What does the Operating Agreement Say?

We interrupt our normal broadcasting to rebroadcast this interesting case law news flash! 
Can the provisions of an LLC Agreement avoid probate? Can it act as a Will substitute?  What does the Operating Agreement Say? 
Courtesy of Alan Gassman and Chelsea Bellew, from the “Thursday Report”, Issue 181, comes the following:
LLC Operating Agreement Can Serve as “Transfer on Death” Mechanism to Avoid Probate and Trust Interaction (Not to Mention Confusion and Uncertainty)
by Alan Gassman and Chelsea Bellew
In Blechman v. Estate of Blechman, 460 So. 3d 152 (Fla. 4th DCA 2015), the court found that the provisions of an Operating Agreement of a limited liability company allowed the Decedent’s membership interest to vest immediately upon his death. While the Decedent made provisions for the membership interest to pass to someone outside his family in a trust before he passed away, the court found that the provisions of the Operating Agreement were controlling. The provisions of the Operating Agreement were made to keep the company within the family and did not permit for a membership interest to pass to anyone else.
The Operating Agreement was executed in New Jersey and was, therefore, interpreted according to New Jersey case law. Minoff v. Margetts was a New Jersey case that permitted members of an LLC to use provisions in an Operating Agreement to control the disposition of membership interests when one member passes away. Following this rationale, the court found that the interest in this case vested in the two children upon the death of their father, according to the Operating Agreement, and that this interest was not a part of his estate. The trust had an amendment that provided for the interest in the LLC to pass to the Decedent’s girlfriend upon his death, and the court found that this instrument was subordinate to the provisions of the Operating Agreement. The provisions of the trust directly contradicted the terms and intent of the Operating Agreement. Therefore, the Decedent’s membership interest in the LLC passed upon his death outside of probate to his children and nullified the terms of the amended testamentary trust.
Specific language that was used in the Operating Agreement that was blessed by the court was as follows:
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, 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 the issue of any deceased child, per stirpes.
The court noted as follows:
…not every instrument which provides for performance at or after death is testamentary in character…There is nothing in the statute of wills that prevents the creation of contract of a bona fide equitable interest in property and its enforcement after the death of a contracting party, even though the date of death is agreed upon as the time for transfer.
Do we now have an obligation to review every Operating Agreement that a client has involvement with to see whether inheritance rights and disposition may be impacted thereby? Do we dare use similar language in an LLC Operating Agreement that might distort an estate plan later when the client or their advisors are not aware of the provision?
Perhaps the following provision can be considered:
Upon the death of JOHN SMITH, his membership interest shall immediately pass to and immediately vest in his spouse, MARY SMITH, or in equal shares to his children, per stirpes, if MARY SMITH does not survive him, provided that the above shall not apply to the extent of any future provision of any Will or Pour-Over Will and Revocable Trust that might be entered into by JOHN SMITH, if the legal effect thereof would be to provide for a different disposition of his LLC interest, regardless of whether such LLC interest is specifically referred to or not. The determination of whether any such subsequently signed separate Will or Revocable Trust exists to facilitate such change shall be made by the Manager or Managers of the Company, in their reasonable discretion, and the Company shall be entitled to the distributions or liquidation entitlement rights to the successor owners of the membership interest to the extent of money expended to facilitate such determination.
Should we consider using similar arrangements for our clients, and, if appropriately used, will these avoid exposure to individual creditors of the deceased LLC Member? See our Thursday Reports from October 15, 2015 and October 22, 2015 for further discussion of this in the article entitled “Avoiding the Carnage Caused by Pay-on-Death Accounts.”

About Smilie G. Rogers

Elder law, life care planning estate planning, probate and tax attorney located in York, Maine. Licensed in Maine, Massachusetts and New Hampshire.
This entry was posted in estate planning, Legal practice, wills and trusts and tagged , , . Bookmark the permalink.

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