[WSBAPT] Transferring LLC Units

[Eric Nelsen]

Joshua—Thanks for this exchange; maybe this time I’ll actually remember for a while that RCW 11.02.091<https://app.leg.wa.gov/RCW/default.aspx?cite=11.02.091> exists.

In the meantime, I had another brief thought on this. I haven’t looked at the Uniform Probate Code commentary to find out if this is true, but I wonder if this provision was intended more like a severability clause for the “instrument of transfer”? I think there were old instances in the cases where long and complex documents with multiple purposes were deemed invalid in their entirety because they included a transfer-on-death provision in one section. Thinking of it that way, the operative part of the statute, subsection (1), might be read merely to “sever” the invalid TOD clause from the remainder of the instrument:

(1) An otherwise effective written instrument of transfer may not be deemed testamentary solely because of a provision for a nonprobate transfer at death in the instrument.

That by itself doesn’t actually say that the TOD clause is valid; it just says that the “otherwise effective written instrument” may not be deemed testamentary “solely” because it contains a TOD clause. Thus, saving the instrument from invalidity, but not necessarily rendering valid the TOD clause....

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 <wsbapt-bounces at lists.wsbarppt.com> On Behalf Of Joshua McKarcher
Sent: Friday, July 8, 2022 11:15 AM
To: WSBA Probate & Trust Listserv <wsbapt at lists.wsbarppt.com>
Subject: Re: [WSBAPT] Transferring LLC Units

Eric,

You are a gentleman and a scholar. Thank you.

I follow all that interesting commentary, and I’m in favor of giving those interests via trust or will whenever possible. [Friday morning edit, since I wrote most of the below last night: Jeff, if there is a disgruntled son involved, I might put it in the LLC agreement (with wife’s signature waiving her CP interest, if any; see below) AND (in the body of) a codicil, but not as tangible personal property (TPP) – definitely cannot be passed via a TPP memo since it is an intangible equity interest. Maybe the will says something like I believe I have in made a valid disposition of my equity interest in ABC LLC under RCW 11.02.091 and the LLC’s agreement. However, if for any reason the equity interest becomes part of my probate estate, I give it to [LLC member].” How can it hurt, right? Heck, the wife’s will could say something similar like “I believe my spouse has made a valid disposition of his equity interest (etc.) . . . but if not, then I give my interest in the equity in ABC LLC to [LLC member].” Now the disgruntled son has a lot more to beat than “judges never heard of this 11.02.091 baloney before” reticence. Even if both spouses die in the same car accident.]

But [aside from Jeff’s situation] forgive me if I believe that the same court that decided Rathbone would approve quite readily a well-drafted (and otherwise valid) LLC agreement that thoughtfully recites the members’ desires not to do business with anyone else as consideration for entering into the arrangement and to provide a simple manner of leaving the surviving member with the ownership interest to dispose of at death as he wishes, if, of course, the spouses who are getting nothing from the deal signed off on it after having opportunity to consider their release of any community interest, etc. (Lawyers obtain such spousal waivers for other provisions lawyers put into LLC agreements all the time; nothing special there.)

In fact, I would bet that (at least simpler) LLC agreements have accomplished just what is being discussed without being challenged (thus no case law), because such ease is one of the entire points of the LLC form of entity.

None of this means it magically solves or changes tax issues, community property issues, and other issues that can arise under any plan, however “documented.” But I think a court would be hard pressed to twist the plain meaning of this particular statute to disqualify what I describe above.

Rather, I expect that a document may one day be disapproved that someone uncarefully drafts thinking and hoping “too cleverly by half” that it meets the requirements of this statute when it somehow otherwise violates public policy or is so grossly inconsistent with even the broadest meaning of the statute that it simply cannot be permitted by 9 justices looking at it. (A contract cannot just do whatever it wishes: it still must have consideration, for example. Even a “deed of gift” is a particular thing, not just anything declaring itself a deed of gift when it just plain isn’t.)

E.g., imagine a twentysomething named Jimmy trying to enforce a “unilateral contract” signed only by Uncle Josh – and in the presence of nobody except Nephew Jimmy – that purported to give Nephew Jimmy $20,000 [or even a car or ring, to address the TPP concept mentioned this morning] if Jimmy sits vigil with his dying uncle for the final 72 hours of his uncle’s life. It’s a contract! Maybe it’s valid apart from testamentary form and formalities.

To my view, a court could easily disallow that “unilateral contract” as against public policy and as being not the kind of “contract” the legislature ever possibly intended, reading the statute in context (or perhaps “textually”). Such a court would not make hash of the statute in holding that – unlike the LLC agreement described above – the proffered “unilateral contract” is much more akin to an unwitnessed will that happens magically to benefit the only person who was there at its making.

But I really doubt it will happen to a thoughtfully drafted LLC agreement among sophisticated and counselled parties that simply wish to arrange their business affairs as my hypothetical LLC members do. There is no reason both much be “okay” or “no good.” At least in my reading of things. 😉

Fun! (Well, for me? Only? I hope not . . . )

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 Eric Nelsen
Sent: Thursday, July 7, 2022 5:37 PM
To: WSBA Probate & Trust Listserv <wsbapt at lists.wsbarppt.com<mailto:wsbapt at lists.wsbarppt.com>>
Subject: Re: [WSBAPT] Transferring LLC Units

Huh! Since you pointed it out I faintly remember this statute coming up a while back. I searched and found an email in an exchange last September I had with Karen Boxx. Here was my response, stealing Reutlinger’s erudition to avoid having to come up with my own (note that I have now managed to completely forget about this statute at least twice in the last 10 months):

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 Joshua McKarcher
Sent: Thursday, July 7, 2022 4:06 PM
To: WSBA Probate & Trust Listserv <wsbapt at lists.wsbarppt.com<mailto:wsbapt at lists.wsbarppt.com>>
Subject: Re: [WSBAPT] Transferring LLC Units

Eric,

I am loathe ever to disagree with you – it feels riskier than taking a fiduciary assignment! -- but may I offer https://app.leg.wa.gov/RCW/default.aspx?cite=11.02.091 into evidence, and particularly (2)(c)and (3) “contract”.

I think LLC agreements may be among the primary kinds of agreements this statute is aimed at. Others can fight the validity of the LLC agreement on ordinary contract-validity grounds, but I don’t think they can assert the transfer to the other member is invalid because it is testamentary.

Open to other views. 😉

All my best, Josh

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 Jeff at bellanddavispllc.com<mailto:Jeff at bellanddavispllc.com>
Sent: Thursday, July 7, 2022 4:46 PM
To: 'WSBA Probate & Trust Listserv' <wsbapt at lists.wsbarppt.com<mailto:wsbapt at lists.wsbarppt.com>>
Subject: Re: [WSBAPT] Transferring LLC Units

This is all very interesting.  The problem I have is I did not do the “older” member’s estate plan.  They are married, most likely have and CPA, so if older member dies first that person’s Will would not be probated.  That member also has children who think the other member is a “gold digger.”  I am trying to get copies of what EP documents they have to see what can be done.  However, what happens if you sign an operating agreement like a Will?  How will that insure the transfer is made.  Would it not be better to do a separate “Buy-Sell” for a nominal sum?

Jeff

W. Jeff Davis
BELL & DAVIS PLLC
P.O. Box 510
720 E. Washington Street, Suite 105
Sequim WA 98382
Phone: (360) 683.1129
Fax: (360) 683.1258
email: jeff at bellanddavispllc.com<mailto:jeff at bellanddavispllc.com>
www.bellanddavispllc.com<http://www.bellanddavispllc.com/>

The information contained in this e-mail message may be privileged, confidential, and protected from disclosure. If you are not the intended recipient, any dissemination, distribution, or copying is strictly prohibited. If you think that you have received this e-mail message in error, please e-mail the sender at info at bellanddavispllc.com<mailto:info at bellanddavispllc.com>  or call 360.683.1129.


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 Eric Nelsen
Sent: Thursday, July 7, 2022 3:31 PM
To: WSBA Probate & Trust Listserv <wsbapt at lists.wsbarppt.com<mailto:wsbapt at lists.wsbarppt.com>>
Subject: Re: [WSBAPT] Transferring LLC Units

I’m against having such a provision in the LLC documents, and agree that it would have to be executed with testamentary formalities in order to be valid.

My analysis has been that an ownership interest in an LLC is an asset, just like a stock share. In every other instance of a non-probate transfer of an asset at death, there is an enabling statute that provides for survivorship: bank accounts, transfer on death deeds, pay-on-death accounts, etc. There is no enabling statute in the LLC rules that authorizes survivorship of an ownership interest. Therefore, it would have to be a testamentary disposition, and so must meet the formalities of a will.

At most, I have included in the LLC agreement a right of first refusal, mandatory buy-back, or some other mechanism for the deceased individual’s share to be purchased or otherwise cashed out from their Estate. Those are merely restrictions on transfer, and so aren’t testamentary and would be valid (assuming no violation of the common-law prohibition against restraints on alienation).

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 Jeff at bellanddavispllc.com<mailto:Jeff at bellanddavispllc.com>
Sent: Thursday, July 7, 2022 2:33 PM
To: 'WSBA Probate & Trust Listserv' <wsbapt at lists.wsbarppt.com<mailto:wsbapt at lists.wsbarppt.com>>
Subject: [WSBAPT] Transferring LLC Units

Listmates:

Two member LLC.  They are not related and each is married (to different people).  They want a deceased member’s Units to go to the surviving member.  I know it can be done with a Will.  But can members enter into an agreement, or better yet, amend the operating agreement to say that a deceased member’s units go to the surviving member.  If you do it that way, must the agreement be signed like a Will?

Your thoughts.

Jeff Davis

W. Jeff Davis
BELL & DAVIS PLLC
P.O. Box 510
720 E. Washington Street, Suite 105
Sequim WA 98382
Phone: (360) 683.1129
Fax: (360) 683.1258
email: jeff at bellanddavispllc.com<mailto:jeff at bellanddavispllc.com>
www.bellanddavispllc.com<http://www.bellanddavispllc.com/>

The information contained in this e-mail message may be privileged, confidential, and protected from disclosure. If you are not the intended recipient, any dissemination, distribution, or copying is strictly prohibited. If you think that you have received this e-mail message in error, please e-mail the sender at info at bellanddavispllc.com<mailto:info at bellanddavispllc.com>  or call 360.683.1129.


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