As a lawyer in Maryland, I often receive questions about transferring a business ownership interest to a trust. If you own a business and are considering transferring it to a trust after your death, there are several important factors to understand. This article addresses frequently asked questions and provides an overview of how the process works.
Can a Trust Own a Business After the Owner Dies?
Yes, a trust can own a business after the owner passes away. However, the transfer process depends on the type of business interest you own—such as a limited liability company (LLC), partnership, corporation, or sole proprietorship.
How the business is structured and managed will also affect how ownership is transferred and how the business operates after the owner’s death.
How Does the Trust Obtain Ownership of the Business?
The method for transferring ownership to a trust depends on the type of business entity.
- Limited Liability Company (LLC): A trust can receive ownership by executing an assignment of interest. If you are the sole member, the trust will own 100% of the business. If there are multiple members, the trust will only receive your ownership percentage. The LLC operating agreement should be reviewed for any transfer restrictions.
- Partnership: Ownership is transferred through an assignment of interest. The partnership agreement should be reviewed to identify any limitations or approval requirements.
- Corporation: Stock is transferred to the trust, typically through an assignment of stock. Closely held corporations often have governing documents that restrict or condition stock transfers, which should be carefully reviewed.
How Is the Business Managed After the Transfer?
Business management after the transfer depends on the business structure and how it was managed before the owner’s death.
- Single-member LLC: If the trustee previously managed the business, they may continue handling day-to-day operations.
- Manager-managed multi-member LLC: The designated manager typically continues managing the business.
- Partnership: If the deceased partner was actively involved, the trustee may assume that role. If management was delegated to officers or employees, that structure usually remains unchanged.
- Corporation: The trustee, as shareholder, may vote the stock according to corporate documents, but management typically remains unchanged.
What Do Beneficiaries Receive?
What beneficiaries receive depends entirely on the terms of the trust agreement. While the trust may receive income or profit distributions from the business, whether and how those funds are distributed to beneficiaries will be governed by the trust’s instructions.
Special Note About S Corporations
S corporations are subject to strict ownership rules. Not all trusts are eligible shareholders, and improper transfers can jeopardize the company’s tax status.
It is critical to consult with a legal or tax professional before transferring an S corporation interest to a trust and again after the death of the grantor or trustmaker.
Why Professional Guidance Is Essential
Transferring a business ownership interest to a trust is a complex process that requires careful planning and review of governing documents, tax rules, and trust provisions. Professional guidance can help ensure the transfer is handled properly and aligns with your estate planning goals.
If you require legal assistance with wills or estate planning in Maryland, you may schedule a complimentary initial consultation with the Bauhof Legal team. Every estate is unique, and this website is not intended to provide legal advice. Please contact us at brad@bauhoflegal.com or call +1 (410) 876-4500.
