What is the best way to hold membership interests?
This question often arises when people are forming a new business. It doesn’t matter whether it is a corporation, LLC, or limited partnership, the membership interests should be held in a living trust. How you hold the interests does not affect your ownership in the company, but it could help determine how your company will survive your demise.
A company is owned by whoever is named on the certificate. When a person’s name is on the stock or membership interests, it requires the signature of the person named to transfer it. So if your name is on the certificate and you die it will be subject to probate. The legal proceeding of probate is not only expensive, it is time consuming. Leaving your small company in limbo while your estate is probated could destroy your company.
How to Avoid Probate?
A good way to avoid probate is to hold your membership interests in the name of your living trust. Then, when a member dies, the interest or stock is not held in an individual’s name, but rather in the trust’s name. The trust document appoints another person to act as your successor trustee. Your successor trustee immediately steps in and operates your business. He/she has full power to sell the stock, vote the shares or do whatever they have to in order to make certain your company continues operation.
By simply making sure your living trust “owns” your membership interests in the company, your family can avoid a lot of time, expense and frustration. If you don’t have a living trust, now is the time to get one. When you get a trust make certain you do not get a testamentary trust. This type of trust must be probated. You need a Revocable Living Trust. My book, Protecting Your Financial Future, will walk you through everything you need to insure a trust protects you and your business.
Can You Change Your Membership Interests?
If you already have your trust in place and you need to change your membership interests, just get the company stock or membership ledger. Cancel the certificate already issued in your name. Next re-issue another certificate in the name of your living trust. This is what a big company does when it needs to change the name on a stock certificate. Once the new membership certificate is issued, the interest is then owned by the living trust. You have effectively maneuvered out and around all the probate problems.