A Guide to Transferring Ownership of an LLC at Death
The Uniform Transfer on Death Security Registration (TOD) Act is a model law that enables people to designate beneficiaries to inherit specifically registered investment securities without the need for probate.
Objectives of the Uniform TOD Act
The goal of the Uniform TOD Act is to make uniform the laws governing the transfer of securities upon death among states that choose to enact the model law. In choosing to adopt the Uniform TOD, states have the freedom to make alterations to the Act’s provisions or adopt only specific sections of the Act according to the needs of that state.
Challenges of Transferring LLC Interests Through TOD Acts
Under both South Dakota’s Uniform TOD Act and Iowa’s Uniform TOD Act, the ability to designate a beneficiary is limited to only certain types of securities. While it is clear that corporate stocks and bonds are included as securities under these statutes, the same cannot be said for a member’s interest in a limited liability company (LLC) formed under South Dakota’s Uniformed Limited Liability Company Act or Iowa’s Revised Limited Liability Company Act.
Accordingly, relying on either South Dakota’s Uniform TOD Act or Iowa’s Uniform TOD Act for the non-probate transfer of an LLC interest may expose intended beneficiaries to potential litigation over the validity of the transfer with the possibility the transfer will not be respected.
Alternative Non-Probate Transfer Methods for LLC Interests
However, there is an alternative for individuals who would like to transfer their LLC interests without the need for probate. Under both South Dakota and Iowa law, an interest in an LLC is considered personal property subject to the same titling rules that govern other forms of personal property.
For that reason, an individual with an ownership interest in a LLC can achieve a non-probate transfer of the LLC interest by titling the interest as joint tenants with rights of survivorship and naming their intended beneficiary as a joint tenant.
By titling the LLC interest as joint tenants with rights of survivorship, upon the death of a joint tenant, the surviving tenant can present a copy of the deceased tenant’s death certificate to the LLC and quickly have the interest put in the survivor’s name. As a result, the LLC interest no longer needs to pass through probate.
Legal Presumptions and Requirements in South Dakota and Iowa
Under South Dakota Law, where property is created and held in joint names or with the designation “jointly” there is a presumption that the owners intend the usual rights incident to jointly owned property, including the right to survivorship. However, under Iowa law, creation of a joint tenancy with rights of survivorship requires the designation of “joint tenants” or “joint tenancy” and the phrase “or their survivor” in reference to the tenants.
Consultation with Attorneys for Proper Transfer Planning
If the LLC interest is not properly titled as a joint tenancy with rights of survivorship it will have to pass through probate. Accordingly, it is always a good idea to consult an attorney. Reach out to the Attorneys at Woods Fuller to learn more.
Read more about strategically planning your business’s success and the importance of planning ahead. If you’re already in progress, read more on how you can ensure your transition is being properly structured.
