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You started a business and formed an entity, like a partnership, an LLC, or a corporation, to protect yourself from certain types of liability exposure related to your business endeavors—great! However, you might not have thought about the benefits of going one step further and vesting your interest in that business in a revocable trust.
A revocable trust can serve several important purposes. When properly funded and managed, it can help:
- Avoiding probate or public estate administration,
- Planning for possible incapacity,
- Directing assets,
- Preserving family assets or wealth,
- Planning for minor children,
- Mitigating estate taxes on larger estates, and
- Planning for asset management and death in blended families.
With respect to business interests, some or all of these revocable trust benefits may be relevant and applicable; however, this article will focus on items (1)–(4).
Avoiding Probate or Public Estate Administration
If you die without a trust, your assets are subject to probate or court-supervised estate administration proceedings. Both are a public legal process used to marshal assets, pay creditors, and ultimately transfer your remaining assets to your intended beneficiaries after your death, regardless of whether you die with or without a will. These proceedings require filing several petitions and documents with the court, and often involve hiring an attorney, making it a lengthy and costly process.
Whether you own your business alone, with your spouse, or with other business partners, failing to properly vest your personal ownership in the business in your trust can easily thwart one of the main reasons you established a revocable trust in the first place and cause a major headache for your heirs in the future.
Sole Owner
First, consider what happens if you are the sole owner of the business. If you hold your interest in your individual name, rather than as trustee of your trust, your heirs will likely need to petition the court for authority to wind up and dissolve the business and take control of its assets. However, if your interest is held in a trust, you can designate exactly to whom your interest will pass upon your death, and those heirs often can seamlessly take control of the business assets, generally without court involvement (though licensing requirements for certain types of businesses can sometimes complicate this).
Multiple Owners—Buyout Provisions are Necessary but Insufficient Alone
In the case that you have business partners, other members, or other shareholders (depending on the type of entity) involved in the business with you, often the business’ governing documents will include buyout provisions that are triggered by the death of a partner, member, or other shareholder. While these provisions usually take care of how the business will be valued and the payment terms upon your death, they do not account for who has authority to make the decisions and sign the documents that inevitably will be necessary, or who is to receive the money when a buyout occurs. This is a problem often overlooked until it crops up—after it is too late to fix (except through a court-supervised proceeding).
If the business is held in your individual name, then when you die, the purchasing partners, members, or shareholders must pay the value of the shares to the holder of that business interest…which is you individually. The problem is that any assets, or cash received by a deceased person individually, are given to his or her estate, and the only way to get something out of an estate is through a public court proceeding. Therefore, buyout provisions alone are insufficient to avoid a future headache for your heirs.
If you properly vest your business interest in the name of your trust, then upon your death and the subsequent exercise of buyout provisions, your trust is the owner of that interest. Therefore, the money to purchase the shares is paid to your trust, and the proceeds can then be administered privately according to the terms of the trust document without court involvement, the same as any of your other trust assets would be distributed. In addition, assuming the company’s governing documents permit, a trust allows you to gift your interest in the business to your heirs, rather than have that interest sold at your death.
Planning for Incapacity
Many people plan for death but often overlook the need to plan for the very real risk of incapacity. Incapacity may come suddenly, say the result of a terrible car accident, or it may be the gradual result of mental or physical decline at the end of life. Regardless of how incapacity occurs, it can create serious problems for your business if you are unprepared.
This is particularly an issue if you are the sole business owner. If you own a business in your individual name, and you become physically or mentally unable to manage the business’ affairs, then suddenly no one has ownership authority over the business to make decisions, sign contracts, etc. When you vest your interest in your trust, a successor trustee, the person who takes control of your trust and its assets when you die or become incapacitated, has the authority to take over business operations and make decisions if you, as the sole owner, become unable to do so.
Passing on Family Legacy and Preserving Wealth
While there are costs and fees associated with proper administration of a revocable trust upon your death, these costs and fees are almost always significantly lower than the cost of administering an estate through the courts. Moreover, if you already have a trust that will require administration after your death, then why set your heirs up to require the extra headache and expense of a probate proceeding too? Lowering the cost of estate administration allows your heirs to keep more of the estate that you worked during your life to build.
If you know someone wants to take over the business when you retire, vesting your small business interest in your revocable trust is one mechanism to implement a business succession plan. While these transfers are often planned and implemented during your lifetime, unexpected events can occur before these plans are carried out. Properly vesting your interest in your revocable trust helps ensure your business legacy is carried on.
Lastly, probate and court-supervised estate administration proceedings are public. Details and aspects of your business and family become part of public court record. Holding your business interest in a trust allows you to keep your business and family affairs private after death because trusts are privately administered and generally do not require court involvement.
Interested in making sure your business interest is properly vested in your trust? Let’s talk.