Do your contractual obligations have priority over your testamentary wishes in a will or trust? That’s the critical question at the heart of the Blechman case, which involves a family-owned limited liability company (LLC) that conflicts with a revocable trust. If you’re a probate lawyer and you haven’t dealt with this kind of conflict yet, just wait, you will sooner or later.
The LLC at the heart of this case was partially owned by Bertram Blechman, who died in 2011. The LLC’s operating agreement contained testamentary transfer restrictions. If these restrictions aren’t complied with, then the LLC’s operating agreement applies the following default provision, which in this case results in an automatic non-probate transfer of Blechman’s interest in the LLC to his two adult children:
… 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.
Surprise! Blechman’s revocable trust failed to comply with the LLC’s testamentary-transfer restrictions, which meant his interest in the LLC automatically vested exclusively in his two adult children. Here’s the problem, under the terms of Blechman’s revocable trust this same property was gifted in part to his girlfriend. So who wins?
Contracts vs. Testamentary Instruments: who wins? Contract:
Probate judges deal with testamentary instruments, like revocable trusts, all day long. LLC operating agreements effectuating non-probate dispositions rarely show up in probate proceeding. So (perhaps not surprisingly), the probate judge in this case ruled in favor of the familiar: revocable trust wins. Not so fast says the 4th DCA. Under Florida law contracts (such as LLC operating agreements) trump testamentary instruments (including revocable trusts):
As to the construction of the [LLC operating] Agreement, the parties have provided no . . . law to contradict the general principle that express language in a contractual agreement “specifically addressing the disposition of [property] upon death” will defeat a testamentary disposition of said property. Murray Van & Storage, Inc. v. Murray, 364 So.2d 68, 68 (Fla. 4th DCA 1978).
Which means Blechman’s revocable trust is nullified to the extent it’s contradicted by the LLC’s contractual provisions, but otherwise the document remains valid:
In this case, by virtue of [the LLC’s operating agreement], the Deceased’s membership interest immediately passed outside of probate to his children upon his death, thus nullifying his testamentary devise as an attempted disposition of property not subject to his ownership. See In re Estate of Corbitt, 454 S.E.2d 129, 130 (Ga.1995) (“The effect of the invalidity of a bequest (or the ademption thereof) would be to render the bequest void, but not to invalidate the will and it is no ground of caveat to the probate of a will that a devise to a particular person may be void.” (internal quotation omitted)).
OK, so now we know the answer: contracts trump revocable trusts. But it’s the “why” of it all that’s most interesting. Revocable trusts are, as their name implies, “revocable” at any time prior to the settlor’s death. Which means all a beneficiary has under one of these documents is a non-enforceable “expectancy” (and expectancies, as I’ve previously written here, have zero property value). By contrast, contracts irrevocably transfer legally-enforceable property rights the instant they’re created. Which means the property rights you’ve transferred by contract don’t belong to you anymore. In other words, once you sign a contract, the subject property stops being yours to give away, and nothing you say to the contrary in your revocable trust is going to change that fact. Here’s a quote from a NJ appellate opinion relied on by the 4th DCA to make this point:
A contract operates immediately to create a property interest in the premises while a will is . . . inoperative or ambulatory until the death of the testator, at which time it operates to create a property interest in the beneficiary. . . . The undertaking of a party under a contract is made in consideration of something to be paid or done by or on behalf of the other party, so that the obligation to and the right to require performance are reciprocal. A contract creates a present, enforceable and binding right over which the promisor has no control without the consent of the promisee, while a testamentary disposition operates prospectively . . . An instrument which does not pass any interest until after the death of the maker is essentially a will. But not every instrument which provides for performance at or after death is testamentary in character. If the instrument creates a right in the promisee before the death of the testator, it is a contract . . . [T]here is nothing in the statute of wills that prevents the creation by contract of a bona fide equitable interest in property and its enforcement after the death of a contracting party, even though the date of death is agreed upon as the time for transfer.
And if Blechman’s share of the LLC wasn’t controlled by his will or rev trust, it’s not a “probate” asset. Rather, it’s just one more variation on the non-probate revolution that’s been changing the face of testamentary law for decades now. Again from the 4th DCA:
The Florida Probate Code broadly defines the probate “estate” as encompassing the decedent’s property “that is the subject of administration.” § 731.201(14), Fla. Stat. (2011). In deciphering a probate estate’s parameters, the deciding factor is the decedent’s ownership interest in property. § 731.201(32), Fla. Stat. (2011). If the subject property will pass either intestate or by way of a will, then it is part of the decedent’s probate estate. Cf. In re Estate of Riggs, 643 So.2d 1132, 1134 (Fla. 4th DCA 1994) (noting that an “estate” does not include property passing outside of probate).
Estate planners frequently use non-probate mechanisms to transfer a decedent’s property outside of the probate system. This can be accomplished in a myriad of ways, such as: “inter vivos gifts . . . , Totten trusts, joint tenancy, life insurance, employee benefit and other annuity beneficiary designations, payable on death or transfer on death accounts, and” any other contractual means. Nathaniel W. Schwickerath, Public Policy and the Probate Pariah: Confusion in the Law of Will Substitutes, 48 Drake L.Rev. 769, 798 (2000) (quoting Jeffrey N. Pennell, Minimizing the Surviving Spouse’s Elective Share, 32 Inst. on Est. Plan. (MB) 900, 904 (1998)). The common thread of such non-probate mechanisms is that the assets to which they apply are “distributed to the designated beneficiaries immediately upon the transferor’s death” without the need for judicial intervention. Roberta Rosenthal Kwall, The Superwill Debate: Opening the Pandora’s Box? 62 Temp. L.Rev. 277, 278 (1989).