Estate planning clients frequently come to us who are parties to business agreements such as limited liability companies, shareholder agreements, partnership agreements, corporations. These agreements routinely include clauses that govern who may inherit the shares of deceased partners. If you are party to such a contract, it is essential to review it to determine if it fits with your estate planning goals. It is not unusual for us to discover that they conflict. And that can plunge your business partners and loved ones – often the very same people – into a legal mess.
Do not assume that your last will and testament will be the final word on who inherits your business interests. Depending on its wording, the agreement may prevail over your will: your interest may transfer by operation of law, beyond the reach of your will, similar to the way a payable on death account passes to beneficiaries. Two Florida court cases demonstrate what can happen when a business agreement trumps a will, and why it is important to make sure the two documents are “in sync.”
Partnership Agreement Trumps Will: Finlaw v. Finlaw
In 1986 a partnership agreement was entered into by Twila Finlaw and her husband, and another couple. All the parties wanted their share of the partnership to remain in their respective families upon their deaths. Accordingly, the Palmer-Finlaw Associates partnership agreement required that a deceased partner’s share must pass to the surviving spouse, and thereafter to the surviving spouse’s children. The agreement stated:
“Any partner shall have the right and privilege of leaving his or her interest in the Partnership by last will and testament to his or her spouse or to his or her lineal descendants. To protect and preserve the family character of this Partnership, each of the undersigned partners agree to have prepared and to execute a last will and testament so as to ensure that his or her interest in this Partnership will, upon his or her death, pass to and vest in his or her surviving spouse. 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 Palmers passed away, leaving their 50% interest to their son. The other 50% at that point was owned by Twila, the surviving Finlaw spouse. When she died, she left a will bequeathing her interest in the partnership not to her child, Roger S. Finlaw, but to her grandchild, Jeffrey S. Finlaw. This was the match that ignited an estate battle between Roger and Jeffrey.
Grandson Jeffrey argued in court that because he is a “lineal descendant,” his grandmother’s bequest of her partnership interest to him upheld the partnership agreement. The Florida Second District Court of Appeals rejected that argument, ruling that the business agreement trumped her will and that Roger was the rightful beneficiary. The court’s ruling of April 2021 states as follows:
“While the grandson is a “lineal descendant” of the decedent, he is not her “child,” and thus he was outside the class of people who could receive the interest under the plain language of the agreement.”
Limited Liability Company Trumps Will: Blechman v. Blechman
Blechman v. Blechman is another Florida case that underscores the principle that when a conflict exists between a business agreement and a will, the business agreement takes precedence.
In 2009 Bertram Blechman and his sister formed Laura Investments, a limited liability company. Each owned a 50% interest in the business. The operating agreement set forth that upon the death of either one, the decedent’s share was to pass automatically to the decedent’s children, without probate.
Bertram passed away in 2011, leaving two children, Robert Blechman and Cathy Blechman Chermak; an estranged wife of 62 years; and his girlfriend since 2003, Arlene Rogoow. Blechman’s will was admitted into probate. It directed the residue of his estate to pour into his living trust. The living trust called for the distribution of his income from the LLC to be managed for the benefit of Arlene, who was also to receive $5,000 to cover expenses on the Boynton Beach home Blechman left to her.
Blechman’s children objected to the distribution of LLC income to Roogow. The case ultimately made its way to Florida’s Fourth District Florida Court of Appeals, which ruled in April 2015. The court handed a legal victory to Blechman’s children, ruling that the operating agreement overrode the will. Blechman’s interest should have vested in his children upon his death, and the children were owed $89,850 in payments that had already been made to Roogow.
What Steps You Should Take
Since business agreements override your will, a review of any business agreement you are party to must be conducted when you are doing your estate planning. If the agreement does not further your estate planning goals, it may be possible for you to renegotiate the agreement with the other parties to the agreement. If this is not possible, at least our attorneys will be aware of these facts and will help you work with that reality. Call our office at (561) 625-1100 for an appointment, or email us at firstname.lastname@example.org.
Incidentally, the most frequent type of business relationship we encounter in our practice is when family members are parties to a limited liability company for real estate holdings. In this situation, we urge clients to consider not just whether there is conformity between their business agreement and their will, but also whether they can get along with whomever inherits the other family members’ interests. Do you really want to be partners with your in-law, niece, nephew, grandchild when they inherit ? Even if you enjoy a good personal relationship with the person, it does not guarantee you can work with them effectively. This is important to consider when you are negotiating, or renegotiating, your business agreement.