LLC Agreement Provisions Create Non-Probate Interest

In Blechman v. Estate of Blechman, a Florida District Court of Appeal recently held that the provisions of a particular limited liability company’s (LLC) operating agreement restricted the transfer of a decedent’s ownership interest in an LLC at death via a will.

In the opinion, the court briefly rehearsed the concept of probate, including transfers that are subject to probate and those transfers that are not subject to probate, which are commonly called non-probate transfers:

Estate planners frequently use non-probate mechanisms to transfer a decedent's property outside of the probate system. This can be accomplished in a myriad of ways, such as: “inter vivos gifts, Totten trusts, joint tenancy, life insurance, employee benefit and other annuity beneficiary designations, payable on death or transfer on death accounts, and” any other contractual means.

The court concisely articulated the precise issue 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 this particular case, the LLC’s operating agreement limited the decedent’s ability to transfer his ownership interest in the LLC to the following three scenarios:

… (i) where the member transfers during his lifetime “all or a portion of his or her Membership Interest in accordance with 6.1 or 6.2,” (ii) where the 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) where “all such Membership Interests of a deceased Member are inherited, or succeeded to, by Members of the Immediate Family of the deceased Member.” Should none of these three scenarios occur prior to a member's death, the member's interest passes to and “immediately vest[s] in the deceased Member's then living children and issue of any deceased child per stirpes.” By providing for such “immediate vesting,” the April 30, 2010 amendment to Article 6.3 explicitly steered the membership interest away from the probate estate, unlike the earlier iteration of that provision.

The decedent included a provision in his will that purported to transfer his ownership interest in the LLC to a person who was not in the decedent's "Immediate Family" as is required by the operating agreement. The court held that the foregoing transfer restrictions operated to nullify such transfer. In effect, the court held that the contractual provisions of the operating agreement transformed the LLC membership interest from a probate asset to a non-probate asset.

So what does this all mean? In part, It means — at least in Florida — that an LLC operating agreement can be used to transfer a person's ownership interest in an LLC outside of probate and that such transfer will not be affected by the decedent's will. Please note that this case was in Florida and dealt with Florida law, not Arizona law; however, the provisions and principles of law at issue are not entirely dissimilar and a similar outcome could well occur under Arizona law.

This brief overview of some important considerations associated with estate planning and limited liability companies (LLC) in Arizona is by no means comprehensive. Always seek the advice of a competent professional when making important financial and legal decisions.

Arizona Estate Planning AttorneySteve Cook is a estate planning lawyer at Cook & Cook. Although his main office is located in Mesa, Arizona, he represents clients throughout the Phoenix, Arizona Metropolitan area including the following east valley cities: Scottsdale, Paradise Valley, Tempe, Chandler, & Gilbert.

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