The Florida Estate Planning and Probate Law Blog is focused on recent federal and state case law and planning ideas.



Step One: Make a List How the Deceased Person’s Assets are Titled

Start with a list of each spouse's assets and how they are titled.  That will determine the need for probate and the rights of the various parties.


Step Two: Remove All Non-Probate Assets From the List

Not all assets are Florida probate assets. Many assets pass automatically to a survivor based on how the asset is titled. Common examples of “non-probate” assets include:
  • Real estate that is owned jointly with rights of survivorship will pass to the surviving owner(s).
  • Bank accounts that are jointly owned will pass to the surviving owners.
  • Life insurance and financial accounts (bank accounts, brokerage accounts, CDs) that have valid beneficiary designations will pass to the surviving beneficiaries.
  • Assets that are titled in a living trust will pass in accordance with the terms of the trust.
It is important to understand that it doesn’t matter if the deceased person had a will or what the will says. If the asset isn’t a probate asset, it never gets to probate and what the will states.  The way the asset is titled will trump whatever the will says about it. 


Step Three: Be Sure that You can Prove Ownership of Whatever is Left

Subtracted from the list the non-probate assets and the assets that remain are assets of the estate.  These are the “probate assets” that are governed by the deceased person’s will (if he or she had one) or the intestacy laws (if he or she died without a will). If the decedent had a bank account or parcel of real estate in his or her name alone, that property will pass under the Will or through the intestacy laws to his or her heirs are beneficiaries. 

But many times, all that is left after subtracting out the non-probate assets is miscellaneous personal property (household furnishings, etc.).  You then need to be able to prove who owns that property.  If the remaining items were purchased by both spouses then it will be very difficult to prove in court who owned it. This kind of factual difficulty makes it almost impossible to claim an interest in most personal property.


Step Four: Decide Whether it’s Worth It

After reviewing steps 1-3, you should have a list of assets and know their value.  You then need to compare the value of the assets with the cost of probate (or an alternative to probate) to determine whether it is worthwhile to deal with the estate in court. For small estates, there may be an alternative to full estate administration that will make financial sense.  If a full administration is required, you will want to be sure that the net value of the assets (after subtracting out the debts) involved exceed the value of the decedent’s property.


Walro v. The Lee Group Holding Co., LLC (In re Lee), 524 B.R. 798 (Bankr. S.D. Ind. 2014) –

A chapter 7 trustee sought a court determination that (1) a debtor’s voting rights in a limited liability company (LLC) were property of the bankruptcy estate, and (2) other members of the LLC violated the automatic stay by taking action to remove the debtor as a member and terminating his voting rights. The operating agreement for the limited liability company (Lee Group) provided that the debtor had a 0% economic interest, but held 51 out of 101 votes.  The agreement further provided that his voting rights would expire upon his death or withdrawal from the LLC.

The debtor signed the operating agreement as a member.  The debtor was also designated as the manager of the LLC, which meant that he was in control of the company’s business and affairs.  The members were entitled to vote on certain matters, including “alienation of interest of individual members.” After the bankruptcy was filed, the trustee’s counsel wrote a letter to the LLC’s counsel contending that the debtor’s non-economic voting right interests became property of the bankruptcy estate subject to the trustee’s control. After receipt of this letter, the members adopted a resolution accepting withdrawal of the debtor from the LLC as of December 31 of the prior year.  The resolution acknowledged termination of the debtor’s voting rights and his resignation as a manager.  The remaining members subsequently designated the debtor’s son as the new manager and reallocated voting rights based on economic interests.  They also agreed that the debtor would continue to work for the LLC as a “consultant.”

The trustee argued that the voting rights were property of the estate, and that the postpetition action taken by the other members to terminate the debtor’s membership violated the automatic stay.  The defendants responded that (1) the debtor’s voting rights were derivative of his role as a manager, (2) he had no other property interest in the LLC, and that (3) their actions did not violate the automatic stay. The court began by noting that “property of the estate” has been “construed most generously” so that it includes “[e]very conceivable” interest of the debtor.  While determination of whether an interest is part of the bankruptcy estate is a federal question, courts look to state law to define the debtor’s interests. Reviewing the operating agreement and applicable state law, the court concluded that the debtor was a member of the LLC and that his voting rights were incident to that membership.  In response to the defendants’ contention that the debtor was not a member because he did not have a right to any distributions, the court concluded that “interest” was broadly defined so that the debtor did have a qualifying economic right.

As the holder of a majority of the votes, he could ensure that he was not removed as a manager, and as a manager and majority member, he had “unfettered control,” including the right to award incentives and bonuses and to provide for indemnification of expenses and liability in any proceeding.  Further, under the operating agreement, if his wife divorced him he could purchase her interest for a substantial discount. And regardless, the debtor was not required to have any economic rights in order to be a member.  The court then reviewed a series of cases in which courts held that both economic and non-economic rights in an LLC are property of the bankruptcy estate.
Once the court concluded that the debtor’s voting rights were property of the estate, it turned to whether the defendants had violated the automatic stay.  The court held that when the other LLC members voted postpetition to remove the debtor as manager and to appoint a new manager they were exercising control over property of the estate in violation of the stay. The defendants next tried to argue that the debtor’s 51% voting rights applied only to routine management of the LLC and not actions that require a vote by a majority in interest of the members.  However, the court did not find this argument to be supported by the operating agreement.  In addition, it was irrelevant whether the debtor was entitled to a vote on his own removal. Thus, the court granted the trustee’s motion for summary judgment and held that the debtor was a member as of the petition date, he had voting rights pursuant to the operating agreement, and actions of the other members in terminating his membership and voting rights violated the automatic stay so that those actions were invalid.

On a positive note, the court did not go on to hold that the trustee was entitled to step into the debtor’s shoes as manager or to compel the debtor to remain as manager.  However, this does not provide a lot of comfort since this was because that the trustee did not request this type of relief and does not indicate how the court would have ruled if it had been asked to address these issues.