Who are the Partners Now?
We are often asked as trust and estate litigation attorneys for advice on how to avoid future family disputes with better estate planning. I want to highlight an issue that seems to be appearing more frequently in disputes involving family partnerships. When a partner dies, the succession provisions of the partnership agreement can become an issue in litigation when the provisions are not clearly drafted or fail to coordinate with other estate planning documents.
There have been several cases involving whether the decedent’s successors are partners, or simply assignees who do not have all the rights of a partner. Family partnership agreements may allow for the transfer of a partnership interest to another family member automatically. Even in these scenarios, there may be technical terms of the partnership agreement that have to be complied with before the family member officially becomes a partner. Some agreements do not allow anyone to succeed to a partner’s interest unless otherwise determined by the partnership/other partners. Accordingly, if a partner’s will purports to unilaterally pass a partnership interest to a beneficiary, it may cause a dispute if such a transfer is not allowed by the partnership agreement. The dispute is often fueled by a beneficiary who asserts that the will is the best evidence of the decedent’s intent.
For example, there was a case that involved a dispute over a decedent’s general partnership interests in a family partnership. The terms of the decedent’s will stated that all of her property passed to her children. The terms of the partnership agreement stated that upon the death of a partner, any general partnership interests automatically converted to limited partnership interests. A few of the children filed a claim asserting that they were the proper general partners due to the language in the will passing all of the decedent’s property. After trial, the Judge ruled that the decedent’s will only passed limited partnership interests due to the conversion language in the partnership agreement. This dispute may have been avoided with better coordination of all estate planning documents.
In order to avoid disputes, it is best practice to be sure that partnership agreements (or any other type of entity documents) and estate planning documents coordinate. In addition, during the estate administration, it is important to follow the technical terms of partnership agreements to make sure there are no disputes in the future regarding the status of any of the partners.