LLC Interests Are Personal Property

If you own a Limited Liability Company (LLC), or an interest in an LLC, then you should seriously consider transferring your LLC into your Trust.

Under Arizona law, an LLC interest is treated as personal property. If you own personal property when you pass away, then your estate will have to go through probate. Thus, if you own your LLC personally when you pass, then your estate will go through probate to transfer your LLC–which will cost a good amount of money in fees, take time, and can delay the handling and eventual transfer of your LLC.

Avoid Probate by Transferring Your LLC into Trust

To avoid probate, you can transfer your LLC interest(s) to your Trust, just like you would transfer title to your house, investments, and other property to your Trust.

Here is how you can transfer your LLC to your Trust:

  1. Draft and Execute the Transfer Document. Prior to transferring your LLC, you will of course want to thoroughly review your LLC’s Operating Agreement to ensure that you are permitted to transfer (assign) your LLC interest. If your Operating Agreement does not permit such a transfer, then you will want to make sure not to violate that provision. Doing so can create unrealistic expectations by your Trust’s beneficiaries after you pass (because the transfer will likely be ineffective and your Trust won’t actually own your LLC), which in turn can cause a lot of litigation and upset. If your Operating Agreement will allow such a transfer, but has some limitations or procedures to follow, it will be important to follow those provisions to ensure an effective transfer takes place. Assuming your Operating Agreement permits it, you would prepare and sign an assignment of your LLC interest to your Trust. You would also sign the same document accepting the interest of the LLC as Trustee of your Trust.
  2. Draft and File an Amendment to your Articles of Organization with the Arizona Corporation Commission. If the LLC is member managed, then you will need to file an amendment to update the member of the LLC. Prior to the transfer, you, as an individual would be listed as the member of the LLC. After the transfer, the new member will be your Trust, not you. Thus, an amendment to the Articles will need to filed to accurately update the LLC’s member. If the LLC is manager managed, then you will need to file an amendment with the Arizona Corporation Commission if you (now your Trust) owns 20% or more of the LLC.
  3. Amend the Operating Agreement. Although not required, it would be optimal to amend and update the Operating Agreement to reflect the membership change from you individually, to your Trust. The feasibility of doing so will depend in part on the number of members of the LLC and the terms of the existing Operating Agreement.
  4. Have LLC Members Sign a Resolution Accepting Transfer. Again, this is not required, but it would be helpful to avoid future conflict and litigation by having the LLC members sign a resolution to acknowledge and accept transfer of your LLC interest to your Trust. This can be particularly helpful if the Operating Agreement has any limitations or other restrictive provisions regarding transfers of ownership. This way, the issue of whether your transfer is valid and permitted by the Operating Agreement can be dealt with now and proactively, rather than waiting for a problem to arise after you pass (and likely after it’s too late to do something about it).

Getting It Done

If you have an LLC and would like to transfer it to your Trust, I can absolutely help. Contact me here to schedule a consult. In most cases, I offer a low, flat rate for reviewing your Operating Agreement and preparing the Transfer Document. If you have authority to file, I can also file an amendment with the Arizona Corporation Commission, if required.

If you don’t have a Trust set up yet, I can help with that too. Contact me here to set up an estate planning consult. In the meantime, you can learn more about how a Trust can benefit you and your family.