Holding your company ownership in trust

If you die while owning your company, in whole or in part, in your individual name, then, generally, the court-administered process of probate, which is costly and time consuming, will be triggered and required. The probate process is virtual death to a company. A high number of companies that fall into probate will fail due to a variety of reasons – primarily: (i) no orderly transition of control or management exists; (ii) the inability to pay expenses and debts; (iii) the heirs or spouses are unable or not licensed to run the business; or (iv) ownership disputes arise.
 

To avoid probate, you must transfer your ownership interest to a revocable living trust or irrevocable trust. Irrevocable trusts, in particular, can be useful to gift interests to the next generation or to help reduce your estate tax liabilities.

 

If ownership is held in trust, the successor trustee can immediately take steps to arrange for successor management and continue operations after the death of a primary owner/operator. The trust is a form of a succession plan that creates a clear chain of command for the business to continue and run smoothly. 

 

The steps to transfer your ownership interest in trust are not difficult. First, we review the corporate governance documents of the entity – primarily the bylaws and shareholders agreement for a corporation, operating agreement for an LLC or partnership agreement for limited liability partnerships. Sometimes there are transfer restrictions in these governance documents that require consent or approval of the manager, board of directors or other members/shareholders. Next, assignment documents and stock certificates, if applicable, are prepared to transfer the ownership interest from the individual to the trust. Once all documents are executed in full, they are effective. Care should be given to file appropriate tax forms so as not to disrupt an S-corporation election, if applicable. 

 

Placing your shares or membership interests in a trust is a small step that pays off big as it allows your business to continue and provide income or, upon sale, liquidity to your family without any court involvement. Bottom line: if you own a business, you need a trust if you desire your business to continue in the event of your death or incapacity.

 

The estate planning attorneys at Chuhak & Tecson can answer your questions or assist you with creating a revocable trust or an estate plan.