THE CONFUSING LAW OF WILL SUBSTITUTES
“Many legal doctrines today appear jarringly, carelessly, almost randomly out of harmony with one another. The chaos has gone largely undetected and hence, has continued to swirl unimpeded. But it is there to be seen, if we only care to look. To observe the chaos, one has simply to forsake all instruments of magnification and scan the skies with the naked eye.” -Adam Hirsch, Professor of Law, Florida State University.
Professor Hirsch’s enlightened and succinct summary of the inconsistencies in the law of inheritance is most apparent when viewing the body of law surrounding the issue of Will Substitutes. The increasing use of Will Substitutes to dispose of property upon death has caused great confusion among both practitioners and lay persons in the State of Florida. Compounding the confusion problem is the fact that our probate law practice is observing the increased use of Will Substitutes to remove many testamentary gifts and assets from probate courts and the policies that are written into the Florida Probate Code to protect the surviving spouse and other family members. Simply stated, the confusing law of will substitutes often defeats the public policy implemented by our legislature in the form of protecting the rights of the surviving family (e.g., elective share, homestead, exempt property and allowances as provided in Part IV of F.S. 732. F.S. 732.2105.
The Fourth District Court of Appeals Provides Clarity
The Florida Fourth District Court of Appeals in Blechman v. Estate of Blechman, 160 So. 3d 152 (Fla. 4th DCA 2015) makes a valiant effort to clarify and define what constitutes a Will substitute in Florida for purposes of assisting members of the Bar and lay persons in their estate planning. As the Blechman court noted in its opinion, estate planners frequently use non-probate mechanisms (a/k/a Will substitutes) 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 Trust, Joint Tenancy, life insurance, employee benefit and other annuity beneficiary destinations, payable on death or transfer on death accounts, and ‘any other contractual means. 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.
Can the Operating Agreement of an LLC Serve as a Will Substitute?
In Blechman the Decedent owned a fifty percent (50%) membership interest in an LLC created with his sister in 2009. The Operating Agreement expressly limited the decedent’s ability to devise or otherwise transfer his membership interest. The Agreement set forth three circumstances permitting disposition of a membership interest:
- Where the member transfers during his lifetime “all or a portion of his or membership interest” in accordance with the Agreement;
- Where the member bequeaths the membership interest in the member’s Last Will and Testament to members of the immediate family of the respective member; or
- Where all such membership interest of a deceased member are inherited or succeeded to by members of the immediate family of the deceased member.
Should none of these three scenarios occur prior to a member’s death, the Agreement provided that the member’s interest passes to and immediately vests in the deceased member’s then living children and issue of any deceased child per stirpes.
Following the Decedent’s death and admission of his Last Will and Testament to probate, litigation ensued between the decedent’s children and a girlfriend of the decedent (the decedent was estranged from his spouse for many years). Prior to his death, the Decedent had amended his trust to provide for income from the LLC to be paid to his girlfriend. Since his Will was a pour-over Will into the Trust (the trust was amended prior to death naming the girlfriend as a beneficiary), the girlfriend’s lawyers argued that he had effectively disposed of his LLC interest through one of the three enumerated possibilities under the Agreement. The Decedent’s children, however, argued that the Agreement and its provisions for such “immediate vesting” explicitly steered the membership interest away from the probate estate and acted as a Will Substitute.
We are starting to see the chaos referred to by Professor Hirsch! The Blechman court astutely noted and applied the general rule and legal maxim that express language in a contractual agreement specifically addressing the disposition of property upon death will generally defeat a testamentary disposition of said property. The court held that in this case, by virtue of the Operating Agreement’s default provision, the deceased membership’s interest immediately passed outside of probate to his children upon his death, thus nullifying his testamentary devise (the trust was amended prior to death naming the girlfriend as a beneficiary) as an attempted disposition of property not subject to his ownership. Therefore, since the court held that the decedent’s children were the rightful owners of their father’s membership interest in the LLC, the Fourth DCA reversed the trial court’s order, and remanded with instructions that the decedent’s membership interest not be considered an estate asset.
This opinion serves as a reminder of the uncertainty and difficulty that lawyers face when challenged with Will substitutes in the context of inheritance disputes and the importance of hiring a Florida Probate lawyer to navigate this confusing field of law, especially when Will Substitutes are involved in determining the rights of the surviving family.