As a business owner we are sure you’ve wondered “What happens with my business if something unexpected happens”? That is a valid question for which there are various alternatives. Even though the transfer of corporate and LLC interests outside of probate court, and without a trust, is a viable alternative, business owners should be aware of the complexities surrounding these options before opting for any of these alternatives.
The following alternatives can be used as alternatives for the Succession of Closely Held Business Interests at the death of the owner:
1. Will and No Will
If the business owner owns a corporation or LLC interest individually at the time of death, the interest will pass according to the laws of intestate succession. However, if the business owner has a Will, the business will pass according to the terms of the Will. In both cases, the heirs will have to start a probate process.
2. Revocable Trust
If an individual holds a business interest within a revocable trust at their time of death, or if the Will directs such interest into the trust, the provisions within the trust empower the trustee to assume the business owner’s role. This allows the trustee to manage the business and carry out the owner’s intentions, whether that involves selling the business or continuing its management.
3. Contract or by Operation of Law
a) Transfer of Securities on Death
Florida has adopted the Uniform Transfer-On-Death Security Registration Act (Fla. Stat. §§ 711.50- 711.512) which permits the transfer of securities, defined to include most Business interests, by “TOD” beneficiary designations similar to a bank or brokerage account. In this case, the Business must accept the TOD registration for it to be effective.
The term “security” is defined as a share, participation, or other interest in property, in a business, or in an obligation of an enterprise or other issuer, and including a certificated security, an uncertificated security, and a security account, but does not specifically mention LLC membership interests. However, it is presumably broad enough to include LLC membership interests.
The pay on death registration may be canceled or changed at any time by the owner without consent of the beneficiary. Any consents to admission as a member or partner should be executed following the death of the Client, because the TOD registration is generally revocable until the owner’s death.
b) Survivorship
i. Joint tenants with rights of survivorship (JTWROS)
In the case of a joint tenancy, the surviving co-tenant is an existing Business owner and thus should otherwise be qualified to continue as an owner.
ii. Tenants by the entireties (TBE)
As with a Business interest owned as JTWROS, the surviving spouse is an existing Business owner and thus should otherwise be qualified to continue as an owner.
c) Provisions in Governing Documents
Courts have recognized provisions in the governing documents providing for ownership succession. In Blechman v. Estate of Blechman, 130 So. 3d 152, 154 (Fla. 4th DCA 2015), the court held that the Membership Interest of the deceased Member shall pass to and immediately vest in the deceased Member’s then living children. In the case there were conflicting provisions in a Revocable Trust and the Operating agreement, but the court concluded that the operating agreement overrode the provisions of the decedent’s revocable trust because the express terms of the Operating Agreement created a legally enforceable right, while a disposition under a testamentary document such as a will or a revocable trust creates only an expectancy.
Although this precedent holds the validity of inheritance agreements contained in an LLC operating agreement and its use is becoming increasingly common, inheritance agreement in the operating agreement should be use if there are no other available better options to transfer the business interest since there is no provision in any Florida statute specifically authorizing such provisions, however, it is an open question as to whether an operating agreement provision naming an inheriting member would be effective to override a will or revocable trust provision to the contrary.
Conclusion
The transfer of a business interest is an important matter, not solely decided by the business owner. There is a conversation to be had with the descendants of the founding member and other members. The entity governance documents may have provisions that limit the transferability of the business for multiple reasons, including ensuring that a family business stays in the family or protecting the S corporation status of an LLC taxed as an S corporation. In addition, other members desire to control the admissibility of new members or have an opportunity to sell the membership interest if they would not like to continue working with the inheriting members.
Careful consideration should be given to all the available options to make sure the business owners’ goals are met. I you need assistance, book a 15-minute free call here
