Using Transfer-On-Death (TOD) Provisions in an LLC Operating Agreement

Many business owners in Florida choose an LLC for their entity due to its ease of formation, governance, and additional charging order protection (for multi-member LLCs). When drafting an Operating Agreement for the LLC, it is important to consider how each Member (the owners of the LLC equity) will hold title to their membership interest. One of the ways to do so is to create a transfer-on-death (TOD) provision in the Operating Agreement and Membership Interest Certificates (if any), specifying to whom the interest will pass upon that Member’s death.

To begin, it's important to understand what a TOD provision is. A TOD provision is a clause in a contract, document, or other instrument purporting to vest ownership of, or title in some asset to another person or entity immediately upon the death of a decedent. Most importantly, a TOD provision is a probate avoidance tool. An LLC's operating agreement specifies who will receive a member's ownership interest in the company upon their death without having to go through probate.

The validity of TOD provisions in LLC operating agreements has been a somewhat unsettled area of law in Florida. However, the recent Florida case of Blechman v. Estate of Blechman provides some guidance on this issue.

In Blechman, the Florida Supreme Court held that a TOD provision in an LLC's operating agreement was valid and enforceable. The Court found that the provision was specific, clear, and unambiguous and therefore complied with Florida's statute governing TOD designations.

However, it's important to note that the validity of TOD provisions in LLC operating agreements may still be subject to challenge. For example, a poorly drafted provision that is ambiguous or unclear could be challenged and deemed invalid.

It's also important to consider the potential tax implications of using a TOD provision in an LLC operating agreement. Depending on the specifics of the provision and the ownership structure of the LLC, there could be estate and gift tax consequences to transferring ownership interests in this way.

Additionally, it's important to consider how a TOD provision fits within the overall estate plan of the LLC members. Very rarely should an Operating Agreement be drafted without simultaneous consultation of the owners’ estate plan. A TOD provision may not be the best option for every situation, and other estate planning tools, such as a will or trust, may be more appropriate. 

When drafting a TOD provision for an LLC operating agreement, it's important to ensure it complies with Florida law. Specifically, Florida Statutes Section 732.703 provides the requirements for a valid TOD designation.

One requirement is that the designation must be in writing and signed by the owner. Additionally, the designation must specifically reference the LLC ownership interest being transferred and must comply with any applicable requirements in the LLC's operating agreement.

It's also important to consider the potential impact of a TOD provision on the LLC's other members. For example, if a member's ownership interest is transferred to a third party through a TOD provision, this could impact the voting and decision-making power of the remaining members.

Another important consideration is the potential for disputes and litigation over a TOD provision. Members who are unhappy with the provision or believe it was improperly executed may challenge it in court, leading to costly and time-consuming litigation.

Overall, while the Blechman case provides some clarity on the validity of TOD provisions in LLC operating agreements, it's still important to consult with an experienced business attorney when drafting these agreements. A knowledgeable attorney can help ensure that the provisions are clear, unambiguous, and legally enforceable while also taking into account potential tax implications and estate planning considerations.

In addition to drafting a TOD provision, an attorney can also assist with other aspects of LLC formation and operation, such as drafting the operating agreement itself, advising on governance and management issues, and handling business transactions and disputes.

An attorney can also help ensure that the LLC is properly registered and compliant with Florida law and can provide ongoing guidance and support as the business grows and evolves.

Overall, a properly drafted and executed TOD provision can provide significant benefits for LLC members, including avoiding probate and ensuring that their ownership interests pass to their chosen beneficiaries. However, it's important to carefully consider the potential legal and tax implications and to work with an experienced business attorney to ensure that the provision is valid and enforceable.

Business owners who are considering using a TOD provision in their LLC operating agreement should consult with an attorney as soon as possible to ensure that their estate planning goals are appropriately addressed.