Who Gets Your LLC When You Die? Alabama's New Rule for Operating Agreements

If you own an Alabama business through an LLC, the question of what happens to it when you die has, until recently, had one default answer: your share of the company goes through probate. Not the company itself, and not its bank account or its trucks. Your interest in it, the thing that entitles you to the profits, becomes an asset of your estate and waits there with everything else.

A change in Alabama's LLC law that took effect on August 1, 2025 gives owners a second option. The operating agreement itself can now say who takes that interest at death, and the transfer happens under the agreement rather than under a will. This guide explains what the rule does, what it leaves alone, and how it fits with the rest of an estate plan.

What happened before, and what still happens if your agreement is silent

Under the Alabama Limited Liability Company Law, a member who dies is "dissociated" from the company. The management rights end. The economic rights, which the statute calls the transferable interest, survive and pass to the deceased member's personal representative, who holds them for the estate. If there is a will, the interest passes under it. If there is not, it passes by intestacy. Either way it is a probate asset.

That default is still the law for any operating agreement that does not say otherwise, and most agreements written before August 2025 do not.

The cost of the default is mostly time and friction. The remaining members deal with a personal representative rather than a successor owner. The heirs wait on the estate. In one Alabama Supreme Court case, the majority owner of a steel-erection company died in 2009, the minority member ran the company as if it were hers, and the court was still sorting out what his estate was owed in 2017. That case was decided under the older LLC statute, but the default it illustrates carried forward: without a plan, the interest goes through the estate and the estate has to be administered well for anyone to be paid.

What the new rule says

Act 2025-281, which the Legislature passed as House Bill 200 and which Representative Cynthia Almond of Tuscaloosa sponsored, added a new subsection (g) to Ala. Code 10A-5A-5.02. Its operative sentence:

Notwithstanding anything in Title 43 to the contrary, a limited liability company agreement may provide that a transferable interest may or shall be transferred in whole or in part, with or without consideration, to one or more persons at the death of the holder of the transferable interest.

Title 43 is Alabama's probate code, the body of law that governs wills and estates. The point of the opening phrase is that an operating agreement provision naming a taker at death is valid even though it is not a will and was not signed like one. The interest passes under the contract, so it does not pass through the estate.

The same words were added to the partnership statute and the limited partnership statute in the same act, so a general partnership or limited partnership agreement can do the same thing.

Think of it as a beneficiary designation for your company

Most people already have something like this on a brokerage account or a life insurance policy. You name a beneficiary, and when you die the account goes to that person without a probate court being involved. The new rule lets an operating agreement do the same job for LLC units.

The statute is flexible about the terms. The transfer can be mandatory ("shall") or optional ("may"). It can cover the whole interest or part of it. It can go to one person or several. It can be for a price, or for nothing. So the clause can be written as a straightforward transfer to a spouse or child, as a transfer to the trustee of a living trust, or as part of a buy-sell arrangement where the other members take the interest and pay for it.

Three things the clause does not do

It does not make the taker a member. This is the part owners most often miss. Alabama law draws a firm line between a member, who votes and manages, and a transferee, who receives distributions and nothing else. A person who takes an interest at death under this rule is a transferee. Unless the operating agreement also admits that person as a member, or the existing members vote to admit them, they get the money but not the vote, and no right to look at the books. If the point of the clause is to hand the business to a family member who will run it, the agreement has to say how that person becomes a member.

It does not shed creditors. The statute says so in its own text. An interest transferred at death stays subject to any charging order already in place, and the transfer does not limit what creditors can pursue against the person who receives it. This is a probate-avoidance tool, not an asset-protection device.

It does not replace a living trust. If you have a revocable trust, the ordinary way to keep an LLC interest out of probate is to assign the interest to the trust while you are alive, so the trustee already owns it when you die and can act during incapacity as well. That remains the better approach. The operating agreement clause is a backstop: it catches an interest that was never assigned, or a company formed after the trust was signed, and routes it to the trustee anyway. Both together are stronger than either alone.

What to check in your own operating agreement

When was it signed? An agreement that predates August 2025 is silent on this, because the law did not allow it yet. Silence means the old default.

Does it already have a buy-sell provision? Many multi-member agreements require the company or the surviving members to buy a deceased member's interest. That provision still works and may be what you want. The question is whether it says what happens to the interest between the death and the closing of the purchase, and whether the two clauses agree.

Is the company a professional LLC? Law firms, medical practices, and other professional companies have their own mandatory buyout rules when a member dies, and the same 2025 act rewrote those rules. The general transfer-at-death clause does not override them.

Does your estate plan know about the company? The most common failure in this area is not a bad clause. It is a will, a trust, and an operating agreement that were each written without reading the others. A trust that says one thing and an operating agreement that says another produces the argument the clause was supposed to prevent.

The rule is new, the case law under it does not exist yet, and how a particular company should use it depends on who owns it and what the owner wants to happen. What has changed is that an Alabama business owner now has a way to answer the question inside the document that governs the company, instead of leaving it to a probate court.