The Transformation of LLC Interests at Death

 The Transformation of LLC Interests at Death

A recent decision from Virginia highlights the transformation that happens to an LLC interest at death, in this case vacating a decision as to a pos-death redemption.  Paul A. Galiotos v. Stavros P. Galiotos, 2026 WL 932636 (Va. App. April 7, 2026).

Irene Galiotos, mother of Paul and Stravos as well as a third brother Tasos, passed away. Her will provided that her 35.8% interest in Executive Cove, LLC (Tasos was the only other member with 64.2%) to her revocable trust for which all three brothers were beneficiaries. Tasos, seeking to interrupt that transfer, sought to affect a redemption by Executive Cove of Irene’s interest in Executive Cove, replying upon section 10.4 of the LLC’s operating agreement, it providing:

A Member who wishes to Transfer his or her Company Interest, in whole or in part, to a person who is not already a Member, or who has reason to believe that an involuntary Transfer or a Transfer by operation of law is reasonably foreseeable (an “Offering Member”), shall first offer such Company Interest (the “Offered Interest”) to the Company and the other Members on the terms set forth below. 2026 WL 932636, *3.

While the trial court held that Tasos redemption pursuant to this provision was valid, it was reversed on appeal.

 Parsing the language of the operating agreement, the Court of Appeals noted that upon Irene’s death her interest became that of an assignee, a bare economic right stripped of the right to participate in the LLC’s management.  To that end:

Prior to her death, Irene held a 35.8% company interest in the LLC, as shown on the schedule. But at the time of her death, Irene’s interest was only that of a membership interest with assignee rights rather than a company interest. Pursuant to the Virginia Limited Liability Company Act (“the LLC Act”), Irene was dissociated from Executive Cove upon her death. See Code § 13.1-1040.1(7)(a) (providing that “a member is dissociated from a limited liability company upon ... [t]he member’s death”). Further, under the LLC Act, “the dissociation of a member shall not affect the membership interest held by ... the former member’s successor in interest. The ... successor in interest shall continue to hold a membership interest and shall have the same rights that an assignee of the membership interest would have under subsection A of [Code] § 13.1-1039.” Code § 13.1-1040.2(A). In turn, subsection A of Code § 13.1-1039 provides limitations on the rights given to the holder of an assignment of an interest: an assignee is not entitled “to participate in the management and affairs of the limited liability company,” but is entitled “to receive, to the extent assigned, ... any share of profits and losses and distributions to which the assignor would be entitled.” Id. (footnote omitted).

And here is why that matters; section 10.4 of the operating agreement triggered a ROFR upon a transfer of a “Company Interest,” and upon Irene’s death what had been her “Company Interest” became an assignee interest; there was no ROFR as to an assignee interest so Tasos’ redemption was invalid and set aside.

Broadly speaking, operating agreements need to be precise in the terminology employed, especially with bespoke defined terms, and to the extent a right of redemption of the interest of a former member is to be provided for, the transformation of the character of an LLC interest upon death or other event of disassociation needs to be addressed.