Potter Update: Informal Business Succession Planning Takes Another Twist

The rules regarding estate planning through business agreements are changing again. As this blog discussed in 2021, the Maryland Court of Special Appeals held that the operating agreement of a Maryland LLC could not control the disposition of a member’s interest after their death. Potter v. Potter, 250 Md. App. 569, 252 A.3d 17 (2021). In practical terms, the Court held that any document that purports to transfer title to property upon the death of its owner must be executed according to the Maryland law regarding Wills.

The Potter decision upset decades of informal attempts to integrate estate planning into business arrangements. As it stands, many business owners are unaware that their succession plan in their operating agreement will not be effective to transfer their ownership interest upon their death.

However, recent legislation abrogates the rule from Potter v. Potter, allowing for an operating agreement to control disposition of a deceased member’s interest without adhering to the formalities of a will. Specifically, the rule reads that:

“Transfers on death pursuant to an operating agreement of a limited liability company or a partnership agreement of a general or limited partnership are effective according to the operating agreement or partnership agreement and are not to be considered testamentary.”

Therefore, the new rule applies not only to operating agreements of LLCs (like in Potter), but also extends to general and limited partnership agreements. The rule would also apply to any such agreement in effect on the effective date of the Act, meaning it would retroactively enable existing agreements.

There is a significant caveat. While the legislation has been passed and signed by the Governor, the rule does not take effect until October 1, 2022. Therefore, we are in a state of limbo until the effective date, at which point the new rule retroactively applies. Now is a good time to revisit your estate plan to ensure your plan works no matter the rule.

Key Takeaway: Planning Coordination is Still a Must

Whether or not the rule discussed above impacts your business is not important. The important lesson is that the governing rule has changed multiple times in quick succession, leading to uncertainty about their effectiveness. The bottom line is that your business assets must be coordinated with your estate planning documents. And your estate planning documents, and your corporate, partnership or LLC documents, must be updated as your life changes or the law changes. Effective estate planning and well-written documents are about making sure that your wishes are respected in life and in death.

Contact the lawyers of Altman & Associates, a Division of Frost Law should you wish to discuss your business planning.

Contributed by Paul Tracy, Associate

Share This Story, Choose Your Platform!


Receive our new blog articles in your email inbox.
  • This field is for validation purposes and should be left unchanged.


Recent Posts

linkedin facebook pinterest youtube rss twitter instagram facebook-blank rss-blank linkedin-blank pinterest youtube twitter instagram