How to Transfer a Business Interest Into a Living Trust in California

Business owners often fund a living trust with their home and financial accounts and leave the business itself in their own name. When that happens, the ownership interest may still pass through probate. Transferring the interest into the trust is a separate process, and the steps depend on how the business is organized.

Why a Business Interest Must Be Transferred Separately

A trust controls only the assets that have been titled to it. Signing the trust document does not move anything into it. The same principle that applies when you fund a living trust with real estate applies to a business, but the documents are different. Real estate moves by deed. A business interest moves by assignment, and the entity's own records must reflect the change.

Transferring an LLC Membership Interest

Review the Operating Agreement First

Most operating agreements restrict transfers. Some require the consent of the other members. Others contain buy-sell provisions that could be triggered by an assignment. Many agreements include an exception for transfers to a revocable trust created by the member for estate planning purposes, but that language has to be present. If it is not, the agreement should be amended before the transfer takes place.

Prepare the Assignment and Update Company Records

The transfer is completed with a written assignment of membership interest from the owner to the trustee of the trust. The operating agreement's membership schedule is then updated to list the trust as the member, and the company's internal records should reflect the date of the change.

If the trust becomes a manager or a listed member, the company must also update its filing with the state. California Corporations Code section 17702.09 requires an LLC to file an updated Statement of Information when the information on record changes.

Transferring Corporate Shares

Shares in a corporation are transferred by cancelling the existing stock certificate and issuing a new one in the name of the trustee. The corporation's stock ledger must be updated at the same time. Any shareholder agreement should be reviewed for transfer restrictions in the same way an operating agreement is reviewed for an LLC.

S corporation status requires additional attention. A revocable living trust is an eligible shareholder during the grantor's lifetime, but after death the trust remains eligible only for a limited period unless it qualifies under a separate election. A transfer that ignores this rule can jeopardize the corporation's tax status.

Sole Proprietorships and Partnerships

A sole proprietorship has no separate legal existence, so there is no ownership interest to assign. Instead, the individual business assets are transferred to the trust. Each of the following should be addressed.

• Equipment, inventory, and vehicles titled in the owner's name
• Business bank accounts and merchant accounts
• Fictitious business name registrations
• Leases, contracts, and intellectual property
• Client agreements that may require notice of assignment

A partnership interest is governed by the partnership agreement, which will state whether consent is required and whether the trust can be admitted as a partner or will hold only an economic interest.

Tax and Practical Considerations

For income tax purposes, a revocable living trust is disregarded during the grantor's lifetime. The business continues to use its existing tax identification number, and the owner continues to report income as before. No new return is created by the transfer.

Other issues require review before the transfer is made. If the entity holds California real estate, a change in the ownership of the entity can affect property tax treatment. Lenders may require notice under a loan agreement. Professional corporations and licensed businesses are subject to ownership rules that may prohibit a trust from holding shares. Because a revocable trust can be amended or revoked at any time, the owner keeps full control of the business after the transfer, but the entity documents must still be drafted to permit it.

A Los Angeles trust lawyer can review the operating agreement or bylaws, prepare the assignment, and confirm that the trust's provisions address how the business will be managed after the owner's incapacity or death.

At The Werner Law Firm, we have prepared and funded living trusts for California families since 1975, including trusts that hold closely held business interests. If your business is still titled in your own name, contact a Los Angeles trust attorne at our firm to discuss completing the transfer.