Families are becoming increasingly knowledgeable and sophisticated about estate planning. The use of revocable and irrevocable trusts is on the rise, as families are understanding the need to have an estate plan to avoid probate and family turmoil. However, having executed trust documents alone is not enough. In order to receive the benefits of the trust, including avoiding probate, a trust must be funded.  

For business owners, to capture the full value of the trust and avoid probate, the equity interests of the business should be transferred to the trust. This is a fairly simple and effective process. Owners of corporations or corporate stock can assign and transfer their stock to their trust. Similarly, members of limited liability companies can transfer their membership interest to their trust. Both of these transfers can be easily completed by signing a transfer document. Business owners should also consider amending their Articles of Organization and Operating Agreement to reflect the transfer of interest to the trust.   

Other important considerations for business owners are:

1.     Do you currently have management responsibilities for your business? If so, those responsibilities may need to be addressed in the documents, to differentiate your individual management responsibility form the trust’s equity ownership. 

2.     If you intend to transfer your business interest to your spouse, can your spouse effectively fulfill your business role? If not, who will?

3.     If you have business partners, does the business have liquid capital or insurance to buy-out your family? How will the buy-out be valued?

4.     Do you have a plan to transition the business to your heirs and, if so, when and how? If one heir is working at the business, have you discussed the business transition with him/her?

5.     If you plan to transition the business to only one heir, do you plan to provide a similar inheritance to your other heirs? If you plan to transition management to one heir, but allow the other heirs to maintain an economic interest in the business, will such arrangement lead to family turmoil? Will the heir in management be obligated to report to or follow the direction of those heirs with only an economic interest? Will the heir in management be adequately compensated for their active participation in the business?

6.     Are you and your spouse in agreement regarding the distribution of the business or business assets to your heirs?

7.     If you transition the business before your death, do you require certain distributions and profits from the business to support your retirement?

Discussions with an estate, financial, and tax planners can help you strategize and develop answers to each of these questions.

Contributing Attorney: Allison Kierman is an attorney at Kierman Law, PLC where she provides assistance with estate planning and business consulting.