When an Estate Plan Conflicts with an LLC’s Operating Agreement, Which Wins?
If you have a business, and particularly an LLC, that LLC is probably governed by what is known as an operating agreement. The operating agreement is the guidebook for your LLC—it details everything about the rules, operation and management of your LLC. It also usually states, how the LLC will pass on, should you or another managing member, pass away.
When There is a Conflict
But as is often the case with contracts, people will often make estate plans, without concern for things like an LLC operating agreement. That can lead to a situation where the operating agreement says that the company will go to one person upon the death of a managing member, but that managing member’s estate plan says the business (or the member’s interest in the business) will go to someone else.
So what happens when there is a conflict like this? As it is in most cases, the contract—or in this case, the operating agreement—will usually win, taking precedence over anything in your estate plan that says anything to the contrary.
Not Part of the Estate
That’s because the LLC, with the operating agreement that says how the LLC will transfer on the manager’s death, never actually becomes part of the probate estate—like other assets that have a transfer on death provision, the interest in the business passed immediately on death per the operating agreement, and there is no asset to actually probate.
The Agreement or Contract Wins
Even if the operating agreement wasn’t so definitive as to who gets the LLC on the death of the member, if there are any conflicting statements between the operating agreement and an estate document, the operating agreement will still take precedence—the drafting of estate plan documents to the contrary will be seen as a breach of the operating agreement.
For example, some operating agreements may not say that the LLC transfers on death, but will set forth some procedure to pass the LLC on—for example, it may require a vote of other members, or it may give other members the option to purchase the interest in the LLC.
Harmonizing the Documents
A probate court will, to the extent possible, try to harmonize an operating agreement and an estate document, to try to effectuate the will of the deceased. But any challenge to an estate plan based on an LLC may have to be brought to the probate court for resolution, creating an unnecessary (and potentially costly) problem.
The best route is of course, to harmonize your estate documents with your corporate documents as much as possible. This can easily be done by bringing these documents to your estate planning attorney when drafting a will or estate plan. And remember that if you start or form a business after your estate plan was drafted its time to go back and revise those estate plan documents.
Do you have a question about your estate plan? Make sure your estate plan is up to date and doesn’t conflict with your business documents. Call the West Palm Beach estate planning lawyers at The Law Offices of Larry E. Bray today.