From time to time we receive inquiries about using limit liability companies to avoid probate of business interests and real estate. Some people believe that they can write terms and conditions in an LLC operating agreement that control the transfer of a member’s LLC interest after the member’s death. They believe that the deceased member’s interest would immediately transfer to the designated heir because of contractual terms in the operating agreement, and that the LLC interests would not be included in a probate proceeding dealing with other assets titled in the decedent’s name.
The law on this issue was unclear. For may years I had advised clients that regardless of what is written in an LLC agreement a LLC interest must be included in the probate estate. The LLC interest would be an asset available to pay creditors of the state through a charging lien. The value of the decedent’s LLC interest is part of the “gross estate” used to calculate estate tax liability. ZI had suggested to clients the option of the LLC member to own the LLC interest during his lifetime as a joint tenant with rights of survivorship which would pass the interest to the surviving joint tenant outside of probate.
My advise to current clients about post-death transfers of LLC interests is different because of a 2015 Florida appellate court decision. The decision held that an LLC operating agreement could legally direct the transfer and recipients of a deceased LLC member. The transfer immediately vests in the name of the recipient upon the member’s death, and the membership interest passes outside of the decedent’s probate estate. Further, transfer directions in the operating agreement take precedence over conflicting dispositions in the decedent’s will. The general rule in Florida applicable to LLCs and to shareholder agreements in the case of a corporation is that dispositions of property in a contractual agreement will defeat a conflicting testamentary disposition.