In general, the answer is yes; your trust can own your business after you die. But taking a deeper look into this matter, some factors may affect your individual situation. Both the type of business you own (LLC, Partnership, corporation, sole proprietorship), as well as how your business is currently managed can determine how the trust obtains ownership and continues operations after you pass. We’ll explore these determining factors here:
How Does the Trust Obtain Ownership of Your Business?
LLC: Once you have completed an assignment of interest, a trust can obtain ownership of your LLC after you are gone. The percentage that the trust obtains depends on whether you are the sole owner of the LLC, or if it has other members. For instance, if you own only 25% of the LLC, and the other members own the other 75%, the trust will obtain 25% of it. There may be restrictions on transferring your interest within the LLC’s operating agreement, such as consent from other members prior to any transfer. Additionally, some LLCs enact membership certificates to identify its owners. Therefore, it’s important to have revised membership certificates issued in the trust’s name. This can be done through your assignment document.
Partnership: Similar to an LLC, a partnership is transferred through an assignment of interest. We recommend reviewing your specific partnership agreement to determine any restrictions you’ll have to work around.
Corporation: Documentation may be necessary to transfer your corporate stock to your trust, so contact your corporation to get the proper forms. In the event that there are not documentation requirements, stock can be transferred to the trust with an assignment of stock. Similarly to an LLC, new certificates should be issued to reflect that the trust owns the stock upon completion of the assignment of stock.
Sole Proprietor: Since a sole proprietorship doesn’t identify a legal distinction between the owner and the business entity, the transfer of ownership can be performed just as you would any other personal assets.
How Will the Business Managed After You Pass?
Once the trust has obtained ownership of your business, there are factors that affect how it will be managed after you are gone. The first factor is the type of business that has been transferred (which we explored above). The other is the way the business was managed prior to the transfer of ownership.
LLC: Upon completion of the transfer of interest, a trustee obtains ownership of the business. Assuming the LLC was run by a single member trustee, the successor trustee would continue to run the business’s daily affairs in the same manner prior to the transfer. In the event that the operating agreements specify that duties will be delegated to another person, the trustee would not manage the business. If the business is a multi-member LLC that was run by a designated manager prior to the transfer, that same manager will resume the operation of daily affairs after your death. This assumes that the deceased had no direct management of daily affairs before their death.
Partnership: If you are a partner that participates in daily management activities and transfer your ownership percentage to a trust, the successor trustee will resume the management practices after your passing. In cases where the deceased has delegated management activities to another person prior to death, that agreement takes effect. Officers / employees who were managing the business prior to the death will most likely be allowed to resume their management duties, as long as it’s approved by the successor trustee.
Corporation: Corporate stock can be transferred to the trust, and the trustee can then vote that stock based on the terms of the corporation’s governing documents. Transfer of a stock to a trust will not typically change the corporation’s management practices.
What Do the Beneficiaries Receive?
As is the theme with trust transfers, the terms will determine whether income is distributed to beneficiaries. The trust is entitled to receive income or distribute profit distributions to owners or stockholders.
Special Circumstances: 'S' Corporations
In the case that your business is taxed as an S corporation, there are unique circumstances under which someone can own the S corporation after your death. Prior to transferring ownershipof trust assets, consult a qualified attorney or financial professional.
As discussed, there are many factors to consider and navigate when transferring business ownership before you die. Overall, it depends heavily on the type of business you are operating, as well as how it is currently being managed. Therefore, it’s a great idea to consult with professionals to properly consider every factor and complete the transfer of ownership with confidence. It can be daunting, but Anderson, Dorn & Rader is here to help!