The short answer is yes, your trust can retain ownership of your business following your demise. However, several considerations come into play that may influence the outcome. One crucial factor is the type of business interest you possess, such as a limited liability company (LLC), partnership, corporation, or sole proprietorship. Another important consideration is how your business is managed, whether it operates as an LLC, partnership, or corporation.
Let’s explore how the trust acquires ownership of the business and how the management of the business is handled under various circumstances:
How Does the Trust Obtain Ownership of the Business?
- LLC: If your business is an LLC, transferring ownership to your trust involves executing an assignment of interest. If you are the sole member, once you complete the transfer document assigning your interest to the trust, it will hold 100 percent ownership of your business. In cases where there are other members, the trust will only own the percentage of the business corresponding to your ownership share. It’s crucial to review the LLC’s operating agreement for any restrictions on transferring your interest, and consent from other members may be required. If your LLC issues membership certificates, submit the assignment document to the LLC and obtain new membership certificates in the trust’s name.
- Partnership: Similar to an LLC, transferring a partnership interest to a trust requires an assignment of interest. Review the partnership agreement for any restrictions or conditions, including consent requirements, regarding the transfer.
- Corporation: For businesses structured as corporations, contact the corporation to determine the necessary documentation for transferring your stock to the trust. In closely held corporations without specific requirements, transfer the stock by executing an assignment of stock. Submit this document to the corporation, which will then issue new stock certificates in the trust’s name. Review the corporate governing document, if any, for any restrictions or conditions on transferring ownership to the trust.
- Sole Proprietorship: If you operate your business as a sole proprietor, there is no separate legal entity to transfer. To transfer ownership of your business assets to the trust, simply transfer ownership as you would with any other personal assets.
How is the Business Managed?
Post-transfer, the management of the business by the trust depends on factors such as the type of business transferred and how it was managed before the transfer.
- LLC: After transferring a business interest to the trust, the trustee becomes the owner. If it’s a single-member LLC where you run the business and also serve as the trustee, you will continue to handle day-to-day affairs as before the transfer. Following your death, the successor trustee will manage the business unless the trust and operating agreements specify otherwise or the trustee delegates management duties. In the case of a manager-managed multimember LLC where you aren’t involved in day-to-day decisions and those decisions are delegated to a manager, the manager will continue to oversee the business both before and after your death.
- Partnership: In a partnership where you actively participate in day-to-day management and have transferred your ownership share to a trust where you serve as the trustee, you will continue to manage the business as before the transfer. After your passing, the successor trustee will step in unless the trust and partnership agreements dictate otherwise or management duties are delegated to someone else. If the partnership has assigned these duties to officers or employees, the trustee will likely allow them to continue managing the business based on the directives in the trust and partnership agreements.
- Corporation: After transferring corporate stock to the trust, the trustee, as the owner, has the right to vote that stock according to the terms and conditions specified in the corporation’s governing documents. Generally, transferring stock to a trust does not change the corporation’s management.
What Will the Beneficiaries Receive?
The distribution received by the beneficiaries is determined by the provisions set forth in the trust. As the trust holds the right to receive income or profit distributions meant for owners or stockholders, whether these earnings are distributed to the beneficiaries and the conditions governing such distributions depend on the terms specified in the trust agreement.
Special Notes on S Corporations
If your business is classified as an S corporation (note that being an actual corporation is not a requirement for S corporation taxation), specific regulations govern the ownership of S corporations. It is crucial to seek guidance from a qualified legal or tax professional before transferring the ownership of your S corporation business interest to a trust, particularly following the death of the grantor or trust maker. Obtaining professional advice ensures compliance with the specialized rules concerning S corporation ownership and guarantees a sound understanding of the implications involved in such a transfer.
Although your trust can own your business after you die, you must consider many factors when transferring your business ownership interest to your trust. Therefore, it is important to consult a qualified professional who can ensure that you have considered all the factors and help you properly complete the transfer.