If you co-own a business, you probably have an agreement with the other owners that addresses what happens to your respective interests if any of you die. However, you may also have a will that indicates who gets your property upon death. Ideally, the two documents should be consistent, but what if they aren’t? Does the company’s operating agreement supersede the will or vice versa?
New York’s Estates Powers & Trust Law (EPTL) Section 3-2.1 establishes formal requirements for the execution of a last will and testament. The law states that a will must be signed at the end by the Testator (or at the direction of the Testator, which is beyond the scope of this post) in the presence of two witnesses who must sign in front of each other. The Testator must also declare to the witnesses that the will is their last will and testament. Strict compliance with these requirements is necessary for the will to be deemed valid.
However, questions can arise when an individual owns an interest in a business operated through an entity and an agreement exists that controls the operation of the business. For example:
- Members in a limited liability company (LLC) have Operating Agreements
- Shareholders in a corporation have Shareholder Agreements
- Partners in a partnership have Partnership Agreements.
These ownership agreements typically address what happens in the event of an owner’s death. They may provide for:
- Termination/winding up of the business
- Procedures for the entity or other owners to buy out the deceased owner’s interest
- Designation of a successor to the ownership interest upon the owner’s death
- Limits on the class of people who can succeed to the ownership interest (commonly restricted to family members).
Although the agreements are generally signed by the owners, they are not signed with the testamentary formalities that would be required for a valid will. Therefore, if there is a conflict between an agreement and a will, New York law must indicate which one controls what happens to the ownership interest.
It has long been held that these ownership agreements are a matter of contract law and are not attempts to make a “testamentary disposition,” which would require compliance with the formalities of will execution. Therefore, the agreements are enforceable as contracts, even if they don’t meet the requirements of a valid will.
This is true even if the two documents are inconsistent. For example, if the will leaves the owner’s interest to her husband, but the operating agreement provides that the owner’s child receives the interest, the operating agreement will supersede the will, and the child will succeed to the ownership interest.
While this protects the business, it can create other conflicts when property is disposed of unexpectedly. Accordingly, in the course of comprehensive estate planning, it is important to review ownership agreements to ensure that all parts of the estate plan are consistent and in line with the wishes of the testator.
If you would like to discuss your estate plan, contact one of our attorneys.