How Your LLC May Affect Your Estate Plan
Many Floridians own their own business. But what happens to such business, at least from a legal standpoint, if the owner suddenly passes away? The answer to this question depends greatly on the business’ legal structure and governing documents.
Let’s take a relatively simple example. Abigail and Leah decide to start a consulting business together. They form a limited liability company (LLC) to run the business. A few years later, Abigail dies in a car accident. So where does this leave Leah and the business?
Ideally, Abigail and Leah created an operating agreement when they formed their LLC. An operating agreement is a contract signed by each member (co-owner) of the LLC. Among other subjects, the operating agreement should address what happens when either member dies or wishes to exit the business.
For example, Abigail and Leah’s operating agreement may say that if either one of them dies, the surviving member agrees to a buyout of the deceased member’s interest from her estate. This makes sense if neither member wants their family or other descendants involved in running the business. But it is critical to put this in writing. Absent a written agreement, a judge may consider the deceased Abigail’s interest in the LLC as a probate asset, which would then be disposed of under her will with the rest of her personal property.
Operating Agreement Takes LLC Interest Out of Probate
Here is an actual example of how these principles work in practice. This is taken from a 2015 decision by the Florida Fifth District Court of Appeal, Blechman v. Estate of Blechman. In this case, a decedent owned a 50-percent membership in a New Jersey LLC. The decedent’s sister owned the other 50-percent interest.
The siblings signed an operating agreement for the LLC, which stated either member could transfer “all or any portion of his or her Membership Interest” to a person in their “immediate family” without the consent of the other member. The agreement defined immediate family to mean a then-living child or the descendants of a deceased child. Another clause said that when a member dies, their interest in the business “immediately” vests in their children.
Because of this language, the Fifth District said the decedent’s share of the LLC was not part of his probate estate. The operating agreement effectively transferred the share to the decedent’s children immediately upon his death. In other words, the decedent’s LLC membership did not pass according to the terms of his will or trust, but rather as provided for in the operating agreement.
Speak with a Florida Estate Planning Lawyer Today
If you own or co-own a business, you need to take that into account when making your estate plan. An experienced Fort Myers estate planning attorney can review your business’ governing documents and advise you on the appropriate steps to take. Contact the Kuhn Law Firm, P.A., at 239-333-4529 today to schedule a free confidential consultation with a member of our estate planning team today.