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George F. Bearup, J.D. Senior Legal Trust Advisor

November 21, 2022

Contracts vs. Wills: Who Wins the Devise

Background: We often address the implications of a beneficiary designation in estate planning, e.g. IRAs; life insurance; transfer-on-death (TODs.) Yet another contract that can conflict with testamentary intent expressed in a Will or Trust is a provision in a limited liability operating agreement or partnership agreement that can interfere with, or frustrate,  a decedent’s testamentary intent. It is clear that a Will does not control the disposition of nonprobate assets. In re Estate of Maxwell, No 294357, Michigan Court of Appeals, November 9, 2010. Less certain is when the nonprobate ‘contract’ is not clear vis-à-vis the terms of a Will, or the implications of a specific devise.

Nonademption of Devises: The Estates and Protected Individuals Code (EPIC) contains a rule of construction, but it is only applicable to Wills. MCL 700.2602 provides that a specific devisee has a right to the specifically devised property in the testator’s estate and with regard to all of the following:

  • Any balance of the purchase price, together with any security agreement owing from the purchaser to the testator at death by reason of sale of the property;
  • Any amount of a condemnation award for the taking of property unpaid at death;
  • Any proceeds unpaid at death on fire or casualty insurance on, or other recovery for, injury to property;
  • Property owned by the testator at death and acquired as a result of foreclosure, or obtained in lieu of foreclosure, of the security interest for a specifically devised obligation;
  • Real property or tangible personal property owned by the testator at death that the testator acquired as replacement for specifically devised real and tangible property; and
  • Unless the facts and circumstances indicate that ademption of the devise was intended by the testator or ademption of the devise is consistent with the testator’s manifested plan of distribution, the value of the specifically devised property to the extent the specifically devised property is not in the testator’s estate at death and its value or its replacement value is not covered under (a) to (e).

How business agreements apply to the above rules with regard to devised assets can lead to ambiguity when an ademption may have occurred.  A recent Florida decision demonstrates how the terms used in the business  can either defeat the terms of a Will, or be read in harmony and be consistent  with the decedent’s Will.

Tita v. Tita, 334 So.3d 646, 2022 WL 610127 (Florida 4th District Court of Appeals, March 2, 2022)

Facts: The decedent was one of the members, of a family-owned LLC. The LLC held title to two buildings. The decedent-member wanted his two children to receive his membership interest in the LLC on his death, and for his wife to receive the balance of his residuary estate. After the decedent’s death his wife sued to invalidate the Will’s specific bequest of the LLC membership interests to the decedent’s two children. The decedent had signed an LLC Operating Agreement that contained the following clause:

Death Buy Out: Notwithstanding the foregoing provision of Section 8, the Members covenant and agree that on the death of any Member, the Company, at its option, by providing written notice to the estate of the deceased Member within 180 days of the death of the Member, may purchase, acquire and redeem the interest of the deceased member in the Company pursuant to the provision of Section 8.5.

The decedent’s Will contained the following specific devise of his LLC membership interests to his children:

Specific Gift of LLC Interest: I give all of my interests in the Layton Hills Properties, LLC to my son Andre and my daughter, Sandra, in equal shares. If any of them predecease me, the share of the deceased beneficiary will pass to that person’s descendants who survive me, per stirpes.”

Dispute: The widow challenged the devise to the children. She argued that because the LLC exercised its rights of redemption under the LLC Operating Agreement’s buy-out clause, it was impossible for the decedent’s two children to actually receive their father’s LLC interest under his Will’s specific devise of his membership units. If the decedent’s estate is contractually obligated to sell the membership interests back to the LLC, there will not be any LLC interest left in the estate to then devise to the decedent’s children. Following this reasoning, the widow then claimed that as the residuary beneficiary of her late husband’s Will, she is entitled to the Membership interests’ redemption proceeds. The widow relied upon two Florida decisions, discussed below, to support her claim.

Trial Court: The trial court adopted the widow’s claims, finding that the decedent’s two children were not entitled to take the redemption proceeds of the decedent’s LLC membership interests. The trial court relied on two earlier Florida decisions.

Blechman: In this court decision there was a dispute over the decedent’s ownership interest in an LLC. The LLC Operating Agreement, signed by the decedent, provided: “In the event of a death of a Member during the duration of this Agreement, the Membership Interest of the deceased Member shall pass to and immediately vest in the deceased Member’s then living children and issue of any deceased child, per stirpes.” The decedent’s Will and Trust conflicted with this contractual obligation. The court held that the contested LLC interests were never part of the decedent’s probate estate, but were transferred immediately to, i.e. vested in, his children as nonprobate transfers, thus bypassing the decedent’s conflicting estate planning documents entirely.

Finlaw: In this court decision, there was a dispute over the decedent’s ownership interest in a Partnership Agreement that contained the following clause: “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 decedent’s Will conflicted with this contractual obligation in the Partnership Agreement. The Court held that based upon the “so as to vest his or her interest” terms of the Partnership Agreement the contested partnership interests had to pass in accordance with the terms of the Partnership Agreement, not the decedent’s Will.

Appeals Court: The Court of Appeals reversed the decision of the trial court for a couple of reasons.

Florida Vesting Statute: First, the Court relied on a Florida probate court section that often does not receive much attention. [F.S. 732.514.] It provides that the death of a testator is the event that vests the right to devises unless the testator in the Will has provided that some other event must happen before the devise vests. Based on this section, the Court harmonized three controlling elements: (i) the decedent’s contractual obligation under the LLC’s Operating Agreement; (ii) the decedent’s testamentary wishes articulated in his Will; and (iii) Florida’s probate law which governs what happens when a specifically devised asset is sold by the decedent’s estate.

“The decedent’s bequest to appellees of his interest in the Company vested upon his death. Once vested, the Operating Agreement controlled the nature of appellee’s interest and the terms of the buyout… Here, the decedent was in possession of a membership interest in the Company when he died. Nothing in the Operating Agreement operated to trump the Will and effect a transfer of the membership interest outside of the Will. The membership interest devised to appellees was a specific legacy that became part of the probate estate. Because the Company elected to exercise its right to purchase the decedent’s membership interest from the estate, the appellees are entitled to receive the proceeds of the sale under the Will.”

Blechman: This decision was distinguished because this Operating Agreement was not result in an alternate nonprobate transfer. ”In contrast, the Operating Agreement in this case anticipated that a transfer of a member’s interest would be through a testamentary devise; there was ot explicit language addressing the disposition of a membership interest upon death.”

Finlaw: This case was distinguished because this LLC Operating Agreement’s buy-out clause did not provide for who receives the LLC after the deceased member’s death. In short, the LLC’s buy-out clause and the decedent’s Will did not conflict, so both the Will and the Operating Agreement could be enforced. “The Operating Agreement here does not specify to whom a decedent’s interest may be passed upon a member’s death, so there is no conflict between the Operating Agreement and the decedent’s Will.”

Vesting: The closest Michigan’s EPIC comes to the Florida statute on when a specific devise vests is MCL 700.2602 which provides: A specific devisee has a right to the specifically devised property. The statute does not say when that right actually vests. Vesting is also indirectly addressed in Michigan’s disclaimer statute. It provides that the effective date of a governing instrument, other than a Will or trust created by Will, means the date on which a property right vests or a contract right arises, even though either right is subject to divestment.

Nonprobate Transfers: There may be occasions when the provisions of a stock purchase agreement,  an LLC Operating Agreement, or Partnership Agreement conflict with the specific devise under the testator’s Will. The outcome of that conflict may turn on whether the provisions of the business agreement provide for immediate vesting, or they function as a nonprobate transfer device. EPIC’s provision on nonprobate transfers governs all sorts of written instruments, including: “Property the decedent controls or owns before death that is the subject of the instrument passes to a person the decedent designates either in the instrument or in a separate writing, including a Will, executed either before, at the same time as, or after the instrument.” [MCL 700.6101(1)(c).] An important distinction is made in the Comments to this provision. It notes that valid nonprobate documents that are described in 6101(1) all serve a purpose other than simply to shift ownership at death. “That change in ownership at the time of death is upheld under these other documents because the attention given to signing the documents for its primary purpose is sufficient to ensure that the functions served by the formalities required for signing a will have been satisfied.” By the same token, if the governing instrument’s apparent primary purpose is to convey title at the time of death, then the governing instrument must comply with the execution requirements of MCL 700.2502 for Wills, or the instrument will be deemed unenforceable as a testamentary device.

Conclusion: The obvious point is that if a nonprobate governing instrument seeks to address the transfer of an interest on the death of the interest-holder, that agreement needs to be consistent with the decedent’s Will and Trust. Otherwise, expect some probate litigation to determine  ‘who wins?’