Transferring a Business Interest into a Trust: an Overview

Limited Liability Company (LLC)

1. Establish a Properly Set Up Trust: Ensure that your trust is correctly established and that its language aligns with your business goals.
   
2. Review the LLC Operating Agreement: Examine your LLC’s operating agreement to verify if it permits the assignment of the company to a trust and identify the necessary steps for the transfer.
   
3. Obtain Necessary Consents: Determine if consent is required for the assignment. This may involve unanimous consent from all members in a member-managed LLC or consent from an officer in a manager-managed LLC, depending on the operating agreement.
   
4. Prepare the Assignment Document: Draft an assignment of your LLC interest to transfer the interest into the name of the trust.
   
5. Amend Relevant Documents: Update the necessary documents to reflect the change in ownership, including amending the operating agreement.

Other Potential Issues

When transferring an LLC that holds real property, be aware that this could trigger a tax reassessment of the property under Proposition 13 in California. However, California offers several reassessment exemptions for ownership changes. Pay close attention when filing the Preliminary Change in Ownership Report (PCOR) to ensure that an applicable exemption is correctly applied.

Additionally, review any buy-sell agreements in the operating agreement for restrictions that might impact the transfer. Be mindful of specific state requirements. For instance, in California, the Secretary of State generally does not need to be notified if you are assigning the LLC to a revocable trust.

General Partnership

1. Review Your Partnership Agreement: Ensure that assigning your partnership interest to the trust complies with the terms of your partnership agreement.
2. Follow Required Procedures: Adhere to any procedures outlined in the agreement, such as obtaining consent from the other partner(s).
3. Prepare the Assignment Document: Draft an assignment to transfer the partnership interest into the trust.
4. Amend Relevant Documents: Update the necessary documents to reflect the change in ownership.

Other Potential Issues

Assuming your partnership agreement permits an assignment to the trust, it's crucial to carefully consider the implications for the partnership after your passing. Specifically, think about who the successor trustee will be and how they will align with your business goals. This could be particularly challenging if a professional trustee is involved.

Sole Proprietorships

Transferring a sole proprietorship into a trust is generally less complex than transferring other types of business entities. This simplicity stems from the nature of a sole proprietorship, which is self-operated and less formal, typically requiring no paperwork for its existence. You and the business are legally one and the same, meaning there is no legal separation between you and your business.

As a result, you aren’t necessarily transferring the business itself to the trust, but rather its assets. For example, you can assign the business’s bank accounts or other assets to the trust in the same way you fund your other assets. While there are methods to create broader assignment provisions for sole proprietorships, the process should be straightforward, as no consent is required and there are usually fewer restrictions within your own business.

Corporations

Transferring ownership of a corporation into a trust generally requires completing an Assignment of Stock. After assigning the stock to the trust, the new stock certificates should be filed with the corporation. However, corporations often have specific rules and procedures for transferring ownership to a trust. Therefore, it is advisable to contact the corporation to understand and comply with their unique requirements before proceeding with the transfer.

Conclusion

Transferring your business into a trust can save tens of thousands of dollars by avoiding probate. Beyond the cost savings, anyone who has been through probate knows the significant time and stress it imposes on already grieving heirs. Additionally, placing your business in a trust allows for a level of confidentiality, as probate is a public proceeding. Allowing a successor trustee to take over can also facilitate business stability.

However, establishing trusts and transferring business entities can be complex, and legal expertise is often necessary. Depending on the situation, there may be tax consequences or fees associated with these transfers. Therefore, it is advisable to consult with an attorney to develop effective legal strategies when transferring a business into a trust.