Can You Put an LLC in a Revocable Living Trust?
Many business owners assume that having an LLC operating agreement is enough to protect their business in the event of their death. However, without...
10 min read
One of the most overlooked aspects of LLC estate planning is naming a backup manager—a designated individual who can step in and run the business if the owner becomes incapacitated or passes away. Without a backup manager in place, an LLC could face major operational disruptions, including frozen accounts, leadership disputes, and legal battles over who has the authority to manage the company.
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A well-prepared estate plan ensures that business ownership and management transitions seamlessly, without court intervention. This guide explains how to legally appoint a backup manager, structure your LLC documents to support the transition, and prepare your successor to take over when needed.
Why Every LLC Needs a Backup Manager
LLC owners often assume their business will automatically pass to their heirs or business partners. However, without clear legal documentation, state laws or courts may decide who takes over, which can lead to conflicts and delays.
What Happens If an LLC Has No Backup Manager?
When an LLC owner dies or becomes incapacitated without a designated backup manager, the business may face:
- Frozen bank accounts – If the owner is the only authorized signer, employees and vendors may not get paid.
- Leadership uncertainty – Family members, employees, or co-owners may disagree on who should take control.
- Probate delays – Without a clear succession plan, a court may need to appoint a business manager, which can take months.
- Potential business closure – If no one has legal authority to manage operations, clients and vendors may leave, leading to business failure.
Example – How a Lack of a Backup Manager Led to a Business Shutdown After an Owner’s Death
James owned a successful contracting LLC but never formalized a succession plan. When he unexpectedly passed away, his family had no legal authority to access business bank accounts or sign contracts. It took eight months of probate court proceedings before a judge appointed his wife as the business manager. By that time, the company had lost key clients, and employees had moved on, forcing the business to shut down.
Had James designated a backup manager in his LLC operating agreement and estate plan, the transition would have been immediate, and the business could have continued without disruption.
Choosing the Right Backup Manager
Selecting a backup manager is one of the most important decisions an LLC owner can make in estate planning. This individual will step in if the owner is incapacitated or passes away, ensuring the business continues operating smoothly. Choosing the wrong person could lead to financial mismanagement, legal disputes, or the decline of the business.
What to Look for in a Backup Manager
A backup manager should be:
- Capable of running the business – They should understand the company’s operations, finances, and industry.
- Trustworthy and financially responsible – Since they may have access to company accounts and legal documents, they must be dependable.
- Legally eligible – Some state laws restrict who can manage an LLC, so the chosen individual should meet all legal qualifications.
- Aligned with the owner’s vision – The backup manager should be willing and prepared to run the business in line with the owner's goals.
Who Should You Appoint?
LLC owners often choose one of the following as their backup manager:
- A Business Partner – If the LLC has multiple members, one of them may be the best choice for continuity.
- A Trusted Employee – A high-level manager or long-time employee who knows the business well can ensure a smooth leadership transition.
- A Family Member – If the LLC is family-owned, naming a spouse, child, or relative may be appropriate, provided they have the skills to manage operations.
- A Professional Trustee or Executor – In some cases, hiring a business executor or trustee ensures the company is managed professionally until a permanent successor takes over.
Pro Tip – Why Business Owners Should Train Their Backup Manager Before They Need Them
It’s not enough to name a backup manager—they must be trained and prepared for the role. Business owners should:
- Walk their successor through daily operations and financial responsibilities.
- Grant them limited decision-making authority before an emergency occurs, so they gain experience.
- Keep them informed about legal and financial matters that may impact the business transition.
By ensuring the backup manager is ready in advance, the business can continue operating without disruption when the transition happens.
Naming a Backup Manager in Your LLC Operating Agreement
The LLC operating agreement is the most important legal document for ensuring a smooth transition of business management in case of an owner’s death or incapacity. This document legally defines who has authority over the company, preventing disputes and probate delays.
How the Operating Agreement Protects Business Continuity
When an LLC owner dies or becomes incapacitated, state laws may require court intervention to determine who will take over. However, if the operating agreement names a backup manager, the transition can happen immediately and without legal delays.
Key provisions to include in the agreement:
- Automatic Management Transfer – Specifies that the backup manager takes over immediately upon the owner’s death or incapacity.
- Approval Process for New Managers – If the LLC has multiple owners, the agreement should outline how new managers are approved.
- Compensation Terms – Defines whether the backup manager will receive a salary or equity in the business.
- Restrictions on Transfer of Ownership – Prevents unauthorized individuals from gaining control over the LLC.
Example – How an Operating Agreement Prevented an LLC from Going Through Probate
Sarah owned a successful consulting firm and named a backup manager in her LLC operating agreement. When she unexpectedly became incapacitated, her backup manager was able to immediately take over business operations without waiting for court approval.
Because Sarah had clearly defined who had authority in the operating agreement, her business continued running smoothly, and employees and clients experienced no disruption. Without this provision, the business could have been tied up in probate for months, causing financial instability.
How to Amend an Existing Operating Agreement
If an LLC’s current operating agreement does not name a backup manager, the owner can amend it by:
- Drafting an amendment that specifies who the backup manager is and their responsibilities.
- Obtaining approval from other LLC members, if required by the agreement.
- Signing and notarizing the updated document to make it legally binding.
- Providing copies to key individuals, such as the backup manager, attorney, and business partners.
Pro Tip – Why Every LLC Owner Should Review Their Operating Agreement Regularly
Business needs change over time, and the backup manager named in the agreement today may not be the best choice in the future. LLC owners should review their operating agreements:
- Every few years or after major life events.
- If the backup manager steps down or is no longer available.
- When business structure changes, such as bringing in new partners.
Keeping the operating agreement up to date ensures that the right person is always in place to manage the LLC when needed.
Using a Trust to Appoint a Backup Manager and Avoid Probate
For LLC owners who want to avoid court delays and ensure an immediate transition, placing their business in a revocable living trust is an effective estate planning strategy. A trust allows an owner to appoint a successor trustee who will take over management duties upon their death or incapacity, bypassing probate and keeping the business running smoothly.
How a Trust Works for LLC Succession
When an LLC is transferred into a revocable living trust, the owner (grantor) maintains full control of the business while alive. Upon their death or incapacity, the successor trustee named in the trust automatically steps in to manage or distribute the business assets according to the owner’s wishes.
Key advantages of using a trust:
- Avoids probate delays – The successor trustee takes over immediately, without needing court approval.
- Ensures business continuity – Employees, vendors, and clients experience no disruption.
- Provides legal protection – The trust prevents disputes over LLC ownership and management.
- Allows flexibility in choosing a successor – Owners can appoint a family member, business partner, or professional trustee.
Example – How a Trust Prevented an LLC from Legal Delays After an Owner’s Death
Tom, the owner of a real estate investment LLC, placed his business in a revocable living trust and named his son as the successor trustee. When Tom passed away, his son was immediately able to manage the LLC without going through probate.
Because the LLC was already in the trust, banks and business partners recognized the new manager immediately, preventing financial or operational issues. If Tom had not used a trust, the LLC could have been tied up in probate court for months, risking lost income and mismanagement.
Steps to Place an LLC in a Trust
- Create a Revocable Living Trust – Work with an estate planning attorney to draft a trust document specifying how the business should be managed and transferred.
- Amend the LLC Operating Agreement – Update the agreement to reflect that the trust now holds ownership of the business.
- Transfer LLC Membership Interest to the Trust – Draft an Assignment of Membership Interest document, legally transferring ownership from the individual to the trust.
- Inform Business Partners and Key Stakeholders – Ensure that relevant parties are aware of the trust arrangement for a seamless transition.
Pro Tip – How to Use a Trust to Ensure Your Business Avoids Court Battles
If an LLC is not placed in a trust, the state’s probate court may decide who takes over, which can result in:
- Family disputes over business control.
- Unqualified heirs inheriting management responsibilities.
- Financial instability while waiting for court decisions.
By transferring LLC ownership to a revocable living trust, owners retain full control while alive but ensure a smooth transition to the designated successor trustee without legal delays.
Creating a Power of Attorney for Temporary Backup Management
While a trust or operating agreement ensures a long-term succession plan, there may be situations where an LLC owner becomes temporarily incapacitated due to illness, injury, or other emergencies. In these cases, granting a business-specific durable power of attorney (POA) allows a trusted individual to manage the LLC on the owner’s behalf until they recover or a permanent transition occurs.
How a Power of Attorney Protects an LLC During an Owner’s Incapacity
A business-specific POA grants a designated person (agent) the legal authority to:
- Access business bank accounts and manage financial transactions.
- Sign contracts and agreements on behalf of the LLC.
- Handle tax filings and business legal matters.
- Make payroll and vendor payments to keep operations running smoothly.
Without a POA in place, the business may face financial and operational difficulties while waiting for court intervention or permanent management changes.
Why a Business-Specific POA Is Better Than a General POA
Many business owners assume that a general power of attorney will cover LLC management, but this is not always the case. A business-specific POA is tailored to provide authority only over business matters, preventing:
- Unintended access to personal finances if the POA is too broad.
- Legal challenges from business partners if authority is not clearly defined.
- Potential abuse of power by restricting the agent’s authority to LLC-related decisions only.
Example – How a Business-Specific POA Saved an LLC from Financial Disaster
Michael, a single-member LLC owner, suffered a medical emergency and was unable to manage his business for three months. Because he had created a business-specific POA, his designated agent was able to:
- Access business funds to pay employees and vendors.
- Sign contracts to keep operations running.
- Ensure no legal or financial obligations were missed.
If Michael had not established a POA, his business would have stalled for months, potentially leading to unpaid bills, employee departures, and contract breaches.
How to Create a Business-Specific POA
- Select a Trusted Agent – Choose someone with business experience who can responsibly handle LLC operations.
- Define the Scope of Authority – Specify which decisions the agent can and cannot make on behalf of the LLC.
- Ensure It’s a Durable POA – A durable POA remains valid even if the owner becomes incapacitated.
- Obtain Business Partner or Member Approval – If the LLC has multiple members, ensure that the operating agreement allows for a POA delegation.
- Sign and Notarize the POA Document – Keep copies on file with business records, attorneys, and financial institutions.
Pro Tip – Why Every Business Owner Should Have an Emergency Transition Plan
Even if an LLC owner never expects to be incapacitated, life is unpredictable. Having a business-specific POA in place ensures that day-to-day operations continue, even in emergencies. Without one, business accounts may be frozen, contracts may be delayed, and critical decisions may be left in legal limbo.
Training and Preparing Your Backup Manager for the Role
Naming a backup manager in your LLC operating agreement, trust, or power of attorney is an essential first step, but it’s equally important to prepare them for the responsibilities they will take on. Without proper training, even a legally designated backup manager may struggle to manage the business effectively when the time comes.
Why Training Your Backup Manager in Advance Is Critical
A backup manager who is unfamiliar with business operations, financial accounts, or key decision-making processes could face challenges that delay important transactions, harm client relationships, or even put the business at risk. By gradually introducing them to the business and ensuring they understand their role, you can prevent disruptions and ensure a smooth transition.
Example – Why Early Training Helped One Backup Manager Take Over Smoothly
David, the owner of a small construction LLC, had named his daughter as his backup manager but never involved her in business operations. When he unexpectedly passed away, she struggled to access vendor contracts, payroll accounts, and client agreements, leading to weeks of operational delays.
By contrast, another business owner in David’s industry had trained his backup manager in advance, allowing them to gradually take on responsibilities. When that owner became incapacitated, the backup manager stepped in immediately, maintaining business continuity without legal or financial obstacles.
Steps to Prepare Your Backup Manager for Business Transition
- Introduce Them to Business Operations
- Provide an overview of daily business functions, financial responsibilities, and vendor relationships.
- Walk them through the decision-making process for key areas such as contracts, client agreements, and major business expenses.
- Give Them Limited Management Responsibilities in Advance
- If possible, assign the backup manager some operational tasks ahead of time so they gain experience.
- Allow them to shadow key meetings or review financial statements periodically to stay informed.
- Create a Business Transition Plan
- Document important details such as:
- Bank account information and payment processing procedures.
- Vendor and client contact lists.
- Employee roles and payroll processes.
- Store this document in a secure but accessible location, and update it regularly.
- Document important details such as:
- Ensure They Have Access to Critical Documents
- Provide copies of the LLC operating agreement, trust documents, and power of attorney.
- Ensure they know where digital and physical records are stored.
- Communicate the Backup Manager’s Role to Key Stakeholders
- Let employees, business partners, and financial institutions know who the backup manager is and what their role will be.
- This ensures a seamless transition in the event that the backup manager needs to step in.
Pro Tip – Why Every Business Owner Should Have an Emergency Transition Plan
Naming a backup manager is only half the solution. Preparing them for the role and ensuring they have access to key business details can mean the difference between a smooth transition and a business disaster. Take the time to create an emergency transition plan that provides the backup manager with everything they need to lead the business effectively.
Conclusion
A backup manager is essential for ensuring your LLC continues operating smoothly in case of death or incapacity. Without a clear plan in place, the business could face probate delays, leadership uncertainty, and financial disruptions.
To prevent these risks, business owners should:
- Name a backup manager in their LLC operating agreement to legally define the transition process.
- Consider placing the LLC in a trust to bypass probate and ensure an immediate handover of management.
- Use a business-specific power of attorney for temporary incapacity situations.
- Train and prepare the backup manager in advance to ensure they are ready to step in when needed.
Taking proactive steps today will protect your business, employees, and financial stability in the future. Review your LLC estate plan and make sure you have a strong backup management strategy in place.
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