When you die, what happens to your single-member LLC?
Strategies to avoid months of delay and possibly substantial legal fees
Mary Jones is a solo practice New Hampshire financial adviser with two employees. She lives in Manchester. She is happily married to John Jones. Her accountant tells her that, to protect her personal assets if one of her employees does something that harms a client or other third party, Mary should form a single-member LLC to conduct her business. The LLC will protect her personal assets from claims against her business.
Not to be morbid, but whenever anyone forms an LLC, they should decide, among other things, what should happen to their LLC membership when they die. How should Mary address this question?
Assume that when Mary dies, she wants her LLC membership to go to her husband John. One big issue in achieving this goal may be to keep her membership out of the New Hampshire probate court. (Believe it or not, probate is good for some estates, but probably not for Mary’s.) If Mary’s LLC membership is subject to probate administration when she dies, her estate may incur substantial legal fees and many months of delay before John finally obtains her membership.
How can Mary avoid New Hampshire probate? There are four ways:
1. Transfer on death: The simplest and cheapest way is for her to provide in a written LLC operating agreement that upon her death, her membership will pass to John. While the matter is not entirely without doubt, this provision will very probably protect her membership from probate under New Hampshire’s Uniform Transfer on Death Act.
2. Revocable trust: A more complex and expensive way, but perhaps also a better one for Mary, is for her to provide for the transfer of her membership to John upon her death under an estate planning document called a revocable trust. If she doesn’t already have such a trust, it will cost her roughly $2,000 to have a competent estate planning lawyer draft one. But if she has significant wealth, she’ll probably need a revocable trust anyway, and the trust will protect her from legal complexities, such as having to amend her LLC operating agreement if John dies before she does. (If Mary does decide to hold her membership in a trust, her LLC operating agreement should provide that Mary in her capacity as an individual, not as a trustee, is the LLC’s manager. This will avoid confusion when she signs LLC contracts.)
3. Joint-tenancy single membership: The third way is to provide in her operating agreement that, although her LLC is a single-member LLC, Mary holds her membership in it jointly with her husband. As long as her operating agreement also provides that only she will be entitled to manage her LLC unless she resigns from managing it or dies, this will protect her from having to share management with John.
4. Husband-wife joint-tenancy memberships: Finally, she can avoid probate of her LLC membership by forming her LLC not as a single-member LLC, but rather, as a two-member husband-wife LLC in which both she and her husband hold their LLC memberships as joint tenants. Indeed, this two-member structure will not only avoid probate upon her death by automatically transferring her membership to John upon her death, it will also very probably give her substantially stronger asset protection under the “liability shield,” “pick-your-partner” and “charging order” provisions of New Hampshire’s new LLC act. (However, when the second of Mary and her husband dies, this structure won’t protect her heirs from probate.)
Which of the above four options should Mary choose? If she wants to live dangerously, she can decide by using a dartboard. If she wants to live prudently, she will ask a lawyer.
Attorney John Cunningham, of counsel to the Manchester-based law firm of McLane, Graf, Raulerson & Middleton, is author of "John Cunningham on New Hampshire's New LLC Act," available at cunninghamonnhllcs.com.