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What to do in event of the death of a family member

Flowers from a funeral after death of loved one.

Here is a short list of things you should do in the event of a family member’s death.

  1. Contact a probate attorney to guide you through the process.
  2. Begin inventorying property that was owned or controlled by the person who passed away. It is best to take a video camera (or your smart phone) and record a video of the items.This will document the condition that things were in at the person’s death. Then you will have a good record of what was there and what was not. This may help avoid later lawsuits claiming that someone has taken items.
  3. Immediately contact a reputable funeral director to assist with the appropriate disposition of the decedent’s remains. Most states have laws that are particular about how the person’s remains are to be handled. You will want to make sure everything is done properly for the benefit of the family, and also in terms of complying with the law.
  4. Order multiple certified copies of the death certificate. As standard practice, it is good to get ten or twelve. The funeral home will most likely order these for you.
  5. Get a copy of the Will if one exists. Find out where the original Will is and make sure it is kept safe. If you can’t find the Will, contact the deceased person’s lawyers or other professional advisors. Lawyers often have a way of sending a request on your behalf to all of the other estate planning lawyers in the local area.
  6. Determine whether probate is necessary or in the best interest of the estate. This should be done with the advice of an attorney. Never assume it is best to avoid probate. As an example, if there are possible creditor issues, it may be better to have a probate to figure out exactly what creditor claims are valid and should be paid.
  7. Locate financial documents, such as annuities, insurance policies, IRAs, retirement accounts and other types of funds that may not be physically located where the person resided. Usually, you can contact employers and banks to determine if they have accounts for the deceased person.
  8. Protect against family disputes by preserving property, and making sure that one family member doesn’t start throwing things away. That could cause other family members to get angry and suspicious. See item number 2 above about taking an inventory of all the personal property.
  9. Obtain an estimate from your attorney as to the costs of administering the estate. Ask for a list of things that need to be done and what you can expect in terms of cost. Get a written agreement with the attorney in relation to administering the estate, and make sure the attorney understands that he or she is to notify you if there is going to be any change from the estimate.

To summarize, the key things to do are (a) to properly document what personal property exists (preferably by making a video of all the property), (b) contact a lawyer and find out what needs to be done, and (c) locate financial documents and the Will.

This short blog post is not intended as a substitute for actually talking to a probate attorney. If you have experienced a death in your family, please contact us. We are one of the most experienced law firms locally in terms of administering probate estates, and our staff is committed to providing efficient and caring service.

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How to Admit Parent to Locked Memory Unit

Older man with dementia; needs to be admitted to memory unit

If your loved one has dementia or Alzheimer’s Disease, you may need to consider admitting him or her to a locked memory unit. There are very nice, caring places available. But you can’t just drive your loved on with dementia or Alzheimer’s to the facility and drop them off. Why? Because one of the issues is that dementia and Alzheimer’s patients tend to wander. They can also be violent or suffer from hallucinations. That’s when the patient requires powerful psychotropic medications. And placing a person in a locked memory unit and authorizing certain psychotropic medications requires special authorization. How do you get this authorization? How can you admit your parent to a locked memory unit?

The statistics.

The number of cases of dementia and Alzheimers Disease is on the rise in Arizona. In 2015, there are 120,000 Arizonans age 65 and older who have Alzheimer’s disease, according to a Arizona Alzheimer’s Task Force report. This number is expected to increase to 200,000 by 2025, representing the second highest projected growth rate in our nation.

What is a Locked Memory Unit?

In Arizona, if you see a care facility that says it has a “Memory Unit”, that refers to a Behavioral Health Inpatient Facility. According to R9-10-101 (24), of the Arizona Administrative Code:

“Behavioral health inpatient facility” means a health care institution that provides continuous treatment to an individual experiencing a behavioral health issue that causes the individual to:
a. Have a limited or reduced ability to meet the individual’s basic physical needs;
b. Suffer harm that significantly impairs the individual’s judgment, reason, behavior, or capacity to recognize reality;
c. Be a danger to self;
d. Be a danger to others;
e. Be persistently or acutely disabled as defined in A.R.S. § 36-501; or
f. Be gravely disabled.

How to get the authorization to admit your loved one to a locked memory unit.

As you can probably imagine, you can’t just take anyone to a memory care facility and have them admitted against their will. It is possible to admit a person for a 72-hour hold at a Locked Memory Unit. That is intended to be sufficient time to get the person evaluated and figure out if additional help is needed. But, if you don’t do anything further, after the 72 hours is up, the person can be released. (For some older people who obviously cannot take care of themselves, a memory unit may continue to hold the person even though this is technically not permitted.)

During this 72 hour window, you should get the person evaluated by a psychiatrist or psychologist. There is a special report that needs to be filled out. If the doctor says that the person needs inpatient treatment, then you can file a Petition to get appointed as the person’s guardian with mental health powers. The “mental health powers” are additional powers over and above just being able to dictate where the person lives. They authorize the placement in at Locked Memory Unit and also the prescription of psychotropic medications.

Next steps.

If you have a loved one who you believe needs to be placed in a Locked Memory Unit, you should contact an attorney. This article did not cover the court procedures that are involved. It is complicated. For starters, there will be a court appointed attorney who will represent your loved one, and may fight the granting of mental health powers. Also, a Court Investigator will be looking into the situation. Unless you have someone guiding the process, it’s possible that the mental health powers will get denied, and you won’t be able to admit your loved one to a Locked Memory Unit.

This articles was not intended as legal advice. If you need help, contact us. We will have you sign a fee agreement and represent you through the court process.

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How to Transfer Your Car to Your Trust

vintage car driving fast through desert

If you live in Arizona and own a vehicle, there’s now a convenient way to transfer your car to your trust. Previously, you had two bad choices. You could have kept the car outside the trust, and then let the family fight over how to transfer it. Sometimes you would have to open a probate. OR, you could put the car in your trust and be forced to deal with an MVD bureaucracy that was not intended to handle trusts.

Where to find the form

A.R.S. §28-2055 creates a method of transferring vehicle titles upon death. This is similar to deeds for real property and pay on death / transfer on death titling for personal property. As a result, the Arizona Department of Transportation created a Beneficiary Designation form (for vehicle title transfer upon death). This form allows a vehicle owner to transfer a vehicle on his or her death by designating one or more beneficiaries.

Filling Out the Beneficiary Designation Form To Transfer Your Vehicle To Your Trust

First: Enter the Vehicle Identification Number and the year and make of your vehicle. This information should be on the vehicle’s title.

Second: Determine what person(s) the vehicle should be transferred to upon death. Write each person’s full legal name under ‘Beneficiary Full Legal Name’. If you know the person’s date of birth you should enter it. This will help eliminate any potential confusion. If you want to leave the vehicle to only one person, leave the ‘Legal Status’ box blank. If you are leaving the vehicle to two or more people, you will need to decide how you want the beneficiaries to own your vehicle. Here are the options:

  • Name your trust: If you have a trust, talk to your estate planning attorney about whether to transfer the vehicle to your trust. This would make sense if, for example, the vehicle has significant value (such as more than a few thousand dollars), or there is a chance that the beneficiaries will be minors.
  • Joint Tenants: Each person has full authority to transfer ownership of the vehicle or take out a loan on the vehicle. The names on the title will read: Bob Smith or Mary Green. If this is what you want, write OR in the ‘Legal Status’ box next to each beneficiary’s name. (NOTE: If you want to ensure that one owner doesn’t just take and sell the car, this is probably not the best solution.)
  • Tenancy in Common: The signatures of each party will be required to transfer ownership of the vehicle or take out a loan on the vehicle. If one party dies, the deceased party’s interest must be handled with their estate. The names on the title will read: Bill Henry and Mary Green. If this is what you want, write AND in the ‘Legal Status’ box next to each beneficiary’s name. (NOTE: This should rarely be used because it puts the two owners in the position of having to make joint decisions about everything. What happens if the two new owners don’t get along? That could be a nightmare.)
  • Joint Tenants with Right of Survivorship: The signatures of each party will be required to transfer ownership of the vehicle or take out a loan on the vehicle. If one party dies, upon proof of death, the surviving party may sign alone. The names on the title will read: Bob Smith and/or Mary Green. If this is what you want, write AND/OR in the ‘Legal Status’ box next to each beneficiary’s name. (NOTE: This is slightly better than the previous two methods. But one owner could still either refuse to cooperate.)

Third: Once you have finished filling in this information, stop: do not sign the form. Take the form with your title to your local MVD office. You must sign the form in front of the MVD agent and have the MVD agent notarize your signature. (You can alternatively sign in front of a regular notary.) Give the completed form and your title to the MVD agent along with the $4 fee. The MVD agent will give you a new title with the beneficiary information on it. Your vehicle will now be transferred, probate-free, to the person(s) you named upon death.

If you couldn’t tell, my preference would be to either name one person to inherit the car, or name your trust. If your vehicle has any significant value, I’d suggest naming the trust. However, I’m not giving legal advice here. I don’t know your particular situation. If you want legal advice, please make an appointment by calling 602-443-4888, or contacting us here.

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Partition When Family Owns a House Together

Cartoon of two men fighting over a house. Partition would be appropriate.

If you and your siblings end up owning a house together, what can you do? You probably don’t want to move in together. And in all likelihood, your brother or sister moved into the house and refuses to move out. What are your rights? The basic remedy is Partition (which means to either divide the property or to force the sale). There are other remedies available, such as getting a court award of back rent and possible attorney fees. Keep reading to learn more …

Partition.

The concept of partition dates to when most people were farmers and it was more common to inherit large tracts of farm land. In that case, if three kids inherited the farm land, they could get the court to divide the land in equal thirds so they could each get a chunk of their own land. Nowadays, with most people living in the city, it’s more common to inherit a house or other property that is not so easily divided. In such a case, what makes more sense is not to divide the property, but to sell it and divide the proceeds. This is called a Partition by Sale.

Partition by Sale.

In Arizona, a claim of Partition by Sale is grounded on A.R.S. § 12-1211, et seq. “[T]he fundamental objective in a partition action is to divide the property so as to be fair and equitable and confer no unfair advantage on any cotenant.” 59A Am. Jur. 2d Partition § 6. The court starts with the presumption that the parties own equal shares in the Property. See id. § 114. The burden of paying the necessary expenses of jointly owned property is the responsibility of all cotenants (unless one party has been excluded from having an equal right to possession). See id. § 154; see also 20 Am. Jur. 2d Cotenancy & Joint Ownership § 63 (2009).

Each joint owner has a separate interest in jointly held property. See In re Marriage of Berger, 140 Ariz. 156, 165, 680 P.2d 1217, 1226 (App. 1983). When the property cannot be physically divided, partition by sale is more equitable than division in kind of the property.

Rent.

Another question that can arise is whether a co-owner who had prior use of the property owes rent to the other co-owners. Here’s the rule.

Ouster.

“A tenant in common who does not have actual possession of the property may compel a cotenant in possession to account for rents and profits received from tenants on the premises.” See 59A Am. Jur. 2d Partition § 153. See also 20 Am. Jur. 2d Cotenancy & Joint Ownership §§ 63, (same), 66 (cotenant with exclusive possession does not have right to contribution). See also Cox v. Cox, 138 Idaho 881, 886, 71 P.3d 1028, 1033, (Idaho June 3, 2003), which stated:

Though a settled issue in many states, no Idaho court has decided the issue of whether an ousted co-tenant is entitled to a proportion of the fair rental value of common property. The majority rule is that when one co-tenant excludes another co-tenant from use and possession of common property, the excluding co-tenant is liable for the value of their exclusive use of the property, including rent. Sack v. Tomlin, 110 Nev. 204, 871 P.2d 298, 306 (Nev. 1994); Palmer v. Protrka, 257 Or. 23, 476 P.2d 185, 190 (Or. 1970) (when difficulties in personal relationships between co-tenants make co-occupancy impossible, the excluded co-tenant is entitled to the rental value of their interest in the property); Ireland v. Flanagan, 51 Or. App. 837, 627 P.2d 496, 500 (Or. App. 1981); Maxfield v. Maxfield, 47 Wn. App. 699, 737 P.2d 671, 676 (Wash. Ct. App. 1987) Cummings v. Anderson, 94 Wn.2d 135, 614 P.2d 1283, 1289 (Wash. 1980) (where property is not adaptable to double occupancy, the mere occupation by one co-tenant may operate to exclude the other). This Court adopts this position.

(Emphasis added.)

In Northcutt v. McPherson, 81 N.M. 743, 745, 473 P.2d 357, 359 (1970), the court stated that “[t]o constitute ouster there must be some express, open and unequivocal denial of the right to possession of the cotenant . . . .” (Cited by Morga v. Friedlander, 140 Ariz. 206, 208, 680 P.2d 1267, 1269, (Ariz. Ct. App. Apr. 19, 1984).)

The court in Young v. Young, 37 Md.App. 211, 376 A.2d 1151 (1977), stated it slightly different: “Ouster has been defined as a notorious and unequivocal act by which one co-tenant deprives another of the right to the common and equal possession and enjoyment of the property.” (Also cited by Morga v. Friedlander, 140 Ariz. 206, 208, 680 P.2d 1267, 1269, (Ariz. Ct. App. Apr. 19, 1984).)

However, you may be able to establish an “ouster” even without a clear “express, open and unequivocal denial of the right to possession of the cotenant.” For example, the court in Morga found that an ouster had occurred based on the possessing co-tenant claiming “more than his due as a co-tenant.” Morga, 140 Ariz. 206, 208-209, 680 P.2d 1267, 1269-1270, 1984 Ariz. App. LEXIS 414. The Morga court based this on three facts that showed the possessing co-tenant “claimed more than his due as a co-tenant.” Morga, 140 Ariz. 206, 208-209, 680 P.2d 1267, 1269-1270, 1984 Ariz. App. LEXIS 414. First, that the possessing co-tenant “interfered with [the non-possessing tenant’s] right of entry.” Specifically, the possession co-tenant changed the locks with the intent of excluding the non-possessing tenant. Second, the possessing co-tenant removed the non-possessing tenant’s name from the office glass front. Third, the possessing co-tenant interfered with the non-possessing tenant’s right to sublease the common property to the extent of his interest.

In my personal experience, a court may find that an ouster occurred (and that rent is due to the non-possessing owner) if the person in possession (a) changed the locks and/or alarm code, and (b) there is some evidence that the possessing co-owner intended to exclude the non-possessing owner.

In plain English.

In other words, if you and your siblings inherit property, and your brother or sister moves into the house and doesn’t let you have equal use to the property, the sibling living in the house can be liable for rent for the time that he/she had use of the house.

Contribution.

The general rule is that the burden of paying the necessary expense of jointly owned property is the responsibility of all co-tenants. See 59A Am.Jur.2d Partition § 154 (2009); see also 20 Am.Jur.2d Cotenancy & Joint Ownership § 63 (2009. When one co-owner pays for an obligation owed equally by the other co-owner, he is entitled to recover from the other for his respective share. Brown v. Brown, 58 Ariz. 333, 336, 119 P.2d 938, 939 (1941); see also 59A Am.Jur.2d Partition § 154 (2009) (“When one cotenant pays more than his or her share, equity imposes on each cotenant the duty to contribute a proportionate share.”)

However, there is an exception to that general rule. A co-tenant’s right of contribution does not exist when the cotenant had exclusive possession and enjoyment of the property. See 20 Am. Jur. 2d Cotenancy & Joint Ownership § 66; see also In re Marriage of Maxfield, 47 Wn. App. 699, 737 P.2d 671, 676 (Wash. App. 1987). The right to compensation for improvements made on jointly owned property without the consent of the cotenants may be awarded when the improvements: “(1) are made in good faith; (2) are of necessary and substantial nature; (3) materially enhance the value of the property; and (4) are such that circumstances show it would be equitable to do so.” 20 Am. Jur. 2d Cotenancy & Joint Ownership § 69; see also 59A Am. Jur. 2d Partition § 171 (courts may award a cotenant who makes improvements the resulting increase in value of the property, but not the cost of improvements).

In plain English.

If you and your siblings inherit property, and you move into the house and don’t let the siblings have equal use to the property, but you spend a bunch of money fixing the place up, you can’t expect your siblings to chip in to pay for the improvements.

Reimbursement for Improvements to the Property.

Generally, a co-tenant improving joint tenancy property with separate funds is entitled to reimbursement upon partition of the property. In re Marriage of Berger, 140 Ariz. 156, 161, 680 P.2d 1217, 1222; see also 59 Am.Jur.2d Partition § 171. The measure of the right to reimbursement for improvements is the resulting increase in value to the property, and not the actual costs of the improvements. Berger, 140 Ariz. at 163, 680 P.2d at 1224; Lawson v. Ridgeway, 72 Ariz. 253, 262, 233 P.2d 459,465 (1951).

The right to compensation for improvements made on jointly owned property without the consent of the cotenants may be awarded when the improvements: “(1) are made in good faith; (2) are of necessary and substantial nature; (3) materially enhance the value of the property; and (4) are such that circumstances show it would be equitable to do so.” 20 Am.Jur.2d Cotenancy & Joint Ownership § 69; see also 59A Am.Jur.2d Partition § 171 (courts may award a cotenant who makes improvements the resulting increase in value of the property, but not the cost of improvements).

Attorney Fees and Costs.

The common fund doctrine provides that a person who employs “attorneys for the preservation of a common fund may be entitled to have their attorney’s fees paid out of that fund.” LaBombard v. Samaritan Health Sys., 195 Ariz. 543, 548, ¶ 22, 991 P.2d 246, 251 (App. 1998).  The doctrine (1) ensures fairness to the successful litigant, whose recovery may be consumed by the expenses of litigation; (2) prevents the unjust enrichment of others who benefit in the fund and should share the burden of recovery; and (3) encourages the attorney to diligently litigate a claim by ensuring payment of his or her fees. Id. at 549, ¶ 22, 991 P.2d at 252. Because the common fund doctrine is a rule of equity, however, it will not be applied if a statute precludes apportionment of attorneys’ fees. Id. (Cited in State ex rel. Raber v. Wang, 230 Ariz. 476, 477-478, 286 P.3d 1085, 1086-1087 (Ariz. Ct. App. Sept. 6, 2012).

In plain English.

If the situation would not get resolved without your taking the initiative to hire a lawyer, at least some of the legal fees can be paid off the top so you aren’t stuck paying them out of your share.

Conclusion.

This has been a very brief introduction to the subject of partition. Don’t rely on this article as legal advice. If you have a question, give us a call at 602-443-4888 or contact us here. We have handled numerous Partition by Sale cases, and have a consistently favorable track record.

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Avoid Disaster With Your Single-Member LLC

Pad lock and chain securing handles to Single-Member LLC business

Do you own a single-member LLC? If so, your business can become paralyzed if you become incapacitated or die. Even a short paralysis may cause a business to collapse. Avoid this problem by doing the following:

  1. organizing single-member LLCs as manager-managed,
  2. drafting an operating agreement that both appoints a successor manager in the event of the manager’s incapacitation or death,
  3. either having the membership interest owned by a trust, or including a “transfer on death” registration for the membership interest in the operating agreement.

Why a Single-Member LLC Should Be Manager Managed?

Essentially, there are only two choices for management of an Arizona LLC: member managed or manager managed. A.R.S. 29-681. When an LLC has a single member who is active in the business, it may seem unnecessary to designate that member as the manager. After all, a member of a member-managed LLC has all of the powers of a member and all of the powers of a manager. A member of a member-managed LLC, however, cannot easily delegate management authority to a third party when the member is incapacitated, is disabled or dies. Further, on the member’s death, the management authority may suddenly be split between multiple heirs. In a manager-managed LLC, the operating agreement provides the needed flexibility and continuity of business operations to keep the business running.

Example:

Assume a 50-year-old married man who has two children is the sole owner and member of a member-managed LLC that owns and operates a profitable business. If the owner becomes incapacitated or dies, there may be initial uncertainty as to who has the authority to operate the business. Even if the spouse or children are best suited to run the business, they may not have the authority to do so. If a trusted employee is best suited to run the business, he or she also may not have the authority to do so. Leaving this issue to be sorted out by the member’s conservator, trustee, or personal representative will take time and will likely result in unnecessary business interruption and conflict. But, if the LLC was manager-managed, the member could have appointed a successor manager and eliminated the uncertainty, delay, and, hopefully, conflict regarding who will run the business.

Why Have an LLC?

A sole proprietor can form either an LLC or a “S” corporation and receive many of the same benefits discussed in this article—namely business continuity and transfer on death registration. An LLC provides more flexibility, however, for the varying situations that a business owner may encounter. Through a carefully constructed operating agreement, the owner of an LLC can designate or appoint a successor manager to act when the owner becomes disabled, incapacitated, or dies. An officer of a corporation, on the other hand, is appointed by the Board of Directors, A.R.S. 10-3840, and the (likely) sole director is elected by the sole shareholder. When the sole shareholder is also the sole director and sole officer, the business may be stuck without anyone who has clear authority to run the business or take other necessary actions to keep the business afloat upon that shareholder’s disability or incapacity. In addition, the flexibility of the LLC operating agreement presents a preferable opportunity to give a successor manager limited, but specific, powers to deal with the real-life duties of the business owner.

The Single-Member LLC Operating Agreement.

Appointment of the Successor Manager.

Arizona’s Limited Liability Company Act states that a manager shall be designated or elected and may be removed or replaced in the manner provided in an operating agreement. A.R.S. 29-681. This seems to imply that the operating agreement can designate or appoint the successor manager by including a provision similar to the following:

MANAGEMENT. The Manager shall manage the business and affairs of the Company. The Member shall serve as the Manager. The Manager shall serve as Manager until the Manager is terminated, resigns, becomes incapacitated, or dies, at which time the successor manager, if any, becomes Manager. The Member may, by vote, remove any Manager without cause and elect a successor manager. The Member may appoint a successor manager and may at any time revoke an appointment and appoint a different successor manager or no successor manager. The Member hereby appoints _____________ as successor Manager.

Transfer on Death Registration.

As with any security, a membership interest in an LLC can be registered as transfer on death. See A.R.S. 44-1801 (26) and 29-732. Transfer on death registration can simplify this succession by eliminating: (1) any guesswork about who is the holder of the deceased member’s interest; and (2) the need to probate the member’s interest in the LLC. A.R.S. 14-6307. Of course, care should be taken to ensure such registration fits in with the member’s overall estate plan. The following provision can be added to the operating agreement:

REGISTRATION OF MEMBERSHIP. The registration of the membership of the Member, [Name of member], shall be as follows:

[Name of member], transfer on death to ______________.

Practical Guidance for Who Should be Successor Manager.

There are three important points to consider when counseling the owner as to whom to appoint as successor manager.

Choose Someone Who Knows How to Run a Business.

The owner obviously will want to leave the business in the hands of someone who can actually run it. As a practical matter, the successor manager must be someone who knows the business, knows what must be done, at a minimum, to keep the business running on a day-to-day level, and must be someone the owner trusts. When the successor manager is in charge, by design, the owner is probably unable to provide any effective oversight or guidance for the successor manager or the business. In addition, many people may be perfectly suited to run the business for a short time in normal circumstances but may not be good successor managers. For instance, a spouse may be too distraught upon the incapacity of the owner to be an effective manager.

Spell Out the Successor Manager’s Role.

It is important that both the owner and the successor manager understand, in a general sense, what an LLC manager does and does not do. The manager, unless otherwise provided in the operating agreement, has the sole right of management and conduct over the LLC business. A.R.S. 29-654. Except as provided below or in the operating agreement, the manager exclusively decides all matters relating to the business of the LLC. Some pertinent exceptions to the manager’s authority provide that, except as provided in the operating agreement, the members have the right to amend the articles of organization or the operating agreement, to dissolve the LLC, to make interim distributions, to admit a new member, to dispose of all or substantially all of the LLC assets, to merge or convert the LLC, to incur debt outside the ordinary course of business, to approve conflicts of interest, or to change the nature of the LLC business. If left to the defaults in the LLC statutes, then, the successor manager essentially has the right to run the business on a day-to-day basis in the ordinary way in which it has been run in the past. The operating agreement, however, may (and perhaps should) provide for a very different sort of management structure by both augmenting and limiting the successor manager’s authority to better suit the situation (as explained more fully below).

Hold Successor Manager to High Standard.

Just as the client does not want to set the LLC up for failure, the owner does not want to set up the successor manager for failure (or liability) either. The best practice would be for the operating agreement should specifically set forth duties of loyalty, fairness, good faith and fair dealing. However, an unreported Arizona Court of Appeals case from 2008 suggests that Arizona courts may imply such duties where the operating agreement is silent.  While the incapacitated owner would probably assert a cause of action against a successor manager only for intentionally wrongful conduct, the heirs of the owner may well try to recoup damages for a business venture that loses value while in the hands of the successor manager. To alleviate concerns that the successor manager may have, the operating agreement should fully indemnify the successor manager to the extent allowed, and the successor manager should be carefully selected for the job. The successor manager should also be informed as to who the owner’s heirs are and, if applicable, their personality “quirks.”

Of course, this arrangement will work only if the person appointed as successor manager knows that he or she has been appointed the successor manager and actually agrees to be the successor manager! Make sure that the owner has talked with this person and communicated both what the job entails and the triggers for when the job “begins.”

Ultimately, the owner of the business will know who best fits the qualifications for acting as successor manager. The practitioner’s job is to make sure they understand what those qualifications are.

Not all Managers are Created Equal.

The operating agreement can specify exactly what powers a successor manger possesses. A single-member operating agreement should take advantage of this flexibility by delineating different powers for a manager who is a member and a successor, non-member manager. As explained above, even though by default the manager manages the day-to-day operations of the business and the members retain control for major decisions, these defaults can be modified by the operating agreement.

In the first instance, the owner as manager will always have complete power over the business, and the operating agreement can (but need not2) make this explicit. In contrast, the powers of the successor manager should be explicit. Particularly if the operating agreement grants the owner-manager unfettered authority over the business of the LLC, the operating agreement should limit the successor manager’s powers, perhaps to the statutory defaults of a manager. Those powers should then be explicitly augmented. Some augmentations that may be warranted include the power to allow (or require) the successor manager to make distributions for particular circumstances, such as to pay the owner’s recurring debts; to liquidate or sell the business if the owner has significant expenses for longer term, ongoing care; or to incur debt or engage in other activities that are outside the ordinary course of business but may be needed in dire circumstances.

Here’s an Example:

Imagine an 85-year old woman who has four children is the sole owner and manager of a manager-managed LLC that owns an apartment building. She has appointed her oldest son as successor manager and her youngest daughter as next successor manager (her other two children live outside the area). All four children are her heirs. The operating agreement grants her the full power to conduct the business of the LLC, inside or outside of the ordinary course. The owner has started to show signs of dementia, and she has saved funds to stay in a long-term care facility. The operating agreement could provide that the successor manager takes over when the owner-manager is incapacitated, disabled, or dies. The operating agreement can also provide that, if the owner-manager is incapacitated and living in a long-term care facility, the successor manager will make regular distributions of a certain amount and interim distributions to pay for the costs of the facility (and other debts) not covered by insurance or savings. The operating agreement can further provide that, upon sudden incapacity or disability requiring acute care, the successor manager is authorized to sell the property as needed to pay for procedures or acute care facilities for treating the owner or to refinance the property’s mortgage. In addition, when the member dies, the successor manager has the clear authority to collect rents, execute leases, terminate leases, pay the mortgage and the like.

Two Warnings.

First, the use of a successor manager may not work or may require special treatment in the case of a business with a specialized license. For instance, not just anyone can become the successor manager and run a construction business, law firm, medical practice, or real estate brokerage, unless they have the appropriate license.

Second, in most cases, the owner of a single-member LLC will guarantee some of the debts and obligations of the LLC, such as long-term loans or lines of credit. A likely possibility is that those guarantees or original documents will default when the owner dies or becomes incapacitated. In this situation, a successor manager will not only face the difficulty of caring for the owner and trying to run the business, but may also be trying to deal with creditors (most likely secured with the assets of the business) who are legitimately concerned with the continued viability of the business as a going concern.

Conclusion.

While a manager-managed LLC may not be a panacea for ensuring that a business owned by a single individual survives the disability, incapacity, or death of that owner, it provides sufficient flexibility to give a business a good chance to continue. The flexibility provided by the LLC statutes can and should be utilized to provide for the client and the client’s business when such disasters strike.

Please contact Magellan Law with any questions about this article, or any other issues relating to business organizations.

This article provides general information. You should not construe this article as legal advice or a legal opinion on any specific facts or circumstances. If you have specific legal questions, consult with counsel concerning your own situation.