As a lawyer in Maryland, I often receive questions about transferring business ownership interest to a trust. If you have a business and are considering transferring it to a trust after your death, there are several important factors to consider. In this blog, I will address the most frequently asked questions and provide an overview of the process.
Can a Trust Own a Business After the Owner Dies?
The answer is yes, a trust can own a business after the owner dies. However, the type of business interest you own, whether it is a limited liability company (LLC), partnership, corporation, or sole proprietorship, will impact the transfer process. Additionally, how your business is managed will also play a role in the transfer.
How Does the Trust Get Ownership of the Business After the Owner Dies?
If your business is an LLC, a trust can receive ownership of your business interest by executing an assignment of interest. If you are the LLC's sole member, the trust will own 100% of the business after you execute the transfer document. If your LLC has other members, your trust will only own the percentage of the business that you own. The LLC's operating agreement should be reviewed to determine if there are restrictions or conditions on transferring your interest.
In a partnership, the transfer of ownership is done through an assignment of interest. The partnership agreement should be reviewed to determine if there are restrictions or conditions on transferring your interest.
If your business is a corporation, you should contact the corporation to determine what documentation is required to transfer your stock to the trust. For closely held corporations, you can transfer your stock by executing an assignment of stock. The corporation's governing document should be reviewed to determine if there are restrictions or conditions on transferring the stock to the trust.
How Is the Business Managed After the Transfer?
How the business is managed after the transfer will depend on several factors, such as the type of business and how it was managed prior to the transfer. For example, if your business is a single-member LLC where you run the business and are also the trustee, the trustee would continue to run the business's day-to-day affairs. If your business is a manager-managed multi-member LLC, the LLC would continue to be managed by the manager.
In a partnership where the partner participated in day-to-day management, the trustee will continue to manage the business as before the transfer. If the partnership has delegated management duties to its officers or employees, the trustee will most likely continue to allow the other officers/employees to manage the business.
After transferring corporate stock to the trust, the trustee, as the owner, will be entitled to vote the stock according to the corporation's governing documents. A transfer of stock to a trust will not change the corporation's management.
What Do Beneficiaries Receive?
The trust's terms will determine what the beneficiaries are entitled to receive. The trust is entitled to receive income or profit distributions, but whether the income is distributed to the beneficiaries and on what terms will depend on the trust agreement's terms.
Special Note About S Corporations
If your business is taxed as an S corporation, there are special rules about who can own it. It is important to seek the advice of a legal or tax professional prior to transferring ownership of your S corporation business interest to a trust and after the death of the grantor/trustmaker.
Transferring your business ownership interest to a trust is a complex process and requires careful consideration of several factors. I highly recommend seeking the advice of a qualified professional to ensure that all factors have been considered.
If you require legal assistance with your will and estate planning in Maryland, you may schedule a complimentary initial consultation with our Bauhof Legal team. Every estate is unique and individual, and this website is not intended to offer legal counsel. Please feel free to reach out to us at brad@bauhoflegal.com or give us a call at +1 (410) 876 4500.
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