In probate proceedings how assets are titled is a big deal. While I may walk around thinking that the assets of my single-member LLC are all mine, they’re really not. What I actually “own” or hold title to is my LLC membership interest, and it’s the LLC that in turn owns or holds title to the underlying assets. That title distinction usually doesn’t matter for tax purposes, and sometimes doesn’t matter for asset protection purposes, but always matters for probate purposes (same probate rule applies for single-shareholder corporations).
Case Study
Ezeamama v. In re Estate of Chibugo, — So.3d —-, 2024 WL 1894863 (Fla. 3d DCA May 01, 2024)
In this case the decedent owned a single-member LLC, which in turn held title to real property that was mortgaged. When she died the mortgage holder filed a creditor claim against her estate to enforce its mortgage (which probably wasn’t necessary, so says F.S. 733.710(3)). For some reason the estate’s personal representative (PR) thought it would be a good idea to ask the probate judge to rule on whether the LLC’s real estate was an estate asset. According to both the PR and the creditor the real estate’s not a probate asset. So if everyone with an economic stake in the question is agreed, problem solved? Nope, the probate judge ruled the other way, concluding that the LLC was automatically dissolved when the sole owner died, so yeah, the LLC’s property is part of the probate estate. Who was right? Not the probate judge, so says the 3d DCA.
Are assets of a decedent’s single-member LLC assets of her probate estate? NO
First, the 3d DCA reminded us all — again — that just because an LLC’s owned 100% by a decedent doesn’t mean its underlying assets are assets of the probate estate; they remain one step removed. So saith the 3d DCA:
In Gettinger v. Gettinger, 165 So. 2d 757, 757 (Fla. 1964), the Florida Supreme Court held that “the affairs of a corporation, even though substantially owned by a decedent, cannot be administered by decedent’s executor as assets of the decedent’s estate.”[FN4] The fact that the Decedent owned the LLC in full does not change this result. See BankAtlantic v. Estate of Glatzer, 61 So. 3d 1222, 1223 (Fla. 3d DCA 2011) (“In [Gettinger], the Supreme Court of Florida held that ‘the affairs of a corporation, even though substantially owned by a decedent, cannot be administered by decedent’s executor as assets of the decedent’s estate.’ In this case, ‘substantially’ is 100%, and the result is identical.”). Thus, assets owned by a single-member entity are not estate assets. See id. (“[T]he stock of the professional association is an asset of the Estate, but the funds of the professional association are a step removed from the Estate.”).
[FN 4]: Although the case at hand deals with an LLC rather than a corporation, the same principle is applicable: an LLC is an entity separate from its members, just as a corporation is separate from its shareholders. See Joel W. Mohrman & Robert J. Caldwell, 1 Handling Business Tort Cases § 6:3 (2015 ed., June 2020 Update) (“[J]ust like the corporation, … an LLC is treated as a separate legal entity apart from its members.”); see also Palma v. S. Fla. Pulmonary & Critical Care, LLC, 307 So. 3d 860, 866 (Fla. 3d DCA 2020) (“[A]n LLC is an autonomous legal entity, separate and distinct from its members.”).
Does a single-member LLC automatically dissolve when the owner dies? NO
OK, so the assets of your LLC aren’t assets of your probate estate, but what if your death causes your LLC to dissolve, wouldn’t that drop its assets back into your probate estate? Sure, if that’s what happened under Florida law. But it doesn’t. When you (the LLC’s owner) die you’re automatically “dissociated” from your LLC — but the LLC doesn’t “dissolve” — its legal existence continues. In other words, your single-member LLC outlives you. So saith the 3d DCA:
Though the death of an LLC member is an event causing dissociation, dissolution is not automatic; rather, the LLC must be formally dissolved. Section 605.0602(7)(a), Florida Statutes (2023), provides that “[a] person is dissociated as a member if … [t]he individual dies ….” Upon “[t]he passage of 90 consecutive days during which the company has no members” the LLC “is dissolved and its activities and affairs must be wound up ….” § 605.0701(3), Fla. Stat. (2023). Upon the occurrence of an event causing dissolution, set forth in section 605.0701(1)-(3), the LLC “shall deliver for filing articles of dissolution.” § 605.0707(1). Then, “the [LLC] shall cease conducting its business and shall continue solely for the purpose of winding up its affairs ….” § 605.0707(4).
Accordingly, when the Decedent died on March 23, 2023, she was dissociated from the LLC under section 605.0602(7)(a). Not until ninety days after she passed—well after the probate court’s April 6, 2023 denial of the Motion to Determine Assets—did it become an event causing dissolution under section 605.0701. Section 605.0707 then requires the LLC to be dissolved by filing articles of dissolution. Still, the LLC continues for certain purposes, such as winding up. Id.
What’s the takeaway?
Florida’s expressed public policy, and the natural inclination of well-meaning judges, is to do what you can to promote the “speedy settlement of estates” and “the payment of claims and the distribution to the beneficiaries” in a timely fashion. Pezzi v. Brown, 697 So. 2d 883, 886 (Fla. 4th DCA 1997). We can all agree unnecessary delay is a bad thing. On the other hand, this laudable goal sometimes bumps up against other important priorities, like respecting jurisdictional boundaries in court proceedings. The value of those boundaries may not be immediately apparent, but they matter. Courts have immense power; for all sorts of good reasons that power needs to be exercised in as limited a fashion as possible. Jurisdictional boundaries are one of the guardrails that furthers this important public policy.
Which brings me to the second takeaway. My experience is that parties ask probate judges to rule on lots of questions that don’t really require a court order — with sometimes unintended consequences. We’re all human (and our court system’s overworked and underfunded), so it’s important to recognize that just because you ask your judge to follow what you know to be the correct legal rule doesn’t mean you’re going to get the answer you want. In this case the only two parties we’re made aware of with an economic stake in the administration of the estate — the PR and the creditor — both asked the judge to rule one way (if they’re agreed, why was an order even needed?). The 3d DCA tells us the judge decided on his own to rule the other way (which turned out to be the wrong legal ruling). Bottom line, no matter how “correct” you might be on the law don’t ask your judge to decide a question you and the other interested parties can resolve by agreement. You might not like the answer you get.