[WSBAPT] LLCs and Probate

Mon Sep 20 10:11:06 PDT 2021

Thanks, Eric.  An inter vivos trust appears to me to be a wholesale abrogation of the law of wills.  Nothing strange about that, as long as it conveys a present interest.  Is an expectancy upon death a ‘present interest’, like a todd?

Roger Hawkes, WSBA # 5173
Sky Valley Law
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From: wsbapt-bounces at lists.wsbarppt.com <wsbapt-bounces at lists.wsbarppt.com> On Behalf Of Eric Nelsen
Sent: Monday, September 20, 2021 9:50 AM
To: WSBA Probate & Trust Listserv <wsbapt at lists.wsbarppt.com>
Subject: Re: [WSBAPT] LLCs and Probate

Honestly I hadn’t remembered that RCW 11.02.091 even existed. But when I re-read it and went back to read commentary on it, I remembered why I never remember it: no one seems to be really certain how far its effectiveness is intended to go, so I decided a while back never to rely on it. (Though now I’m going to try to keep it in mind in litigation if I need to defend a document being challenged on the basis that it’s not a testamentary instrument.) There are also literally zero published cases addressing it, so far as I can find; and the cases citing its predecessor RCW 11.02.090 don’t help much either.

The problem I see with RCW 11.02.091 is that, read literally and expansively, it would completely abrogate the need to ever obey the formalities for a will; and using it in the LLC context is pushing that envelope in a way that I wouldn’t want a client to rely upon.

Here is the commentary in Reutlinger’s Washington Law of Wills and Intestate Succession (3d ed. 2018), Ch. 8.K.3:

Clearly the statute's broad language and the ability of the maker to designate beneficiaries by contemporaneous or subsequent instrument has the potential to render the statute virtually limitless, and in fact commentators on the equivalent Uniform Probate Code provision have been uncertain just how far toward eliminating the need for formal wills it was intended to go. The language caused one writer to "wonder what wills are for. It begins to look like all that is necessary is to get a third party into the act, as an agent, custodian, contracting party, or issuer, and the whole law of wills is displaced."462 Another was more cautious, suggesting that the section "might prove to be a very important provision of the Code. On the other hand, it could be viewed as adding nothing to existing case law . If courts will respect various intra-family agreements which the section may invite, the provision could have very significant impact. By offering courts a broad alternative to the probate route for effectuating expressions calling for transfers at death, the draftsmen may have created a form of competition for wills which might serve to assure that probate procedures will be and remain as simple as possible."463

What the Washington courts will make of the section remains to be seen, but few limitations are expressed.464 Although, as indicated, some commentators seem to see the section as potentially displacing the entire law of wills by the simple expediency of execution of a contract,465 neither case law thus far nor the originally expressed intention of the Uniform Probate Code warrants an overly expansive reading of the statute or the writing of a premature obituary for the formal will.

Even if RCW 11.02.091 supersedes much of the case law respecting what are usually classified (and approved) as "will substitutes," and its further options or refinements remain to be seen, a note of caution might well be inserted here. In the words of the dissenting judge in a case of a will substitute that failed:

“I cannot escape the conviction that Mr. Murphy's plan has failed, not because it was in any way legally deficient, but simply because it was unprecedented. If he was guilty of any lapse in its preparation, it was merely in not taking sufficient account of the fact that the legal mind is invincibly hostile to the new, the strange, and the unfamiliar.”466

462   James N. Zartman, An Illinois Critique of the Uniform Probate Code, 1970 U. Ill. L.F. 413.
463   Richard V. Wellman, The Uniform Probate Code: Blueprint for Reform in the 70's, 2 Conn. L. Rev. 453, 485-86 (1970).
464   Apparently the only case to deal with the statute head-on to date is an unpublished one, but it is instructive in its demonstration that an instrument transferring property at death still must comply with the requirements either of an inter vivos nonprobate instrument or of a will. In In re Estate of Phillips, 93 Wn. App. 1030, No. 16947-2-III, 1998 WL 855506 (Dec. 10, 1998) (unpublished), the court found that a purported trust was invalid as either an inter vivos or a testamentary trust because it did not comply with the requirements for either. The court rejected the contention that RCW 11.02.091 validated the instrument, because apart from the question of testamentary formalities, it was not effective inter vivos as it did not pass any present interest to the trustee; and as a testamentary trust it had to comply with the statute of wills.
Professor Price has opined that the statute could validate an otherwise-invalid community property agreement. John R. Price, The Transmission of Wealth at Death in a Community Property Jurisdiction, 50 Wash. L. Rev. 277 (1975). But cf. Tom Graafstra, Recent Developments—Probate Law & Procedure, 51 Wash. L. Rev. 451, 462 n.35 (1976).
465   See Price, 50 Wash. L. Rev. at 284-85.
466    In re Murphy's Estate, 193 Wash. 400, 424, 75 P.2d 916 (1938) (Robinson, J., dissenting).

Sincerely,

Eric

Eric C. Nelsen
Sayre Law Offices, PLLC
1417 31st Ave South
Seattle WA 98144-3909
206-625-0092
eric at sayrelawoffices.com<mailto:eric at sayrelawoffices.com>

Covid-19 Update - All attorneys are working remotely during regular business hours and are available via email and by phone. Videoconferencing also is available. Signing of estate planning documents can be completed and will be handled on a case-by-case basis. Please direct mail and deliveries to the Seattle office.

From: wsbapt-bounces at lists.wsbarppt.com<mailto:wsbapt-bounces at lists.wsbarppt.com> <wsbapt-bounces at lists.wsbarppt.com<mailto:wsbapt-bounces at lists.wsbarppt.com>> On Behalf Of Karen E. Boxx
Sent: Friday, September 17, 2021 6:37 PM
To: WSBA Probate & Trust Listserv <wsbapt at lists.wsbarppt.com<mailto:wsbapt at lists.wsbarppt.com>>
Subject: Re: [WSBAPT] LLCs and Probate

Wouldn’t a provision in the LLC agreement be enforceable under RCW 11.02.091?  you can, for example, include provisions in shareholders agreements that a deceased shareholder’s shares pass to the spouse on death.

From: wsbapt-bounces at lists.wsbarppt.com<mailto:wsbapt-bounces at lists.wsbarppt.com> <wsbapt-bounces at lists.wsbarppt.com<mailto:wsbapt-bounces at lists.wsbarppt.com>> On Behalf Of Sarah McCarthy
Sent: Friday, September 17, 2021 5:03 PM
To: WSBA Probate & Trust Listserv <wsbapt at lists.wsbarppt.com<mailto:wsbapt at lists.wsbarppt.com>>
Subject: Re: [WSBAPT] LLCs and Probate

Great input Eric, thank you!
Sarah
Sent by dictation from my iPhone. Please excuse typos and missing punctuation!

On Sep 17, 2021, at 4:45 PM, Eric Nelsen <Eric at sayrelawoffices.com<mailto:Eric at sayrelawoffices.com>> wrote:

I agree that probate is needed unless the estate qualifies for the small estate affidavit process. An LLC interest is intangible personal property and must pass by Will or intestacy.

The basic problem as I see it is, the LLC has to determine to whom it should transfer the decedent’s interest. To do that, the LLC needs a legal justification or authority that determines the proper person; if the LLC tries to decide on its own and gets it wrong, it risks liability to the proper heirs and potentially decedent’s creditors.

I know that many people try to put provisions into an LLC to effect a transfer at death or some other pre-arrangement that would avoid probate. But I don’t think there is any statutory authority for that, unless perhaps the interest is held JTWROS pursuant to the general provisions of Ch. 64.28 RCW<https://app.leg.wa.gov/RCW/default.aspx?cite=64.28&full=true>. Even that I have never tried, never seen it done, and I’m not absolutely sure it would work. So having such a document might backfire, if the proper heirs under the Will differ from the person designated in the invalid TOD document.

Ordinary TOD provisions for specific assets are supported by statutory authority, such as the RCWs governing bank accounts or investment accounts, or the relatively new TOD deed for real property. I don’t know of any provisions in Ch. 25.15 RCW or elsewhere in the incorporation statutes that allow TOD of LLC interests. If there is no statutory authority, any attempt at a transfer-on-death document would be deemed a “testamentary instrument” which would have to be executed in accordance with the Will formalities—basically, a Will specific to the asset, which likely would require probate or at least adjudication of testacy to put into effect.

On the effect of the LLC being a California LLC—I don’t think it matters. Since an LLC is an intangible personal property interest, it’s inherently mobile and considered possessed by the decedent at the decedent’s domicile for purposes of determining jurisdiction. So long as the LLC management recognizes the authority of the PR to assign the interest, the CA court doesn’t need to get involved. After all, there is no State-run registry of LLC ownership the way vehicle certificates of title are done.

Sincerely,

Eric

Eric C. Nelsen
Sayre Law Offices, PLLC
1417 31st Ave South
Seattle WA 98144-3909
206-625-0092
eric at sayrelawoffices.com<mailto:eric at sayrelawoffices.com>

Covid-19 Update - All attorneys are working remotely during regular business hours and are available via email and by phone. Videoconferencing also is available. Signing of estate planning documents can be completed and will be handled on a case-by-case basis. Please direct mail and deliveries to the Seattle office.

From: wsbapt-bounces at lists.wsbarppt.com<mailto:wsbapt-bounces at lists.wsbarppt.com> <wsbapt-bounces at lists.wsbarppt.com<mailto:wsbapt-bounces at lists.wsbarppt.com>> On Behalf Of Sarah McCarthy
Sent: Friday, September 17, 2021 3:30 PM
To: WSBA Probate & Trust Listserv <wsbapt at lists.wsbarppt.com<mailto:wsbapt at lists.wsbarppt.com>>
Subject: [WSBAPT] LLCs and Probate

All --

A few questions related to planning around multi-member LLCs after an LLC member passes:

1.  I'm looking for a confirmation or clarification of the following understandings:  It's my understanding that probate is generally needed to legally transfer an LLC member's interest in the LLC, unless the member had a RLT and had previously assigned to the trustee of the RLT all of the member's interests in the LLC.   I note that RCW 25.15.251(6)(b) talks about a member's "transferable interest" being "held in a trust or estate," or being "held by a trustee, personal representative, or other fiduciary."

So, I take this to mean that, once an LLC member dies, assuming there is no RLT in place, generally, in order to transfer the LLC member's interest according to the will or by intestacy, in that case we need to file a probate in order to have a PR appointed, and that court-appointed PR THEN has the necessary legal authority to sign an "assignment" of LLC interests to the appropriate heir/beneficiary, which would be maintained on file with the LLC records.  (Though if the LLC interest fell below $100k in value, I imagine a small estate affidavit could work, since the statute also states that an LLC member interest is "personal property." RCW 25.15.246(1).)

2.  Is there an easy work around to this issue?... Are there provisions that can be included in an LLC Operating Agreement that could provide for/authorize some genre of "transfer on death certificate" that each member could sign in advance of death, and file with the LLC records, which the LLC manager could then effectuate upon a member's death, without a PR needing to be appointed for the member's estate? I'm looking at RCW 25.15.246, which seems to provide for a means by which an operating agreement can authorize the issuance of certificates of interests to a transferee... I'm wondering if the probate is truly necessary, if the members can agree on a means of addressing this issue in advance by means of the operating agreement, or a buy-sell agreement.  Kind of like a revocable transfer on death deed that we can record in advance for real property.

I have these questions for Washington LLCs, as well as for Washington residents who hold member interests in LLCs in other states, such as CA... (though I do realize that LLCs are creatures of state law, so a review of the CA LLC statutes may be necessary...)

3.  Does anyone know, under California law, is an ancillary/California probate needed in order to appoint a CA-PR to transfer CA LLC member interests?  Or, can we assume that a Washington probate will suffice, to appoint a Washington PR, who would then have authority to assign out member interests in the CA LLC?

Thanks for any input!

Sarah

Sarah O’Farrell McCarthy

(Pronouns: she / her)
Attorney | Kelly, Arndt & Walker, Attorneys at Law, PLLP
P.O. Box 290 | 6443 Harding Avenue | Clinton, WA  98236

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