Should Your Business Interests be Included in Your Trust?
You already created your living trust and funded it with your residence and other assets such as real property, financial accounts, stocks and securities. But you also own and operate a business or have other business interests. Should your business interests be included in your trust?
Under California Probate Code Section 16222(b), a trustee of a trust may continue to operate a business as authorized by the trust or by the court. You can fund your living trust with your business interests whether such interests are held in a sole proprietorship, general or limited partnership, limited liability company or a closely-held corporation.
Regarding the issue of liability, a caveat for funding general partnership interests into your trust is that the trust will have unlimited liability for a general partnership’s debts. On the other hand, limited partners have limited liability as they generally have no control over management of the partnership. For closely-held corporations, the trust’s liability is limited to the amount of equity in the corporation.
Here are some other factors to consider before funding your business into your living trust. You may seamlessly manage your business as a trust asset while you are the trustee. However, once another individual steps in as the successor trustee, the successor trustee may lack the necessary skills or personnel to manage your business.
Notwithstanding, there are risks involved for trustees managing business interests in a trust. If the trustee of your trust is managing your business interests in a sole proprietorship or general partnership, then the trustee may be personally liable for the business’ debts should trustee breach his or her fiduciary duties and there are insufficient assets in the trust to cover the debt obligations.
Before you transfer your business interests into your trust you should seek advice of counsel to make sure the transfer will not trigger an event covered by the corporation’s bylaws, LLC operating agreement or a shareholders’ buy-sell agreement. Your trust should contain express provisions to allow the trustee of your trust to manage your business, and to invest in or to continue to hold such interests in your business. If your trust owns a corporation, the trustee must comply with the corporation’s bylaws, shareholders’ buy-sell agreement and formalities in order to protect the trust and the trustee from liability. For an S-corporation, the trust must contain certain provisions to avoid disregarding the S election status. Further, if you are a doctor or a lawyer and want to fund your trust with your professional corporation, there are limitations as state law requires that the owner must be a licensed member of the profession.
Funding your business interests into your trust is accomplished by transferring the interests to the trustees of the trust. How these interests are transferred depends on the type of business entity. For a corporation, the stock is transferred from the shareholder to himself/herself as trustee of the trust. By funding business interests into your trust, you are also addressing the issues of business succession planning and taxation of your estate. Your business interests are equally as important as your other assets and should be given estate planning considerations. Vogt, Resnick & Sherak, LLP can assist you in determining if your business interests should be included in your trust. Please contact us if you have any questions or concerns.