The Court of Special Appeals issued an opinion that once again provides a reminder that business decisions could impact estate planning. The lawyers at BOWMAN JARASHOW LAW are familiar with issues such as those present in Potter v. Potter, 250 Md. App. 569 (2021). The Court’s decision in Potter is a reminder to consider the totality of your business interests when assessing your estate planning needs.
POTTER V. POTTER: FACTUAL BACKGROUND
In Potter v. Potter, the Decedent acquired membership interest in a limited liability company (the “LLC”). Id. at 574. As such, the Decedent’s rights and obligations as a member of the LLC were defined by several documents, such as an operating agreement and a members’ agreement. See id. at 574-75.
The Decedent passed away intestate, and the Decedent’s personal representative “identified [the Decedent’s] membership interest in [the LLC] as an asset of the estate.” Id. at 576-77. However, the relevant LLC documents included “provisions for a variety of aspects of the company’s ownership and management, including the disposition of a membership interest upon the death of a member.” Id. at 575. The facts note, importantly, that these documents were not executed in accordance with Maryland’s statute of wills. See id. at 574.
THE QUESTION PRESENTED
The Court of Special Appeals was presented with the following question: “Is a provision in a [LLC] 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 . . . for the execution of a will?” Id. at 574.
ANALYZING THE RELEVANT STATUTORY BACKGROUND
As stated in Md. Code § 1-301(a), “All property of a decedent shall be subject to the estates of decedents law.” MD. CODE, EST. & TRUSTS (“MD. CODE”), § 1-301(a). Md. Code § 1-101(r) defines property “to include any interest that a decedent has in real or personal property except for property ‘which does not pass, at the time of the decedent’s death, to another person by the terms of the instrument under which it is held, or by operation of law.’” Potter, 250 Md. App. 569, 585 (2021) (emphasis added) (citing MD. CODE 1-101(r)).
Looking further, Maryland’s Limited Liability Company Act (“LLC Act”) allows members of the LLC to “agree among themselves as to what should happen when a member ceases to be a member.” Potter, 250 Md. App. at 601 (citing MD. CODE, CORPS & ASS’NS, § 4A-606). However, in order to be legally effective, “a provision in an operating agreement must be ‘not inconsistent’ with the laws of [Maryland].” Id. at 598 (citations omitted).
Furthermore, because an operating agreement or a members’ agreement of the LLC are considered “instruments”, their execution must comply with Maryland’s statute of wills, requiring such an instrument to be (1) in writing, (2) signed by the decedent, and (3) attested and signed by two or
more credible witnesses. Id. at 585; see MD. CODE § 4-102 (setting forth the requirements and formalities of a valid will).
THE COURT OF SPECIAL APPEALS’ CONCLUSION
The attorneys at BOWMAN JARASHOW LAW are highly respected for their experience in business and trusts and estates litigation as well as estate planning and administration. In reversing the lower court’s judgment, the Court of Special Appeals asserted that the “membership interest and the proceeds of distributions associated with it are assets of [the Decedent’s] estate.” Potter, 250 Md. App. at 603. In other words, because the LLC documents, which included provisions relating to the ownership and distribution of a member’s interest upon their death, were not executed in accordance with the provisions of Maryland’s statute of wills, those relevant provisions are not enforceable.
HOW WE CAN HELP
BOWMAN JARASHOW LAW LLC is recognized among top law firms in Maryland and continues to provide the highest level of attention in trusts and estates litigation along with complex business matters.
