Scope: This article explains, under Hawaii law, how a member’s will interacts with an LLC operating agreement when the member tries to give their LLC interest to their child. It uses hypothetical facts to illustrate typical outcomes. This is educational information only and not legal advice. For help with a specific situation, consult a licensed Hawaii attorney.
Detailed Answer
Basic rule under Hawaii law (general principle)
Hawaii’s limited liability company law places primary control over member rights and transfers in the LLC’s operating agreement. In general, a member can dispose of their economic interest by will, but the will cannot unilaterally change provisions in the operating agreement that govern membership, management, or restricted transfers. Put simply: your will can usually pass the value of your ownership (your right to distributions), but it often cannot force the LLC or other members to accept the heir as a full member or manager if the operating agreement says otherwise.
Where to look in the law
Hawaii’s LLC statutes (the rules that address membership, transferable interests, and enforcement of operating agreements) are in the Hawaii Revised Statutes chapter governing limited liability companies. These statutes authorize parties to structure transfer rules and to have an operating agreement control internal affairs. See Hawaii Revised Statutes, chapter on limited liability companies: https://www.capitol.hawaii.gov/hrscurrent/Vol6_Ch0321-0344/HRS0428/.
Typical legal effects in a simple hypothetical
Hypothetical facts: Alice is the sole member of an LLC that is manager-managed. Her operating agreement contains a clause that on a member’s death, the company or the surviving members have a right to buy the deceased member’s interest, and a provision that a transferee of a membership interest does not become a member unless the managers approve.
- If Alice leaves a will giving “my LLC interest” to her son, Ben, the will generally transfers Alice’s transferable interest as part of her probate estate. Ben will likely inherit Alice’s economic rights (the right to distributions and to receive any buyout proceeds) subject to the operating agreement.
- Under the operating agreement’s transfer and approval rules, Ben may not automatically become a member with voting or management rights. The managers or remaining members can enforce the operating agreement and refuse to admit Ben as a member unless the agreement gives different rules.
- If the operating agreement includes a buyout or redemption on death, the company can follow that process: value the interest and pay the estate or Ben rather than admitting him as a member.
Why a will can’t always “override” the operating agreement
An operating agreement is a contract among members. It frequently contains restrictions such as rights of first refusal, approval requirements for new members, buy-sell or redemption clauses, and valuation rules. Because those provisions are contractual, they generally control over a unilateral provision in a will. Courts typically enforce the operating agreement’s transfer restrictions rather than allow a will to defeat them.
What if the operating agreement is silent
If the operating agreement has no death or transfer rules, Hawaii’s LLC statutes and default rules apply. Under typical LLC default rules (similar to the Uniform Act), a member’s transferable interest is personal property that can pass by will, but the transferee may only obtain membership rights if the other members consent or statutory conditions are met. That means an heir often receives the economic interest but not governance rights unless the company’s rules or members agree otherwise.
Practical consequences to expect
- The heir may have a claim to distributions owed to the decedent and to any buyout proceeds, but may not be allowed to vote or participate in management.
- The estate’s executor will likely need to notify the LLC, present the will and probate documents, and work through any buyout or admission procedures in the operating agreement.
- If the LLC or other members fail to follow the operating agreement, the estate (or the heir) may have a contract claim in probate or civil court.
Typical steps to handle this situation
- Find and read the LLC’s operating agreement. Look for death, transfer, buyout, admission, valuation, right-of-first-refusal, and notice provisions.
- Review the will and probate process. The executor must follow probate formalities for transfer of the decedent’s property, including transferable interests.
- Notify the LLC promptly and provide required probate documents. Follow the operating agreement’s procedure for giving notice and proving authority.
- If a buyout applies, obtain valuation information and follow the payment schedule set by the agreement.
- If the heir wants membership or management rights but the operating agreement requires approval, negotiate with the managers or members for consent or an amendment.
When a will might succeed in transferring membership
A will can effectively transfer full membership rights if the operating agreement expressly allows automatic transfer on death, admits transferees as members, or contains language that the member’s interest passes to heirs without needing approval. If the operating agreement is drafted to defer to testamentary dispositions, the will will control. Otherwise, the operating agreement typically governs the process.
Disputes and remedies
If the operating agreement is ambiguous, or if members or managers refuse to follow the contract or the statutes, the estate or heir can bring a civil claim for breach of contract or seek court guidance in probate. Litigation can be costly. Often the practical route is negotiation or mediation to reach a buyout or membership settlement.
Example checklist for an executor or heir in Hawaii
- Locate the original operating agreement and any amendments.
- Obtain a certified copy of the death certificate and letters testamentary (probate documents).
- Deliver notice to the LLC per the operating agreement or state law.
- Request written confirmation from the company about whether the heir will be admitted or whether a buyout applies.
- If a price or valuation is needed, follow the valuation method in the operating agreement; if none, consider hiring a business valuator.
- Keep records of all communications and payments.
Key statute reference
For the statutory framework that governs how LLCs operate and how member rights may be transferred or controlled by an operating agreement, see Hawaii’s limited liability company statutes: HRS Chapter 428 — Limited Liability Companies. Review the sections that concern member rights, transferability of interests, and the enforceability of operating agreements.
Helpful Hints
- Always read the operating agreement first. It usually answers the question directly.
- If you are creating an estate plan and you own an LLC interest, coordinate the will with the operating agreement or amend the operating agreement so the transfer you want will be effective on your death.
- Consider a buy-sell or redemption provision written into the operating agreement to avoid probate disputes and provide liquidity for heirs.
- Label carefully what you are transferring in the will—economic interest vs. membership/management rights—so there’s no ambiguity.
- If you want your heir to manage the business, include explicit admission language in the operating agreement or arrange for member approval in advance.
- Get a Hawaii attorney experienced in estates and business (LLCs) to draft or review documents to avoid unintended consequences and probate litigation.
Disclaimer
This article provides general information about Hawaii law and common practice. It is not legal advice and does not create an attorney-client relationship. For guidance tailored to your situation, consult a licensed attorney in Hawaii.