How to Put Business Interests into a Trust

Reasons to Hold a Business in Trust

A trust is a legal entity that holds assets for and transfers them to beneficiaries. Although not a business entity, a trust can hold business assets, such as real estate and property. Ownership interests in a business, which are considered personal property, can be held in a trust, too.

Indeed, business ownership interests are often among an individual’s most valuable assets. Like other assets, they must be carefully managed and safeguarded. In addition, plans should be in place to avoid disruptions in the business’s operations when the current owner departs the business.

These goals—and more—can be achieved by placing a business in a trust. When a trust holds a business, it can provide the following advantages:

• The business interests are not subject to probate upon the owner’s death
• Estate taxes can be reduced or eliminated
• Trusts are not public and therefore can maintain a business’s privacy
• Business assets are separated from personal assets, providing more protection from creditors’ claims
• It allows for succession planning in the event of incapacity or death by having beneficiaries inherit business interests without interrupting operations
• It provides flexibility due to many types of trust structures

Placing a Company in a Trust

Transferring assets such as ownership interests to a trust is commonly known as funding a trust. Once an asset is transferred to a trust, that asset is the legal property of the trust, not of the person (i.e., the grantor or settlor) who creates and funds the trust.

The assets held in trust are managed by a trustee—an individual or company named by the grantor. They are managed for the benefit of the trust’s beneficiaries in accordance with the wishes of the grantor and any specific rules that apply to the type of trust created.

A business owner can act as the trustee of the trust and be its beneficiary, although state law may not allow the same person to be the sole trustee and sole beneficiary. This can be avoided by naming a co-trustee and co-beneficiary (or beneficiaries).

Putting business interests into a trust can be done at formation or after the company is an established entity by following these steps:

• With the help of an attorney, draft trust documents to set up the trust. This includes choosing a name for the trust, identifying beneficiaries, selecting a trustee, and determining the trust’s rules.
• If forming a new business, issue the stock certificates (corporation) or membership interests (LLC or partnership) in the name of the trust.
• If transferring membership interests of an existing LLC or partnership to a trust, a document of transfer—called an assignment of interest—is required.
• If transferring stock certificates to a trust, an assignment of stock agreement or a similar contract is needed.

As mentioned, sole proprietorships do not involve ownership interests, because there is no legal separation between the owner and the business. While a sole proprietor cannot transfer business interests to a trust, they can transfer the assets that make up their business, such as bank accounts and office equipment.

Before Putting Business Interests in a Trust

Setting up a trust and funding it with business interests is not overly complicated. However, anyone who is considering putting business interests into a trust should keep these potential complications in mind:

• The LLC, partnership, or corporation may have specific terms and conditions established by contract atits formation or in its governing documents for transferring business interests to a trust, such as a majority or unanimous vote of the other members or owners.
• The business might have rules in its operating or shareholder agreement that prohibit a trust from holding ownership interests.
• Placing interests in a trust could be a triggering event in a buy-sell agreement.
• Costs related to trust set up and administration could be high.
• Business interests may lose marketability when placed in a trust.
• Depending on the type of trust, the transfer could dilute ownership interests or lead to unintended tax consequences.
• Funding a trust with business interests could draw the attention of the Internal Revenue Service as an “abusive” trust scheme if it is used to avoid taxes.
• Setting up a business interest trust requires the trustee to act in the best interest of the beneficiaries (fiduciary duty), which could establish legal duties different from those applicable to owners of the business entity.

Numerous trust options provide flexibility, but different types of trusts have unique implications and requirements that must be considered, not only for the current business owner, but also for their heirs down the road.

Transfer Your Business Interests with Help from an Attorney

Creating a trust to hold business interests can enable you to maintain control over the business and provide protection for the company you worked so hard to build, as well as increase your peace of mind about the business’s future. The consequences of transferring your business interests to a trust may vary depending on the type of trust, so some business trusts may be more beneficial to you and your heirs than others.

The pros and cons of a business trust should be discussed with an attorney along with the outcomes you want to achieve from a trust. During an initial strategy session, we can discuss your situation and how a trust can be used to meet your business and estate planning goals. Call or contact us today to take the next steps.

This article is a service of EH Joiner, PLLC, a Personal Family Lawyer® Firm. We don’t just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That's why we offer a Life & Legacy Planning Session™, during which you will get more financially organized than you’ve ever been before and make all the best choices for the people you love. You can begin by calling our office today to schedule a Life & Legacy Planning Session™.

The content is sourced from Personal Family Lawyer® for use by Personal Family Lawyer® firms, a source believed to be providing accurate information. This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal, or investment advice. If you are seeking legal advice specific to your needs, such advice services must be obtained on your own separate from this educational material.