By: Cristina N. Hyde, JD
When drafting incorporating documents, small businesses are commonly encouraged to consider business succession issues upon the death of one of its members. However, many often do not realize that consistency between an operating agreement and an estate plan is extremely important.
In many cases, if a conflict arises between an individual’s LLC Operating Agreement and their estate plan, the specific language in the operating agreement will defeat the testamentary disposition of that property. However, as with anything in law, ambiguity leads to litigation; leaving courts to interpret the conflicting language and, it follows, the disposition of the property at issue.
In a recent case out of Florida, Tita v. Estate of Tita, a specific bequest to a decedent’s two children was upheld, despite his wife’s appeal. According to the decedent’s will, upon his death, his ownership interest in an LLC of which he owned 39.5 percent, passed to his two children. The will also designated his wife as the sole beneficiary of the residuary estate. The LLC’s operating agreement gave its remaining members the option to purchase the decedent’s interest in the company with written notice to the probate estate. However, the agreement failed to specify what happened to the proceeds of that sale.
Litigation ensued, and the court was left to determine whether to uphold the specific bequest to the children or deem it to be invalid, leaving the proceeds of the sale to the wife as part of the residuary estate. Ultimately, the District Court of Appeal for the Fourth District in Florida held that nothing in the operating agreement nullified the transfer of the ownership interest, as specified, in the decedent’s will. In so holding, the court clarified that the terms of the operating agreement only served to give the remaining members the right to purchase the decedent’s membership interest. Thus, the ownership interest belonged to the two children upon the decedent’s passing, and they were the rightful beneficiaries of the proceeds of the sale.
This ruling should be taken as a reminder of the importance of reconciling LLC Operating Agreements with estate planning documents to avoid ambiguity. While operating agreements are an important and necessary part of business ownership, it is also important that the language contained in those documents does not undermine an owner’s estate planning intentions.
If you have questions on this topic or would like to review how your LLC Operating Agreement might interact with your existing estate plan, contact us.