Whether you are the single member of a limited liability company (LLC) in Tennessee, or you are just one member among many, it is likely that LLC has significant value. In fact, depending on the business, it may be your most valuable asset. As such, you may want to leave your interests in the LLC to your heirs or beneficiaries so they will be able to share in your prosperity. The problem is that you may not know whether you can transfer your LLC interests or how to name someone the beneficiary of your LLC. In this blog, we will review the two main ways to name pass on an LLC at your death.
Methods to Naming Beneficiaries to an Interest in an LLC in Tennessee
An LLC is independent of its owners, and so the ownership interest can typically be transferred to a third party upon the death of the owner. There are two main ways this may be done.
- Operating Agreement. An LLC should have an operating agreement, especially if there are multiple members. This operating agreement should have a section on the transfer of interests in the LLC during each member's lifetime or at death. In this same section of the operating agreement, each member can have the opportunity to name a beneficiary of his or her interest, or simply have a standard clause stating the membership interest will be distributed based upon a testamentary document – i.e. a will. Naming a beneficiary to receive an interest in a business may be best done when only one owner of the LLC exists, but it can still be accomplished when there are several owners.
- Last Will & Testament.If no operating agreement exists or if the operating agreement is silent as to a beneficiary, the owner can leave his or her interest to a beneficiary via a will. Accordingly, you can name in your will whomever you wish to inherit your interests in the LLC.
In the absence of a will or operating agreement naming a beneficiary, Tennessee's probate laws will determine who inherits the interest.
Note that sometimes family members or other beneficiaries may not want to have anything to do with your LLC. They may just want to sell. In those cases, the beneficiary can offer to sell the interest to the remaining members. If there is a well written operating agreement, it may provide how to determine a price for that buyout.
Possible Restrictions to Naming Beneficiaries to an Interest in an LLC
While operating agreements are an important part of an LLC, be aware that they can place substantial restrictions on the conveyance of LLC interests to family members or other non-members. Many operating agreements have buyout provisions which are known as “rights of first refusals”. These provisions give the right to the other members of the LLC to purchase the interest of the deceased member before it is transferred to anyone else. Typically, this right must be exercised within 60 to 90 days from the date of death.
Additionally, it is important to keep in mind, that these same operating agreements may have terms or conditions that restrict naming beneficiaries or how the interest is transferred upon death.
- For example, an operating agreement can allow an heir to receive the share in profits but may deny the heir a right to manage any part of the business.
- As another example, the operating agreement could limit who can be named a beneficiary.
There is usually a reason for any restrictions or limitations on naming persons as beneficiaries of an interest in an LLC. It's always important to speak to an estate planning attorney who also helps create limited liability companies. That experience will help make sure you optimize the LLC properly as an advance tool in estate planning.