With all of the business entity choices available to new and existing businesses, a Limited Liability Company (LLC) can be a great entity choice for many types of businesses. They are easy to form, and they help protect your personal assets from the debts and liabilities of the business and its employees. An LLC doesn’t require the strict record keeping, paperwork, or operating formalities that a corporation requires. LLCs also provide flexible income tax options, and they don’t have the strict ownership restrictions of a corporation. Because of these positive qualities, LLCs are often the entity of choice for many businesses. However, most people who create an LLC fail to plan for the disposition of their LLC interest upon their death.
YOUR LLC MEMBERSHIP INTEREST MAY REQUIRE A PROBATE
A Limited Liability Company may be formed by one person, known as a sole member, or it may consist of multiple members. A membership interest is the member’s share of the LLC, which is often expressed as a percentage. The value of a member’s interest depends upon the value of the company at the time of the member’s death, and different methods of evaluation are available to determine this value. Because many people who form an LLC take a “Do It Yourself” approach when they start their company, they fail to plan for the disposition of their membership interest at death, and a probate proceeding is often required in order to pass the interest to the member’s heirs.
HOW TO AVOID PROBATE OF YOUR LLC INTEREST
As an estate planning attorney, I often meet clients who have established an LLC, but they’ve never given any thought to what happens to the company when they die. In some cases, depending upon a person’s circumstances, their membership interest in an LLC may be the only asset they own that would require a probate proceeding. But there are ways to avoid probate.
One common way to plan for the disposition of a person’s LLC membership interest at death is to assign the membership interest to the person’s Revocable Living Trust during his or her lifetime. Since the member who assigned the interest to his or her trust is also typically the trustee of the trust, he or she still retains the same voting rights and financial benefits in the LLC that he or she had prior to the assignment. When the member dies, the membership interest owned by his or her trust passes to the beneficiaries of the trust, without the need for any probate proceedings.
For LLC members who do not create a Revocable Living Trust during their lifetime, another alternative available to members of Wisconsin Limited Liability Companies is to execute a Transfer on Death instrument. This allows the member to specify the beneficiary or beneficiaries who will receive the member’s LLC interest upon his or her death. This method of planning is essentially the equivalent of placing a beneficiary designation on the membership interest. The authority for such planning is found in Wisconsin Statute §705.10, which allows non-testamentary written instruments to be used for non-probate transfers of money or other benefits due upon death.
DON’T FAIL TO PLAN
The above examples are just two of the various planning options available to members of an LLC who wish to avoid probate upon their death. If you presently have an interest in an LLC, or you are thinking of forming an LLC, consult with an attorney who handles both Business Law and Estate Planning, to ensure that you’ve covered your bases. Your LLC planning should include an Operating Agreement that is tailored to fit your business, and an estate plan that provides for a seamless transition upon your death. Contact Attorney Stephen Kosa today to schedule an appointment to discuss your LLC needs.