The Estate Plan That Ignores Your Operating Agreement Isn't a Plan

A business owner does everything right. She hires a good estate-planning lawyer, signs a will and a trust, and leaves her company, the thing she spent thirty years building, to her two children. She dies believing the business is handled. It is not. Her operating agreement, signed at formation and never looked at again, requires that her interest be sold to her surviving partners at death. The children do not inherit the company. They inherit a check, calculated by a valuation formula written in a decade she no longer lived in, and the plan she paid for is quietly overruled by a document she forgot she signed.

This is the most common failure in the estate planning of business owners, and it is entirely preventable. The business interest, usually the largest and most personal asset in the estate, is governed by two separate regimes at once: the estate plan, meaning the will and any trust, and the company's own governing documents, meaning the operating or partnership agreement and its buy-sell provisions. When those two regimes disagree, the plan the owner intended is not the one that runs.

Why the operating agreement usually wins

The instinct is that the will controls what happens to everything the owner owns. For a business interest, that instinct is often wrong. Transfer restrictions and buy-sell provisions in a company agreement are contractual promises the owner made to the other owners, and they bind the interest itself. A will can only give away what the owner is actually free to give. If the operating agreement says the interest must be sold to the surviving members on death, or cannot pass to anyone without the others' consent, or is subject to a right of first refusal, then the will's gift runs straight into that contract and loses.

So the first question in a business owner's estate plan is not "what does my will say." It is "what does my operating agreement allow my will to do." If no one has asked that question, the plan has a hole in the middle of its largest asset.

The places the two documents collide

The conflict shows up in predictable ways.

Disposition. The will leaves the interest to family; the buy-sell requires it be sold to co-owners. One of them is going to be disappointed, and it will be the family, because the contract came first.

Valuation. A buy-sell sets the price the estate receives, and a stale or formulaic valuation can shortchange the heirs badly. Worse, a buy-sell price that does not hold up can create tension with the value the property is assigned for estate-tax purposes, turning a drafting oversight into a tax problem.

Funding. Many buy-sells are meant to be funded with life insurance so the surviving owners can actually pay. If the funding was never put in place, or lapsed, the promise to buy the interest is a promise no one can keep, and the estate is left holding an interest no one will purchase at a price no one agreed to.

Trusts as owners. A sound estate plan often moves assets into a trust. But many operating agreements do not permit a trust to be a member, or treat a transfer into a trust as a prohibited transfer that trips the buy-sell. The very act of funding the trust, the thing the estate plan is built to do, can violate the company agreement.

Control and economics can split. Even when an interest does pass to the intended heir, the agreement decides what comes with it. An heir may receive the economic rights, a share of profits and distributions, without the voting and management rights that made the owner a decision-maker, or the reverse. A family member who inherits income but no control, sitting alongside partners who now run the company without them, is a recipe for exactly the conflict the plan was meant to prevent. What the heir actually receives is defined by the operating agreement, not by the sentence in the will that names them. The plan has to decide, deliberately, whether the next generation inherits an owner's seat or only an owner's check, because the documents will decide it by default if the drafters do not.

The Texas wrinkle: community property

Texas adds a question owners rarely consider. In a community-property state, a spouse may already hold a community interest in a business interest, whatever the certificate or the cap table says. That community interest can complicate both the estate plan and the operating agreement at once, affecting who really owns what, what a surviving spouse is entitled to, and whether the buy-sell and the will can do what they say. A plan that does not account for it is planning around a fact that will assert itself later.

Integration is the whole point

The fix is not complicated, but it requires that the two regimes be drafted to agree rather than in separate rooms. The will or trust, the operating agreement and its buy-sell, and the tax plan have to say the same thing about the same interest: who receives it, at what value, funded how, carrying which rights, and permitted to pass in whatever form the plan contemplates. Sometimes that means amending the operating agreement to allow a trust to hold the interest. Sometimes it means rebuilding the buy-sell so its valuation and funding are real. Sometimes it means the estate plan bends to a buy-sell that should not change. What it always means is that someone read both documents together, on purpose, before the owner died.

That is the integration thesis, and it is why an estate plan for a business owner cannot be built as if the business were just another asset on a schedule. The company has its own constitution, and the estate plan has to be negotiated with it.

Stress-test the plan against the company

If you own a business and you have an estate plan, the test is quick and clarifying. Put the will or trust next to the operating agreement and ask whether they agree on what happens to your interest when you die: who gets it, whether they can actually receive it, at what value, and with what money behind the promise. If you cannot answer, or if the two documents point in different directions, you do not yet have a plan for your largest asset. You have two documents that have never met.

The good news is that this is a solvable problem, and the least expensive time to solve it is now, while both documents can still be changed.

Have your current plan stress-tested →

This material is for general information only and is not legal advice; reading it does not create an attorney-client relationship. References to Texas law are stated at the level of principle and current as of the date shown; the law may change, and application depends on your facts, including tax matters not addressed here as advice. Have your specific plan and company documents reviewed together by counsel.