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What Happens When Your Living Trust and Your LLC Operating Agreement Do Not Agree?

What Happens When Your Living Trust and Your LLC Operating Agreement Do Not Agree?

What Happens When Your Living Trust and Your LLC Operating Agreement Do Not Agree?

A decedent had entered into an Operating Agreement with his sister. Each owned a 50% interest in an LLC. The Operating Agreement imposed restrictions upon the ability of each member to convey, during lifetime or at death, his or her interest to anyone other than members of his or her immediate family unless the other member gave written permission otherwise. However, in his living trust, the decedent gave half of his LLC interest to a trustee to provide income to the decedent’s girlfriend. The trial court found that the LLC interest never automatically vested in or passed to the children, and was an asset of the estate that passed from the will to the trust. The children, claiming that the operating agreement caused the membership interest to vest in them immediately upon their father’s death, appealed that order.

The 4th District Court of Appeal, found that the decedent’s failure to fully devise the membership interest to his children in the trust activated a default provision in the Operating Agreement which vested the membership interest immediately at his death to his children. Hence, the operating agreement trumped the trust.

Estate planners often use non-probate mechanisms to transfer a decedent’s property outside of the probate system. This includes, among other means, Totten Trusts, joint tenancy, life insurance, employee benefits, payable upon death accounts and other contractual means. Common to all of these mechanisms is that the assets are distributed immediately upon the transferor’s death, without the need for judicial intervention. The question before the court was whether the LLC interest was subject to the terms of the decedent’s will and trust or whether the operating agreement immediately passed the interest to the children upon his death.

Remember that a will only governs those assets that are owned by the decedent and are in his or her probate estate. In this situation, the Operating Agreement had removed the LLC interest from the probate estate and thus, that interest never passed through to the trust. The same result can occur with a corporate buy-sell agreement. So, look over your documents and be sure you have a consistency of disposition of assets, if that is your desire.

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