You own several LLC interests. Some are owned outright. Some are owned by other LLC’s that you own. There are valid reasons for this, from asset protection to estate planning. But then you die. Then the survivors read your will. And guess what? You either forgot to update the will for changes you made when reorganizing your LLCs or your estate planning attorney didn’t really understand your legal structure.
This article focuses in on the subsidiary LLCs that are owned by the parent LLC. It gets into the situation where the will disposes of the subsidiary LLC, but is not clear about the share of the subsidiary that is owned by a parent LLC. Do the terms of the will govern, even though they are vague, or does the terms of the operating agreement for the subsidary govern? Or does the court just do whatever it wants?
We’ll use the McMurphy v. Moran, No. 14-23-00543-CV (Tex. App.—Houston [14th Dist.] July 3, 2025), case to address this question. It involves a will that provided for the transfer of a parent LLC and subsidiary LLC, but leaves questions about the subsidiary shares owned by the parent LLC.
Facts & Procedural History
Tom died. He was survived by his second wife, Jane, and three adult children from his first marriage: Megan, Erin, and Trey.
The estate included interests in various business entities. Tom and Jane each owned fifty percent of a parent LLC, an Oklahoma limited liability company. The parent LLC, in turn, owned a ninety-eight percent interest in Hefner/Wilshire, LLC. Tom and Jane each individually owned an additional one percent interest in Hefner/Wilshire, LLC.
Tom’s holographic will granted his children his 50% membership interest in the parent entity (yes, people still use hand written wills and, given the number of disputes involving these wills, decedent’s may be better off with no will). However, the will also included a “buyout clause,” stating that “Jane can buy out my children from Hefner/Wilshire for $500,000 & use our joint accounts for that purpose.”
Following Tom’s death, the will was admitted to probate and Jane and Megan initially served as co-administrators of the estate. However, they did not agree how to interpret the buyout clause. As such, Jane sought the appointment of a successor dependent administrator. Jane then filed a declaratory judgment action in the probate court to have the court interpret the buyout clause. She argued that it permitted her to purchase all outstanding membership interests in Hefner/Wilshire for $500,000–including the membership interests that were held by the parent entity. So her position was that she could also purchase the children’s newly inherited interest held by the parent entity.
Megan challenged Jane’s interpretation through special exceptions and a counter-petition for declaratory judgment. She argued that Jane’s reading was “mathematically impossible” and that the buyout clause could only apply to Tom’s direct one percent interest in Hefner/Wilshire. Under Megan’s interpretation, Jane could not use the buyout clause to reach the children’s inherited interest held by the parent entity.
The probate court agreed with Jane. It granted Jane’s motion for summary judgment and determined that the buyout clause permitted her to purchase all outstanding membership interests in Hefner/Wilshire for $500,000. The children appealed this decision to the Houston Court of Appeals.
Ownership of Business Entities
The appeals court focused on the concept of ownership. Under Texas law, a testator cannot devise more than they actually own. This is one of the fundamental concept that is found in Texas law and the law for other states.
As to business entities, when a person owns an interest in a limited liability company, they own that membership interest. They do not own the company’s assets or the company’s interests in other entities. The law treats each business entity as a separate legal person, distinct from its owners.
The Texas Business Organizations Code makes this separation explicit in Section 101.106(b). This statute says that “a member of a limited liability company or an assignee of a membership interest in a limited liability company does not have an interest in any specific property of the company.” Oklahoma law, which governed the relevant entities, apparently has identical language. This statutory framework ensures that membership interests remain distinct from the underlying assets held by the company.
This limits what a member can transfer through their will by way of a specific bequest. So as in this case, it limits what the testator can transfer when they refer to specific legal entities in their will. It should be noted that this issue does not arise all that often as many business transfers transfer the parent entity directly (which would also pass any interest owned by the subsidiary entities the parent entity owns) and/or the parent and subsidiary entities pass by way of a residuary or “catch all” clause in a will. In these cases, the will provides a clear path for how the entities are to pass. It is in this situation, a specific bequest of a subsidiary entity, that created the probate dispute here.
What Did Tom Attempt to Accomplish with the Buyout Clause?
This does not mean that the courts have to stick to a strict interpretation of the terms of the will. The courts have some latitude to construe, interpret, or even reform or change the terms. The guiding principle for this is the idea that the courts should try to carryout what it believes the testator’s wishes were.
In this spirit, the interpretation of Tom’s will required the court to examine not just the buyout clause in isolation, but also the overall pattern of Tom’s testamentary intentions as revealed through multiple provisions of his will. The will granted the children Tom’s membership interest in the parent entity, which would give them control over that entity’s ninety-eight percent interest in Hefner/Wilshire. The will also granted them Tom’s direct one percent interest in Hefner/Wilshire. The buyout clause then gave Jane the option to purchase the children’s interests “from Hefner/Wilshire” for $500,000.
Tom’s will included several statements that the court highlighted as to his understanding of his ownership interests and his intentions for their disposition. The will stated that his children should receive “100% of my 50% of anything owned in conjunction with Jane.” This language suggested that Tom intended his children to receive his portion of the assets he had built during his marriage to Jane, including his fifty percent interest in the parent entity.
The will also included the statement that “Jane & I have already shared 50/50 on most everything else, so I would like my 50% to go to my children.” These provisions indicated that Tom’s primary intention was to ensure his children received his share of the family business interests while providing Jane with an option to consolidate control over Hefner/Wilshire through the buyout clause.
The Houston Court of Appeals reversed the trial court’s interpretation. It emphasized that testamentary buyout clauses must be interpreted within the constraints of business entity law and the separate legal existence of different corporate entities. The court found that Jane’s interpretation would have allowed the buyout clause to reach beyond Tom’s direct ownership in Hefner/Wilshire to encompass interests that the children inherited through their separate ownership of the parent company. Since Tom did not own the interest held by the parent entity, his will could not be construed to include that in the buy out clause.
How Do Operating Agreements Affect Testamentary Transfers in Probate?
There is also a question about whether the terms of the buy out clause trump or overrule the terms of the Hefner/Wilshire operating agreement.
Operating agreements for limited liability companies typically contain transfer restrictions that require member consent, compliance with securities laws, and other conditions before membership interests can be transferred.
The Hefner/Wilshire operating agreement included a standard transfer restriction clause requiring unanimous member consent, admission of transferees as substitute members, and legal opinions regarding tax consequences. The agreement stated that any transfer not made in accordance with these requirements would be “null and void.” The children argued that because these conditions had not been met, any attempted transfer under the buyout clause would be invalid.
Jane countered that the operating agreement expressly contemplated “transfer by will or intestate succession” and that the required consents could be obtained through the probate process. She argued that Tom had evidenced his consent by including the buyout clause in his will, that she had evidenced her consent by seeking to enforce the clause, and that Moran’s consent could be obtained through Tom and Jane’s ownership of that entity.
The court sided with Jane on this issue, finding that the operating agreement did not void the buyout clause simply because all transfer conditions had not yet been satisfied. The court noted that transfers by will were specifically contemplated by the agreement and that the failure to complete all transfer requirements did not necessarily mean that such requirements could never be satisfied in the future.
The Takeaway
This decision shows that testamentary buyout provisions cannot reach beyond what the decedent directly owned in the referenced entity to encompass interests that beneficiaries inherit through separate entity relationships. Subsidiary entities that are transfered by will only include the subsidiary, not the parent entity or shares of the subsidiary owned by the parent entity. This highlights the importance of precise drafting when creating buyout provisions in wills that involve parent-subsidiary business structures. This can help avoid protracted probate litigation.
Our Dallas Probate Attorneys provide a full range of probate services to our clients, including helping with probate litigation. Probate is what we do. Affordable rates, fixed fees, and payment plans are available. We provide step-by-step instructions, guidance, checklists, and more for completing the probate process.We have years of combined experience we can use to support and guide you with probate and estate matters. Call us today for a FREE attorney consultation.
Disclaimer: The content of this website is for informational purposes only and should not be construed as legal advice. The information presented may not apply to your situation and should not be acted upon without consulting a qualified probate attorney. We encourage you to seek the advice of a competent attorney with any legal questions you may have.
