Probate, trust, guardianship and inheritance litigation
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Membership Interest in LLC Passes Outside of Florida Probate Estate

By:  Jeffrey Skatoff, Esq.

Beneficiary designations and pay on death designations are often used as convenient mechanisms to avoid probate or trust administration.  Most banks and financial institutions allow their customers to name beneficiaries on their accounts and thereby avoid probate. 

What are the negative consequences of a business asset trapped in a probate administration?

  • Difficult or impossible for the estate to guarantee loans, leases, or vendor contracts.
  • How is management of the business going to be determined?
  • How are major decisions at the business going to be made?
  • Can the business be sold while part is held in an estate?

A new case from Florida shows how a mandatory deathime beneficiary provision in a membership agreement for a limited liability company results in the membership interest immediately vesting in the hands of the heirs, as opposed to going through probate. 

In Blechman v. Blechman (Fla. 4th DCA 2015), the Decedent and his sister were the two members in a limited liability company (LLC).  The operating agreement for the LLC restricted the free transferability of the membership interests.  

6.3 Death of Member

(a) Unless

(i) a Member shall Transfer all or a portion of his or her Membership Interest in accordance with 6.1 or 6.2 hereof [lifetime transfers to blood relatives], or

(ii) a Member bequeaths the Membership Interest in the  Member’s last will and testament to members of the Immediate Family of the respective Member, or

(iii) all such Membership Interests of a deceased Member are inherited, or succeeded to, by Members of the Immediate Family of the deceased Member, then in the event of a death of a Member during the duration of this Agreement, the Membership Interest of the deceased Member shall pass to and immediately vest in the deceased Member’s then living children and issue of any deceased child per stirpes.

The court interpreted this provision to mean that, “if a member fails to transfer his or her interest in one of the three ways enumerated in Section 6.3(a)(i)-(iii), then ownership ‘immediately’ vests in the deceased member’s children.” 

The Decedent’s estate plan was a standard “pour-over” will into a revocable trust.  The revocable trust provided that a portion of the income from the LLC would be used to pay certain living expenses of the Decedent’s longtime girlfriend.  

Ultimately, the court ruled that the Decedent’s estate plan operated to give the girlfriend an interest in the LLC, in direct contravention of the operating agreement’s deathtime provisions.  Therefore, the remedial provision of the operating agreement providing for immediate vesting in the hands of the Decedent’s children kicked in, essentially superseding the Decedent’s estate plan.  

The most relevant portions of the Court’s reasoning (applying New Jersey law, which governed the dispute) are as follows. 

The question before us, therefore, is whether the Decedent’s membership interest in the LLC was subject to the Decedent’s will or whether the Agreement’s provisions immediately passed the interest to the Decedent’s children upon his death. * * * In New Jersey, parties may provide by contract that ownership of, or a designated right in, property may pass according to the terms of the contract at the promisor’s death. * * * New Jersey permits the members of an LLC to include “a provision in an operating agreement that will be followed upon the death of a member.” * * * Where supported by adequate consideration, such contracts transferring a property interest upon death are neither testamentary nor subject to the Statute of Wills, but are instead evaluated under contract law. * * * As to the construction of the Agreement, the parties have provided no New Jersey law to contradict the general principle that express language in a contractual agreement “specifically addressing the disposition of [property] upon death” will defeat a testamentary disposition of said property. Murray Van & Storage, Inc. v. Murray, 364 So. 2d 68, 68 (Fla. 4th DCA 1978). * * * In this case, by virtue of Section 6.3(a)’s default provision, the Deceased’s membership interest immediately passed outside of probate to his children upon his death, thus nullifying his testamentary devise as an attempted disposition of property not subject to his ownership. See In re Estate of Corbitt, 454 S.E.2d 129, 130 (Ga. 1995) (“The effect of the invalidity of a bequest (or the ademption thereof) would be to render the bequest void, but not to invalidate the will and it is no ground of caveat to the probate of a will that a devise to a particular person may be void.” Based on the foregoing, since the children are the rightful owners of their father’s membership interest in the LLC, we reverse the trial court’s order and remand with instructions that the Decedent’s membership interest not be considered an estate asset.

Essentially, the operating agreement of the company performed as a pay on death or beneficiary designation would perform if this were an account at a financial institution.  Using this type of provision for a business asset to avoid probate is a very good outcome.  Many business become hamstrung when a majority or significant owner dies and the business interest is trapped in probate.

There are downside issues to using an operating agreement with a beneficiary designation.  Will the business owner remember to update the operating agreement when the estate plan is redone? Perhaps there is no suitable person to take ownership and control of a business and leaving a business directly to an unqualified person could create significant problems for the business.  In some situations, better to have the executor of the estate dispose of the business interest and give the unqualified heirs cash instead.

Jeffrey Skatoff is a Florida probate attorney.  To have Mr. Skatoff review your case free of charge, please go to his website.

Probate attorney Jeffrey Skatoff handles probate, trust, guardianship and inheritance litigation.

Jeffrey H. Skatoff, Esq.

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