Is equity in a company that owns property considered personal or real property?

Question

An individual owns an LLC. The LLC owns property. The value of the property is essentially the entire value of the company. Is the individual's ownership of the company considered "real property" or "personal property"? Or something else?

Edited for context

I'm named as executor in a will for a close relative who passed away suddenly. The decedent was sole proprietor of two closely held companies. One was a small business ("INC") doing actual work, with customers, suppliers, revenue, phones, and all. The other business ("LLC") owns the commercial building, in which the first business was one tenant, and just collects rents, and maintains the property. The property was heavily mortgaged but self-sustaining.

One doc the probate attorney sent me says I will bind myself ("Bond of legal representative of surety") to discharge faithfully the duties as executor. This bond amount is twice the market value of the property held by the LLC, ignoring mortgage and debt, so it's millions of dollars. Um, yikes?!?

Per Google, the state says the bond must be 200% of the value of personal property, excluding real property.

Obviously, I'll get a real opinion from an attorney whom the estate pays, and who knows the details.

But in the meantime I'm curious -- if you own a company that's little but a shell around real property, is equity in the company itself real property or personal property? Or neither?

Answer 1

I think it's personal property.

Here's why.

I think the purpose of the bond is to protect the estate from malfeasance of the executor. I.e., to deter an unscrupulous executor from transferring the personal property of the decedent out of the estate at below market value and, thus, inequitably damaging the value of the estate. The bond gives the estate equitable recourse. The estate's remedy is to enforce a potential judgment by collecting against the bond.

So, in this case, in theory, because the executor might have the power to transfer ownership of the LLC (or its equitable interest, hat tip: @Scott) to a third party at below market value (subject to the Operating Agreement; but then, who would complain anyway against an inappropriate sale of membership interest, if not the estate?), the state will require a bond to ensure the estate is protected against potential malfeasance by the executor.

I believe the reason for excluding real property from the bond requirement is because in order to clear title, the probate judge must specifically approve the sale of any real estate. At which time s/he will withhold her approval if the sale price is out-of-line with market.

One can imagine this is done as a practical matter. In other words, it would be impractical to have the judge personally approve the sale of lots of low-value items (personal property). But more practical to have the judge approve the sale of a few high-value items (real property).

But, as above described, if the sale could circumvent the probate court (as in the case of an LLC membership interest) then the sale should be required to be covered by the bond.

Disclaimer: I am not an attorney. Consult a real attorney to get real advice and don't rely on anything I write here.