Beneficiary designations and pay on death (sometimes abbreviated “POD”) designations are often used as convenient mechanisms to avoid probate or trust administration. Most banks and financial institutions allow their customers to name beneficiaries on their accounts and thereby avoid probate. A new case from Florida shows how a mandatory death bed beneficiary provision in a membership agreement for a limited liability company results in the membership interest immediately passing into the hands of the heirs, as opposed to going through probate.
Here is a little bit of background on the case first.
- In Blechman v. Estate of Blechman (Fla. 4th DCA 2015), the Decedent and his sister were the two members in a limited liability company (LLC). The operating agreement for the LLC restricted the free transferability of the membership interests.
6.3 Death of Member
(a) Unless
(i) a Member shall Transfer all or a portion of his or her Membership Interest in accordance with 6.1 or 6.2 hereof [lifetime transfers to blood relatives], or
(ii) a 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) all such Membership Interests of a deceased Member are inherited, or succeeded to, by Members of the Immediate Family of the deceased Member, then in the event of a death of a Member during the duration of this Agreement, the Membership Interest of the deceased Member shall pass to and immediately vest in the deceased Member’s then living children and issue of any deceased child per stirpes.
- The court was tasked with interpreting this complicated clause and found it meant that “if a member fails to transfer his or her interest in one of the three ways enumerated in Section 6.3(a)(i)-(iii), then ownership ‘immediately’ vests in the deceased member’s children.”
- The Decedent’s estate was set up as a pour-over will into a revocable trust.
- (A pour over will is a will established by an individual who has already taken the necessary steps to set up a trust, so that upon the death of the individual, all of his or her assets are to be transferred – or “poured over” – to the trust.)
- The revocable trust provided that a portion of the income from the LLC would be used to pay certain living expenses of the testator’s live in girlfriend.
- The court ruled that the Decedent’s estate plan functioned to give the girlfriend an ownership interest in the LLC, which was in direct contravention of the operating agreement’s death time provisions. Therefore, the remedial provision of the operating agreement providing for immediate vesting in the hands of the Decedent’s children kicked in, essentially superceding the Decedent’s estate plan.
- So, the LLC interest actually avoided Probate altogether and thus the Girlfriend could not receive her interest, the estate plan was thwarted.
There are a number of lessons here for any Palm Beach Probate Litigator to note,
- This estate plan was a failure: the goal was to protect the girlfriend and the LLC agreement thwarter that. Good estate plans do not have these types of flaws, this could mean big trouble down the road.
- Contracts are often overlooked by testators. Some never check to see what death time provisions are in agreements that they have been part of for decades.
- This was all so avoidable! Simple planning was all the testator needed and the fact that they had a pour over will set up says to me that they may wanted to do just that, they just missed one crucial part, the LLC agreement.
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