Putting a Company, LLC or Business Into a Trust

For business owners, the biggest fear isn’t dying. It’s that when they die, the business stops: bank accounts freeze, no one has authority to sign checks, payroll goes unpaid, and customers and suppliers don’t know whom to call. A trust can keep the business running.

What Happens to an Unplanned Business When the Owner Dies?

If the owner’s interest is in their own name, it must go through probate. Until the court grants authority, no one can legally vote, sign or make decisions for that interest. For a small business, a few months of paralysis can be fatal.

How Is an LLC Interest Put Into a Trust?

Read the operating agreement first. Many agreements restrict transfers, for example by requiring the other members’ consent or giving them a right of first refusal;
Sign an assignment of membership interest transferring your interest to the trustee;
Update company records: the member list and operating agreement schedule. If needed, amend the operating agreement to make the trust a member, not merely an “assignee”;
Sign as trustee for future member decisions.

What Should a Single-Member LLC Owner Watch For?

Transferring a single-member LLC to your own revocable trust generally does not change its tax treatment. The key is to amend the operating agreement to say who takes over management if you become incapacitated or die (for example, your successor trustee or a named successor manager). Otherwise the company may be left without a leader.

What About Shares in a Corporation (C Corporation or S Corporation)?

Issue a new stock certificate to the trustee, or record the transfer in the stock ledger;
Check the shareholders’ agreement for transfer restrictions;
Be especially careful with S corporations: A revocable trust is an eligible shareholder during your lifetime. After your death, the trust generally can keep holding the shares for only about two years. Then the shares must be distributed to individual beneficiaries, or the trust must make a timely tax election (such as a QSST or ESBT election). Missing the deadline can cost the company its S corporation status, with serious tax consequences.

Can a Professional Practice (PC or PLLC) for a Doctor, Lawyer or Accountant Go Into a Trust?

Usually not. New York law generally requires owners of a professional entity to be licensed in that profession (see, e.g., Business Corporation Law §1507). A trust cannot hold these interests. Professionals need a separate plan, such as:
- A buy-sell agreement with partners;
- An arrangement for a licensed colleague to take over or buy the practice at your death;
- Attention to the legal deadline for disposing of the shares after death.

What About a Partnership Interest?

The same principle as an LLC: check the partnership agreement for transfer restrictions, sign an assignment and update the partnership records.

Can the Trustee Run the Business Day to Day?

Two things need to be kept apart:
- Owner rights (voting, distributions): once the interest is in the trust, the trustee exercises them;
- Company positions (manager, director, check signer): these are internal roles that do not transfer automatically just because the ownership interest is in a trust.

So the company documents should also name a successor manager or signer, and you should have a power of attorney.

Will a Trust Protect Me From Business Lawsuits?

No. A revocable trust does not provide liability protection. Liability protection comes from the company or LLC itself, and from keeping business and personal finances separate. A common structure: the business sits in an LLC for liability protection, and the LLC interest sits in the trust for succession.

Besides a Trust, What Should Business Owners Have?

A buy-sell agreement: Owners agree on the price and funding source for buying out an owner who dies or becomes incapacitated;
Key person insurance or life insurance to fund the buy-sell;
A succession plan: Who will take over? Is family capable? Is a professional manager needed?
The right trustee: Ideally someone who understands the business, or name a business advisor to assist the trustee.

Does a Change in Ownership Need to Be Reported to the Government?

A change in ownership may trigger state or federal beneficial ownership reporting requirements, and these rules have changed frequently in recent years. Check the current requirements with your attorney or accountant before transferring.

The Bottom Line

A trust is only one piece of business succession. The operating agreement, buy-sell agreement, successor choices and trust must be designed together so the business keeps running when the owner can’t.

Attorney’s perspective

For business owners, I design the operating agreement, shareholders’ agreement, succession plan and trust together, rather than just signing an assignment. Because I also handle business law, these documents can be aligned at once. See also Five Shareholder Agreement Clauses Business Owners Overlook.

For advice about your own family’s situation, call +1 718-218-5805 or schedule a consultation. We meet clients in Flushing and Manhattan, in English or Chinese.

Series overview

This article is for general information only and is not legal advice. Reading it does not create an attorney-client relationship. For advice about your situation, please contact us.

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