Most people are aware that investment accounts and bank accounts can be registered with a beneficiary designation.  These designations are referred to as TOD/POD (transfer/payable on death).  They were made possible when Connecticut adopted the Uniform Transfer on Death Securities Registration Act (the “Act”) in 1997.  What is not generally known is that the Act can apply to membership interests and stock in closely held LLCs and corporations. 

The Act allows the issuer of a security to register an account in the beneficiary form.  The beneficiary form will permit an account owner to designate a beneficiary to automatically receive the account assets at the owner’s death without probate proceedings.  Prior to death, control and ownership of the account remains with the account owner who can cancel or modify the beneficiary designation without the beneficiary’s consent or knowledge.  If the account has multiple owners, the TOD/POD designation will transfer ownership only upon the death of the last owner.  Assets registered in the TOD/POD form, like other assets owned by a decedent, will receive a step up (or step down) in tax cost basis equal to fair market value at the owner’s death.  Although the beneficiary will get immediate access to the assets, the beneficiary will be liable for claims, administration expenses and taxes of the owner’s estate which remain unpaid if the probate assets are insufficient.  However, the liability is limited to the value of the assets received.   

The Act broadly defines “security” and “issuer of a security” to include membership interests in a limited liability company and shares of stock in a closely held corporation.  Accordingly, membership interests and share certificates can be registered in the TOD/POD form, provided the governing documents (operating agreement and by-laws) of the issuer authorize registration of their securities in the TOD/POD form.  Although not required by the Act, companies should consider amending their governing documents (operating agreement and by-laws) to authorize registration of their securities in the TOD/POD form.  One of the benefits of the TOD/POD designation is that unlike shares or membership interests transferred to a revocable trust, there is no need for lender’s consent as there has not been a change of ownership.  Only a designation of beneficiary is required. 

A word of caution: TOD and POD designations will override provisions in a Will or revocable trust.  Therefore, periodic and careful monitoring of the beneficiary designations is critical to ensure that the beneficiary designations are consistent with the estate plan.  To prevent an unintended result, consider designating a revocable trust as the beneficiary.  This will allow provisions of the trust to govern the ultimate disposition of the stock or membership interest when circumstances change.  If there is no revocable trust, consider adding a contingent or secondary beneficiary designation.  For more information, please contact William J. Britt or another BW attorney.