text below or the + icon to open the text box to see the explanation of each problem.

If you do not have a will or a trust that states who inherits your interest in the LLC if you die the LLC will go to the person or people selected by the intestate succession law of your state of residence.  Your state’s plan for who inherits may be different from who you want to inherit the LLC.

If you are an Arizona resident see “Who Inherits Property of an Arizona Resident Who Dies without a Will or a Trust?“

Example 1: Bob Jones owns his LLC as his separate property.  He is married to Linda and has two children from a prior marriage.  Bob wants Linda to inherit all of his valuable LLC.  Bob dies without a Will or trust that designates who inherits the LLC.  The law of intestate succession of Bob’s state of residence gives one half of the LLC to Linda and the other half to Bob’s children equally.

Solution:  Bob should have signed a will or a trust that named Linda as the sole heir of Bob’s interest in the LLC.

Example 2: Bob Jones invests $90,000 in J&F LLC and owns a 90% membership interest.  Linda is Bob’s significant other of 20 years. Ned Flanders invests $10,000 and owns 10%.  Bob dies without a Will or a trust.  Instead of the 90% interest in the LLC going to Linda the law of intestate succession of Bob’s state of residence gives the LLC interest to Bob’s son whom Bob hasn’t heard from in 25 years.  Linda gets none of the LLC.

Solution: Bob should have signed a will or a trust that named Linda as the sole heir of Bob’s interest in the LLC.

Example 3: Bob Jones is single and has three kids.  Bob wants his entire interest in his LLC to go to his daughter Maggie who works in the business with Bob. Bob dies without a Will or trust.  The law of intestate succession of Bob’s state of residence gives the LLC interest equally to Bob’s three kids.  Maggie gets one third of the LLC instead of all of it.

Solution: Bob should have signed a will or a trust that named Maggie as the sole heir of Bob’s interest in the LLC.

Example 4: Bob Jones is single.  He wants his brother James to inherit his LLC.  Bob dies without a Will or a trust.  The law of intestate succession of Bob’s state of residence gives the LLC interest to Bob’s parents.  James gets nothing.

Solution: Bob should have signed a will or a trust that named Linda as the sole heir of Bob’s interest in 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 5: Same facts as Example 2 above, but the good news is that Bob’s Will left Bob’s 90% interest in the LLC to Linda.  Because of Section 29-3502 Linda does not have any voting rights and can’t get any information about the LLC.  Linda inherited only an economic interest in the LLC, not a membership interest.  This means that Ned Flanders who owns 10% of the LLC is the only voting member and now has total control of the LLC that Linda has a right to receive 90% of the and distributions.

Solution:  The Operating Agreement of the LLC signed by Bob and Ned should have had a clause that stated that Bob’s heir Linda would automatically become a member of the LLC entitled to all rights of membership on Bob’s death.  Our Operating Agreements contain this language.

If you die and your LLC is not owned by your trust your heir(s) may be forced to open a probate with a court in your state of residence to transfer ownership of the LLC to your heir(s).  We are Arizona probate lawyers.  Our fee to do an uncontested Arizona probate is $2,500 – $3,500 and it takes five or six months.

If you are an Arizona resident and the value of ALL of your personal property including your LLC is less than $75,000 your heir(s) can avoid probate by preparing a small estate affidavit.

Example 6:  Bob dies without a Will or a trust.  The total value of his personal property exceeds $75,000.  Bob’s wife inherited his LLC interest under Arizona’s law of intestate succession, but she has to spend $3,500 to hire an attorney to do a probate.

Solution: If Bob had signed trust the LLC interest would have passed automatically to his wife on Bob’s death without the need for a probate.