I once met with the widow of a successful architect. Her husband had co-founded a thriving firm in Manhattan, structured as a Limited Liability Company (LLC). He had a will, which left everything to her—a straightforward, loving gesture. The problem? His LLC’s operating agreement had a buy-sell provision that was never funded, and his partner had a different idea about the firm’s value. She didn’t inherit a business interest; she inherited a legal battle that consumed nearly two years and a significant portion of the assets she was meant to receive.
This family’s story is common. Many entrepreneurs pour their lives into building a business but treat its succession as an afterthought. They assume a will is enough. In New York, an LLC interest is personal property, but it is unlike a bank account or real estate. It’s governed first by a contract—the operating agreement—and second by state law. Simply naming someone in your will to inherit your share can create profound complications for your family and your business partners.
Your Operating Agreement Is the First Will for Your Business
When we talk about passing on an LLC interest, the first document I ask to see is not the owner’s will. It’s the company’s operating agreement. This document is the foundational contract between the members. A well-drafted operating agreement explicitly addresses what happens upon the death, disability, or departure of a member.
Many agreements, especially those drafted from online templates, are dangerously silent on this topic. When an agreement fails to plan for a member’s death, we fall back on the default rules under New York law. Specifically, New York Limited Liability Company Law § 603 governs the assignment of an interest. The executor of a deceased member’s estate steps into the member’s shoes, but this does not make your heir a new partner. It gives your executor the rights of an “assignee,” which means they receive a right to profits but have no say in management decisions.
Imagine the position this puts your family in. They may be entitled to a share of the LLC’s profits, but they have no control over the business decisions that generate those profits—like salaries, expenses, or new investments. They become silent partners, entirely dependent on the goodwill and fiduciary duty of the surviving members. This is rarely a comfortable or prudent position for a grieving family.
Distinguishing Between Economic and Membership Rights
An LLC interest bundles two distinct sets of rights: the right to vote on business matters (management) and the right to receive a share of the profits and losses (economic).
Your estate plan must be deliberate about who gets which. Do you want your child, who is a teacher, to suddenly have to vote on complex financial decisions for your construction company? Or do you simply want them to benefit from the company’s financial success? The answer shapes the entire strategy.
A common approach is to use the operating agreement to require the surviving members or the company itself to buy out the deceased member’s interest at a pre-determined price or formula. This provides liquidity to the estate and a clean break for the family, allowing the business to continue without disruption. But for this to work, the buy-sell agreement must be funded, often through a life insurance policy. Without funding, it’s just an unfunded promise that can lead to a fire sale or litigation.
Using a Trust as the Beneficiary
For many of our clients, a more intentional approach is to transfer ownership of the LLC interest into a trust during their lifetime. This offers a level of control and contingency planning that a will cannot. By making a trust the owner of your LLC interest, you achieve several critical goals.
First, the LLC interest will not pass through probate. The trust owns the asset, and the trust document dictates what happens upon your death. Your business succession plan remains private and is not subject to the delays and public record of Surrogate’s Court.
Second, you can appoint a trustee who is suited for the role. Your trustee can be a person with business experience—someone who can prudently manage the interest, negotiate a buyout, or oversee the investment on behalf of the trust’s beneficiaries (your family). This separates the stewardship of the asset from the emotional turmoil a family member may be experiencing.
Finally, a trust allows for generational planning. The LLC interest can be managed for the benefit of a spouse and then, upon their passing, for children or even grandchildren. You can build in provisions to protect the asset from a beneficiary’s creditors or a future divorce. Stewardship. It allows you to create a legacy that is both durable and protected.
Passing on a business is more than a financial transaction; it’s the transfer of a legacy. The structure you use must be as carefully constructed as the business itself. Ignoring the interplay between your operating agreement, your will, and trust law is a risk that neither your family nor your partners should have to take.
The first step toward securing your business’s future is to understand its present structure. If you are a business owner, I encourage you to schedule a consultation where we can review your LLC’s operating agreement in conjunction with your existing estate plan to identify and address any gaps before they become a crisis.
