Why Your LLC Operating Agreement Could Derail Your Estate Plan

For real estate investors, a solid estate plan means nothing if your LLC operating agreement won’t allow it to work.

During a recent Your CPA’s Take on Real Estate episode, hosts Daniel Roccanti and Kyle Paxton discussed the unique estate planning challenges real estate investors face. One of the most overlooked issues they raised: the LLC operating agreement estate plan conflict that can quietly unravel years of careful planning.

The Problem Most Investors Don’t See Coming

You spend time working with attorneys and advisors to build an estate plan. Trusts are set up. Transfer strategies are mapped out. Everything looks right on paper.

Then someone reads your operating agreement.

As Kyle Paxton put it during the episode, you can have $100 million worth of real estate held in LLCs and not a single one of those entities has an operating agreement. That is, as he described it, “bad news bears for so many reasons.”

Even when operating agreements do exist, they frequently haven’t been reviewed with estate planning in mind. The result is an estate plan that calls for transfers, trust assignments, or ownership changes that the operating agreement flat-out does not permit.

What Your Operating Agreement Actually Controls

LLCs are the standard structure for holding real estate, and for good reason. They offer asset protection, flexibility, and a way to separate ownership from operations. But the operating agreement is the document that governs what can actually happen inside that LLC.

When it comes to estate planning, your operating agreement determines:

• Whether ownership interests can be transferred to a trust or family member
• Who has voting versus non-voting control
• Who is authorized to manage the LLC after a transfer
• Whether lender consent is required before any ownership change
• How decisions get made on sales, refinancing or distributions

If your estate plan assumes you can move LLC interests into an irrevocable trust, but your operating agreement restricts that transfer, you have a problem. And it may not surface until it is too late to fix cleanly.

Governance Is the Point

Daniel and Kyle made clear that estate planning for real estate is not just about moving value to the next generation. It is about deciding who makes decisions, and when.

That distinction matters because ownership and control are not the same thing. A well-structured estate plan for a real estate portfolio separates the two intentionally. Senior family members can retain management control while slowly transferring economic interest to younger generations. But that structure only works if the operating agreement is built to support it.

Questions every investor should be able to answer about each LLC they own:

• Who has authority to sign leases, refinance debt or approve capital calls?
• What happens to management rights when an interest is transferred?
• Can a trustee step into the role of manager, and does the trustee have the skills or authority to do so?

If you cannot answer those questions by looking at your operating agreement, that is the first thing to fix.

When Estate Plans and Operating Agreements Conflict

The most common scenario Daniel and Kyle described: an investor builds an estate plan that calls for transferring real estate interests into irrevocable trusts or to family members, only to find the operating agreements don’t allow it.

At that point, the operating agreements have to be amended. Sometimes that is straightforward. Sometimes it requires lender consent, partner approval or other complications that take time and money to resolve. And in the worst cases, it creates delays at exactly the moment a family can least afford them.

The fix is not complicated, but it does require intention. Before finalizing any estate plan that involves LLC-held real estate, the operating agreements for every entity in the portfolio need to be reviewed side by side with the plan. They have to be consistent with each other.

Why This Gets Skipped

Estate planning is already an uncomfortable conversation. Most people would rather focus on income tax planning or day-to-day operations than think through what happens after they are gone.

Kyle noted that even clients who are sophisticated real estate investors often haven’t reviewed their operating agreements in years, or drafted them with any thought toward eventual transfer. Daniel added that this conversation gets pushed off because it feels like an end-of-life issue, when it is really a business continuity issue that affects the portfolio right now.

The more complex the portfolio, the more work it takes to get everything aligned. Starting that process early makes it manageable. Waiting until a health event or family crisis makes it expensive and sometimes impossible.

Get Your Documents Working Together

If you own real estate through LLCs and you have not reviewed your operating agreements alongside your estate plan, that is the place to start.

Watch the full episode above for a deeper look at the estate planning tools and strategies Daniel and Kyle covered, including trusts, family limited partnerships, step-up in basis planning and more. Then reach out to a James Moore professional to make sure your operating agreements and estate plan are built to work together.

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