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Two Wives, One Operating Agreement, Zero Estate Certainty

A recent Maryland case, Potter v. Potter, reminds estate planners to stress to our clients the importance of updating legal, estate, and business documents upon significant life events such as divorce, marriage, and death.  

In Potter v. Potter, a member of an LLC died.  The operating agreement of the LLC stated that if his death were to occur, his interest conveyed to Wife #1, who then became a member of the LLC.  However, the husband had divorced Wife #1 and had remarried Wife #2.  The LLC operating agreement was never changed to reflect this life event.

Who Gets the Husband’s LLC Interest: Wife #1 or Wife #2? 

The question before the Court was:

“Is a provision in a limited liability company operating agreement that purports to transfer a member's economic interest at death enforceable, even though the operating agreement was not executed with the formalities required under Maryland law”?

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.  Therefore, the provision in the LLC operating agreement was void and the husband’s interest passed according to his Will and not the LLC operating agreement.

Most lawyers have believed that an LLC operating agreement or a partnership agreement is a contract between its members/partners and that the contract would be valid when a member/partner dies.  This was affirmed in a 1968 New York State Court of Appeals decision in the Matter of the Estate of Abraham Hillowitz, that held the provision in the decedent’s partnership agreement that purported to transfer the decedent’s interest in the partnership at his death was valid and did not have to satisfy the execution requirements for Wills.

Key Takeaway: Assets & Estate Planning Coordination is a Must

Whether or not the Potter case becomes law in Maryland (or elsewhere) is not important.  The lesson of Potter is important.  Your assets must be coordinated with your estate planning documents.  Your estate planning documents, and your corporate, partnership or LLC documents, must be updated as your life changes or the law changes.  The words in these documents matter and it matters how they are executed.   

Finally, Potter is a good reminder that estate planning is about more than estate taxes.  Effective estate planning and well-written documents are about making sure that your wishes are respected in life and in death.

Gary Altman is the principal and founder of Altman & Associates. He can be reached at 301-468-3220.

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