Why Your Operating Agreement May Matter More Than Your Will

The Override Hierarchy: Which Document Wins?

When a business owner dies, the disposition of their LLC membership interest is governed by a specific hierarchy of documents. The operating agreement comes first. If the operating agreement addresses what happens to a member's interest at death — and most do — those provisions control. The will or trust can direct the transfer, but the operating agreement determines what rights come with it.

This is a fundamental misunderstanding that causes enormous problems. A will can say "I leave my 50% membership interest in ABC Holdings LLC to my spouse." The operating agreement can say "No membership interest may be transferred without unanimous consent of the remaining members, and any transferee who does not receive consent shall hold only an assignee interest." Both documents are valid. The operating agreement prevails on the business governance question, and the spouse receives only an assignee interest — not full membership.

Assignee Status: The Silent Downgrade

Under the Revised Uniform Limited Liability Company Act (RULLCA) and most state LLC statutes, when a member dies, the heir does not automatically become a full member of the LLC. Instead, the heir becomes an assignee — a holder of the economic rights (distributions and profit/loss allocations) but not the governance rights (voting, management participation, access to books and records, consent rights on major decisions).

The distinction is enormous. An assignee receives their share of distributions if and when the remaining members decide to make distributions. But an assignee cannot vote on whether to make distributions. An assignee cannot participate in decisions about the business. An assignee cannot inspect the company's financial records. And an assignee cannot force the company to buy them out.

In practice, this means a surviving spouse can be locked into a passive economic interest with no control, no information, and no exit — while the remaining members continue to run the business, set their own compensation, and decide whether to distribute profits.

Transfer Restrictions: The Locked Door

Most well-drafted operating agreements include transfer restrictions that limit a member's ability to transfer their interest. These restrictions typically require the consent of the other members (often unanimous or supermajority consent) before a transfer is effective, grant the LLC or remaining members a right of first refusal to purchase the interest before it can be transferred to an outsider, and prohibit transfers to certain types of transferees (competitors, non-family members, or anyone the members have not approved).

These restrictions serve legitimate business purposes — they protect the remaining members from having to work with unknown or unwanted co-owners. But they also mean that a deceased member's family may not be able to do anything with the interest other than hold it as a passive assignee — collecting distributions (if any are made) but unable to sell, transfer, or leverage the interest.

The Two-Attorney Problem

The most common cause of this disconnect is what practitioners call the "two-attorney problem." The business owner's estate planning attorney drafts a will or trust that says "I leave my LLC interest to my spouse" or "I leave my LLC interest in equal shares to my three children." The business attorney, working separately, drafts an operating agreement with transfer restrictions, buy-sell provisions, and consent requirements that directly conflict with the will's instructions.

Neither attorney reviews the other's work. Neither attorney realizes the conflict exists. And the business owner — who is not a lawyer — assumes that both documents work together seamlessly. The conflict is not discovered until the owner dies, at which point the family is confronted with an operating agreement that prevents the very transfer the will attempted to make.

The solution is straightforward but rarely implemented: both attorneys must review both documents, together, and ensure they are consistent. The operating agreement should contemplate the owner's death and provide clear instructions for the transfer. The will or trust should reference the operating agreement and not make promises that conflict with its terms.

What the Operating Agreement Should Address

A well-drafted operating agreement estate planning provision should address several critical scenarios. At death: does the membership interest transfer to the deceased member's estate, or does a buy-sell provision require the LLC or remaining members to purchase it? If the interest transfers, does the heir become a full member automatically, or only with consent? What valuation method applies if a buyout is triggered?

At incapacity: who steps in to exercise the incapacitated member's rights? Can a power of attorney holder vote and participate in management? Or does incapacity trigger a mandatory buyout?

At divorce: does the operating agreement address what happens if a member's spouse claims an interest in the LLC through a divorce proceeding? Many operating agreements include provisions that restrict or prevent a divorcing spouse from becoming a member.

The Bottom Line

For business owners, the operating agreement is not just a business document — it is an estate planning document. It controls what happens to the most valuable asset many families own. When it conflicts with the will or trust, the operating agreement almost always prevails. Every business owner should have their operating agreement and estate plan reviewed together by both their business attorney and their estate planning attorney to ensure the documents work in harmony, not in opposition. The cost of coordination is trivial. The cost of conflict is devastating.