LLC Dissolution on the death of a member needs to be handled by the LLC Operating Agreement. I recently handled a case where a successful businessman came in with what appeared to be a fairly comprehensive estate plan. He wanted to simply ask some questions and look at long range planning. I looked at the living trust, and at a quick glance it appeared to be reasonable. (Some of the living trusts are just a joke.) I carefully quizzed him to make sure the living trust did what he wanted, i.e., distributed the property after his death to his family the way he wanted it to. I also carefully quizzed him on funding the living trust. Did it own the properties he had told me about? Did it own the membership interests in his large LLC? He assured me and the others in the room that it was fully funded.
Within a couple of weeks after our visit, he became very ill. The family couldn’t find a durable power of attorney in his paperwork, so we quickly did one. His daughter brought him into the office to sign the durable power of attorney, and on the way out I asked if she liked to read. She said she loved novels. I gave her a copy of my book, Protecting Your Financial Future, and assured her it read like a novel. Yeah sure, was the look on her face. About three days later she called. After getting a couple hundred pages into the book, she decided to do some investigating of her own. She couldn’t find deeds transferring her dad’s properties into the trust. The book clearly said to look for the deeds. No deeds! A check at the county showed all the properties were still in dad’s name, not the trust’s name. We hurried and got deeds made. Dad signed the deeds in an intensive care unit.
I thought, “OK, if the deeds weren’t made out, then the attorney didn’t do what needed to be done when the trust had been created several years earlier.” Yet, the businessman seemed to have understood what “funding the living trust” meant. At that point, I questioned the LLC – Dad’s relatively large business. His living trust should own his membership interest in the LLC. It took time to get the LLC documents from the accountant, “who had everything under control.” A quick read of the LLC operating agreement disclosed disaster. The LLC operating agreement clearly called for the LLC dissolution upon the LLC member’s death.
A check with the state showed that the sole LLC member was Dad. The LLC operating agreement had been written so that the LLC dissolution automatically occured at any member’s death. Dad dies, the company is gone. It isn’t uncommon to have a provision in the LLC operating agreement that states that when an LLC member dies the LLC dissolution is immediate. In fact, one of my documents in the Accumulation and Preservation of Wealth set has that provision as a choice. (On the 14 hours of audio CD instructions in the Accumulation and Preservation of Wealth set, I recommend against it, but the choice is there.)
A late night at the office produced a new set of LLC operating documents, with a different LLC dissolution clause. Dad was now in no condition to sign the new LLC operating agreement. So, in the middle of the night we got the individual designated (agent) in the durable power of attorney to sign on Dad’s behalf. It had to be done NOW, because as soon as Dad died, the agent named in the durable power of attorney lost his power to sign on Dad’s behalf. Yes, in spite of what you may have been told, a durable power of attorney (any power of attorney) immediately becomes void upon the principal’s (guy who makes the power of attorney) death.
We got the new LLC operating agreement completed just hours before Dad died. Now the question is, “What else did the attorney who originally provided Dad’s estate plan ‘forget’ to do?” My Protecting Your Financial Future book is a good walk through for yourself or the family to make sure things are done right before it is too late. It was the $19.99 book, Protecting Your Financial Future, not the $3,000 accountants “who had everything under control” that got the ball moving and saved the family thousands in legal fees and the loss of their family company. Whether it is a LLC dissolution clause or something else, I am more interested in saving your family’s skin than I am making money from the book. It’s a 351 page great read. It isn’t boring financial stuff, but all the financial stuff is there.
Lee R. Phillips, Jan. 19, 2010