If ownership of a business asset is contested in an estate, the answer to “who gets it?” is often found in a contract, not some will or trust. Generally speaking, a decedent’s contractual obligations are going to trump any conflicting estate planning documents he might have signed. This key point is often overlooked, especially in probate proceedings where everyone’s focused on the decedent’s will.
Contract vs. Will = conflict = non-probate transfer:
For example, in the Blechman case there was a dispute over the decedent’s ownership interest in a limited liability company (LLC). In that case the decedent signed an LLC “operating agreement” (read: contract) containing the following clause:
… 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 decedent also signed a will and trust conflicting with this contractual obligation. Based on the text of the operating agreement the Blechman court ruled the contested LLC interests were never part of the decedent’s probate estate, but instead transferred immediately to his children as non-probate transfers, bypassing his conflicting estate planning documents entirely.
Bottom line, the decedent’s contractual obligations trumped his conflicting will and trust provisions.
Contract vs. Will = conflict = breach of contract:
Sometimes the controlling contract doesn’t result in a non-probate transfer, but still conflicts with the decedent’s will or trust. This kind of conflict sets up a breach of contract claim against the estate.
For example, in the Finlaw case there was a dispute over the decedent’s ownership interest in a partnership. In that case the decedent signed a partnership agreement (read: contract) containing the following clause:
Each partner, who shall ultimately become a surviving spouse, further agrees to have prepared and execute a last will and testament so as to vest his or her interest in this Partnership in his or her children (lineal descendants).
The decedent also signed a Will that conflicted with this contractual obligation. Based on the text of the partnership agreement the Finlaw court ruled the contested partnership interests had to go in accordance with the terms of the partnership agreement not the will.
Bottom line, the decedent’s contractual obligations trumped her conflicting will provisions.
Contract vs. Will = no conflict = harmony:
Then there are those cases where the decedent’s contractual obligations and the terms of his estate planning documents can be harmonized to work just fine with each other, which means all documents get enforced. That’s actually what happens in the vast majority of cases.
But we all know that no matter how well the documents work together, sometimes litigation is unavoidable. If you’re involved in one of these cases, expect the Blechman and Finlaw rulings to loom large. In this context, these opinions are too important to ignore.
And for those fights you’ll want to turn to a prior example of an appellate court examining — and rejecting — attempts to misapply Blechman and Finlaw. Thankfully, that’s exactly what we got in the Tita case discussed below.
The decedent in this case was one of the owners or “members” of a family-owned LLC that held title to two buildings. The decedent intended for two of his children to get his stake in the LLC, and for his wife to receive all of his residuary estate. I’m guessing the decedent’s ownership interest in the LLC was worth way more than the value of his residuary estate, because his wife sued to invalidate the specific bequest of the LLC to the kids.
Contract vs. Will: harmony or conflict?
The decedent in this case signed an LLC operating agreement containing the following clause:
Death Buy Out. Notwithstanding the foregoing provision of Section 8, the Members covenant and agree that on the death of any Member, the Company, at its option, by providing written notice to the estate of the deceased Member within 180 days of the death of the Member, may purchase, acquire and redeem the Interest of the deceased Member in the Company pursuant to the provision of Section 8.5.
The decedent also signed a will containing the following specific devise, which gifts the same LLC ownership interest to two of his children:
Specific Gift of LLC Interest. I give all of my interests in the Layton Hills Properties, LLC, to my son, ANDRE TITA, and my daughter, SANDRA TITA, in equal shares. If any of them predecease me, the share of the deceased beneficiary will pass to that person’s descendants who survive me, per stirpes. If one of the named beneficiaries predeceases me without descendants, their share shall lapse and pass equally to the remaining share. The main asset of the Layton Hills Properties, LLC, is real property located in Layton, Utah that has two buildings on the property ….
Harmony it is!
First, the operating agreement’s buy-out clause doesn’t automatically transfer property to anyone or otherwise “vest” ownership of the LLC in anyone. So this isn’t some kind of non-probate transfer like in Blechman.
Second, the operating agreement’s buy-out clause doesn’t say who gets the LLC after the decedent’s death, as in Finlaw. Bottom line, the LLC’s buy-out clause and the decedent’s will don’t conflict, so both should be enforced. So saith the 4th DCA:
None of the cases upon which the wife relies compel a reversal.
Blechman involved an LLC operating agreement different than the one in this case. 160 So. 3d at 154–55. The Blechman agreement explicitly provided that the “[d]eceased’s membership interest immediately passed outside of probate to his children upon his death, thus nullifying his testamentary devise.” Id. at 160. In contrast, the Operating Agreement in this case anticipated that a transfer of a member’s interest would be through a testamentary devise; there was no explicit language addressing the disposition of a membership interest upon death.
Similarly, Finlaw involved a partnership agreement that specifically required a member’s will to vest a partnership interest in a deceased partner’s children. 320 So. 3d at 845. The Operating Agreement here does not specify to whom a decedent’s interest may be passed upon a member’s death, so there is no conflict between the Operating Agreement and the decedent’s will.
But if the kids don’t get the LLC, who gets the cash?
Undeterred, wife argued that because the LLC was exercising its rights under the buy-out clause, it was impossible for the decedent’s two children to actually receive their father’s LLC interest under his will’s specific devise. Why? Because if the estate is obligated to sell this asset back to the LLC, there isn’t going to be any LLC interest left in the estate to devise to the kids. Ergo: devise fails.
Wife then argued that if the specific devise of the LLC under the will fails, whatever was paid to the estate under the buy-out clause fell into the residuary, which all goes to her. Presto, she gets it all. Did this work? Nope.
Wife’s argument was undone by F.S. 732.514, a probate code section that doesn’t get talked about all that much, but is really important to keep in mind when assets are specifically devised (as in this case). Here’s what that statute says:
732.514 Vesting of devises.—The death of the testator is the event that vests the right to devises unless the testator in the will has provided that some other event must happen before a devise vests.
Based on F.S. 732.514 the court was able to elegantly harmonize the three controlling elements of this case: (1) the decedent’s contractual obligations under the LLC, (2) the decedent’s testamentary wishes under his will, and (3) Florida probate law governing what happens when a specifically-devised asset is sold by the estate. Answer: kids get the cash. So saith the 4th DCA:
The decedent’s bequest to appellees of his interest in the Company vested upon his death. See § 732.514, Fla. Stat. (2018). Once vested, the Operating Agreement controlled the nature of appellees’ interest and the terms of a buyout. …
Here, the decedent was in possession of a membership interest in the Company when he died. Nothing in the Operating Agreement operated to trump the will and effect a transfer of the membership interest outside of the will. The membership interest devised to appellees was a specific legacy that became part of the probate estate. See Babcock v. Est. of Babcock, 995 So. 2d 1044, 1046 (Fla. 4th DCA 2008) (“A specific legacy is a gift by will of property which is particularly designated and which is to be satisfied only by the receipt of the particular property described.” (quoting In re Est. of Udell, 482 So. 2d 458, 460 (Fla. 4th DCA 1986))). Because the Company elected to exercise its right to purchase the decedent’s membership interest from the estate, appellees are entitled to receive the proceeds of the sale under the will.
Below are links to the briefs filed with the 4th DCA.
So what’s the takeaway?
If you’re a probate-law nerd (and who isn’t?!), F.S. 732.514 is what makes this case interesting. Up until when that one-sentence statute makes its appearance, this case is basically an exercise in contract interpretation. Anyone can do that.
It’s once you get past the four corners of the contract and you have to apply its text in the real world of a contested probate proceeding against the backdrop of an arguably conflicting will, that knowing your stuff as a probate practitioner really pays off. Miss how F.S. 732.514 determines the outcome of this case, and you’ve completely misunderstood the nature of the case you’re litigating.