The simplest way of protecting an interest in a business after death is to transfer it to a revocable (living) trust when the owner is alive. This avoids probate and other complications relating to interest ownership after the original holder’s death.
Before proceeding with the transfer, the owner should review the applicable agreement adopted by the entity to see what restrictions, if any, apply. Some agreements may allow transfers solely for estate planning purposes, while others might prohibit all transfers or necessitate written approval from the remaining entity owners. An operating agreement could also grant the remaining owners the right to repurchase the ownership interest when any conveyance is initiated.
The transfer is accomplished by executing an assignment that conveys the interest from the individual to the trust. This assignment should then be submitted to the entity to record the change in its books. When transferring shares in a corporation, a new stock certificate must be issued in the name of the trust. Following the transfer, the interest is held by the trustee, who is often still the original owner. In the event of the owner’s death or incapacity, a successor trustee will automatically assume the role and exercise the voting and membership rights. The trust will receive profit distributions or dividends due to the owner, and the trustee will distribute the income to the trust beneficiaries in accordance with the terms of the trust agreement.
Transferring to a trust is the simplest, but not the only, option for protecting the owner’s business interest. Other choices include: (i) adoption of a buy-sell or shareholder agreement by the entity’s owners; (ii) lifetime gifts of business interests as part of the owner’s overall estate planning strategy; and (iii) use of transfer-on-death and beneficiary designations naming individuals who will receive the interest upon owner’s death.
