Transferring Assets With An LLC
You Can Transfer Assets With A Transfer On Death Clause
People ask me if they need to put their LLC membership interest into their Trust. The short answer is no, but there may be some advantage to doing so. A transfer on death clause in an LLC operating agreement serves to transfer assets outside of probate.
Though Utah State law does not directly state that limited liability companies may be used as a vehicle to avoid probate, Utah Code 75-6-201 provides that written instruments effective as contracts may avoid probate. Because the operating agreement of an LLC is a written agreement effective as a contract, one may include a provision which transfers the LLC membership upon death.
Transfer on Death Clause
Think of a transfer on death clause in an LLC operating agreement like a Will, but shorter and with fewer requirements. The transfer on death clause in an LLC operating agreement may be simple. The clause needs to be integrated into the agreement and include a provision which gives the membership interest away at death. The clause should be clear who is the giver, who is the receiver, and what is being given at death.
Sample Transfer on Death Clause
I often use the following language in my LLC agreements to transfer to a spouse or other partner upon the death of the transferring person:
“Transfer on Death. Notwithstanding any other provision to the contrary within this Agreement, the following apply at the deaths of [Husband] and [Wife]. Upon first death of either [Husband] or [Wife], the deceased’s interest in the Company shall transfer to the other. Upon the second death, the entire interest of both [Husband] and [Wife] shall transfer to the then trustee of the [Trust], for distribution in accordance with the terms of the [Trust].”
Of course the names of the husband, wife, and trust replaced the words in brackets.
Issues with Transfer on Death Clauses
Transfer on Death clauses solve many problems, but beware of complete reliance upon them. For starters, the statute we estate planners rely upon for probate avoidance doesn’t address limited liability company operating agreements directly. This leaves some room for interpretation. Judges, when faced with results they dislike often create new rules contrary to a common sense application of a statute. For instance, if a husband with significant separate property were to leave that property to a mistress leaving his handicapped wife and children destitute, many judges (not all) would try to find some exception to the statute. When this happens, ambiguity lends a helping hand to the judge.
Also, in Utah, as in most states, limited liability company renewals cost cost money and over decades those costs add up. Additionally, Utah requires requires regular renewals to maintain active status. The cost and time required for regular renewals may prove problematic over the long term.
Lastly, operating agreements are not technically contracts if only one person remains a member. Thus the operating agreements for single member LLCs fail to serve as a contract. If the operating agreement fails to serve as contract, it then fails to avoid probate under the statute.