If you own a Minnesota LLC, you’ve probably thought about what would happen to your business if something happened to you.
Would your spouse automatically step in?
Would your kids inherit your ownership?
Would your business partners suddenly find themselves in business with your family?
For many small business owners, those questions sit in the back of their mind unanswered. And that uncertainty can create real risk. When discussing these questions with clients, one tool that they consider is the use of a Transfer on Death (TOD) designation inside an LLC operating agreement.
If you're not in Minnesota, before you go too far down this rabbit hole, you need to check the regulations in the state where your LLC is registered to determine if this type of technique is allowed by your state.
What Is a Transfer on Death (TOD) Designation?
Most people are familiar with Transfer on Death designations in the context of:
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Bank accounts
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Brokerage accounts
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Real estate (in some states)
A TOD designation allows an asset to pass directly to a named beneficiary when you die without going through probate.
In the LLC context, the idea is similar. A business owner may want their membership interest to automatically transfer to a specific person upon death. Instead of relying on a will or trust, they want the operating agreement itself to control the transfer.
In theory, it sounds simple.
In practice, it requires careful drafting and coordination with the rest of your estate plan.
Does Minnesota Law Allow TOD for LLC Interests?
Under Minnesota law, a member’s interest in an LLC is generally considered personal property. That interest can be transferred, but the type of transfer matters.
There are two key concepts to understand:
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Economic rights (the right to receive profits and distributions)
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Governance rights (the right to vote and participate in management)
Unless the operating agreement says otherwise, a transferee typically receives only the economic rights, not full membership status.
This is where things get interesting.
A TOD-style provision inside an operating agreement can direct what happens at death, but it must address both economic and governance rights. If it doesn’t, the beneficiary may inherit money rights but not decision-making authority.
That can create tension, especially in multi-member LLCs.
Why Business Owners Consider TOD Provisions
For many owners between 35 and 55, the motivation is straightforward:
They want simplicity.
They don’t want their spouse stuck in probate court.
They don’t want business partners dealing with uncertainty.
They don’t want their kids inheriting a legal mess.
A properly structured transfer provision inside an operating agreement can:
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Clarify who inherits the ownership interest
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Avoid disputes among surviving members
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Reduce the chance of litigation
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Provide continuity for the business
When done right, it creates peace of mind.
But “done right” is the key phrase.
The Risks of a Simple TOD Clause
If you've been trying to DIY your operating agreement or if you've downloaded it from some mail-merging website, this option is often not even included. But I’ve also seen operating agreements downloaded online with a one-line clause that says something like:
“Upon the death of a Member, that Member’s interest shall transfer to [Name].”
That may not accomplish what the owner thinks it does.
Here are a few potential issues:
1. Conflict With the Rest of the Operating Agreement
Many operating agreements include buy-sell provisions. These provisions often give surviving members the right to purchase the deceased member’s interest.
If your TOD clause conflicts with a buy-sell provision, you’ve just created confusion at exactly the worst time, after a death in the family.
2. Unintended Membership
In a multi-member LLC, the surviving members may not want a spouse or adult child stepping into management.
Minnesota law typically requires consent of other members before someone becomes a full member with governance rights. If the agreement doesn’t clearly override that default rule, your TOD beneficiary may end up with only financial rights.
That’s rarely what anyone intended.
3. Tax and Estate Planning Conflicts
Your LLC transfer provisions must align with:
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Your will
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Your revocable trust (if you have one)
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Your overall estate tax planning strategy
Pairing these types of provisions with a trust is the most common structure that I've come across in my practice. But, if your operating agreement says one thing and your trust says another, the documents must be reconciled. Otherwise, your family could face delays, legal fees, and unnecessary stress.
When a TOD-Style Provision Makes Sense
There are situations where a transfer-on-death mechanism can work well.
Single-Member LLC
If you are the sole owner of your LLC and want your spouse to inherit everything seamlessly, a properly drafted provision can simplify the transition.
In this scenario, there are no other members to object. The risk of governance disputes is lower. But even then, coordination with your estate plan is critical.
Family-Owned LLC
In some family businesses, all members agree in advance on how ownership should pass between generations. A clear, detailed succession provision can prevent sibling disputes later.
But the key word here is detailed.
A Better Approach: Integrated Planning
For many business owners, the cleaner solution is not a standalone TOD clause.
Instead, it’s integrating your LLC into a broader estate plan.
That often means:
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Transferring your membership interest to a revocable trust during your lifetime
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Updating your operating agreement to recognize the trust as a permissible owner
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Creating clear buy-sell provisions funded by insurance, if appropriate
This approach allows your successor trustee (not the probate court) to step in immediately upon incapacity or death.
It also keeps everything aligned.
Your business documents.
Your estate plan.
Your long-term goals.
The Real Question Isn’t “Can I Do This?”
Technically, yes, you can draft transfer provisions inside a Minnesota LLC operating agreement.
But the more important question is:
Will it work the way you think it will?
Many small business owners try to solve a complex succession issue with a simple clause. They’re trying to avoid legal fees. They’re trying to keep things easy.
Ironically, that shortcut can create the very court battle they were hoping to avoid.
And the cost of cleaning up a broken succession plan is almost always higher than drafting it correctly in the first place.
What Should Minnesota LLC Owners Do Now?
If you own an LLC in Minnesota, here are three practical steps:
1. Review Your Operating Agreement
Does it clearly state what happens upon a member’s death?
Does it address both economic and governance rights?
If you don’t know the answer, that’s your starting point.
2. Coordinate With Your Estate Plan
Your LLC ownership should not be an afterthought in your will or trust. It’s often one of your most valuable assets.
Make sure all documents speak the same language.
3. Think Beyond Death
Incapacity is often more disruptive than death. Who steps in if you’re alive but unable to manage the business?
A well-drafted plan addresses both.
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Your business is more than an asset. It represents years of work, risk, and commitment.
A transfer-on-death designation inside an LLC operating agreement can be a useful tool, but only when it’s carefully structured and fully coordinated with your estate plan.
The goal isn’t just avoiding probate.
The goal is protecting your family, preserving your business, and making sure that if something happens, everything continues the way you intended.
That’s what real planning looks like.
Do I Need a Business Attorney?
If you need help with these steps, or have some other business legal issues you are confronting, let's schedule a Legal Strategy Session online or by calling my Edina, Minnesota office at (612) 294-6982 or my New York City office at (646) 847-3560. My office will be happy to find a convenient time for us to have a phone call to review the best options and next steps for you and your business.
