Should My Trust Own My LLC?

Should My Trust Own My LLC?

Many of my clients who are setting up trusts also own one or more LLC’s.  As a result, in the process of setting up their trust, they ask if their LLC should be titled in the name of their trust.  This blog discusses when the client should title their LLC interest in the name of their trust.

First, before discussing my recommended course of action, it is important to understand how LLC interests are handled under Arizona probate law when a LLC interest owner passes away.

Your Business Has to Go Through a Probate Just Like Any Other Asset in Your Estate.

Under Arizona law, if you pass away with assets in your estate that are valued at more than $75,000, then your estate will have to go through a probate. This $75,000 threshold applies to businesses and business interests too. Thus, unless you take some additional planning steps, your business or business interest will probably have to go through the normal probate process in Arizona. This can add additional time to the administration of your estate, additional cost to the administration, and the requirement of filing certain paperwork with the Arizona courts in order to administer your estate after you are gone. However, with proper planning, you can avoid probate for your business or your business interest by using two relatively straight-forward strategies. For businesses that are owned by one owner or by a married couple, I recommend that the LLC interest be owned by the trust and that the LLC interest be transferred as a distribution from the trust after the business owner passes away. For businesses that have two or more owners, I generally recommend a buy-sell agreement to efficiently set forth the way the transfer will occur after the death of one of the business owners, which is typically handled outside of a trust.

What Happens When The LLC Is Owned by One Owner or by a Married Couple?

For LLC interests that are owned by a single person or by a married couple, I typically recommend titling the LLC interest into the name of the trust in order to avoid probate, because a buy-sell agreements is not appropriate.

If a client wants to do a buy-sell agreement to pass it on to another co-owner, then one alternative is to have another person, often a key employee, buy into the business and become a minority owner. Then, after there is another independent owner in the business, a buy-sell agreement can be used to buy out the original owner when he or she passes away.

One other issue that needs to be addressed is the issue of who will run the business after the business owner passes away. If the deceased owner was the main person running the business, then this will be a big issue and could greatly affect the value of the ongoing business. Although the successor trustee of a trust (typically the surviving spouse or an adult child) certainly has the authority to run the business after the business owner’s death, he or she often do not have the expertise to do so. As a result, I often see the value of the business, one of the largest assets in the business owner’s estate, go down in value after the business owner dies. Although certain provisions can be drafted into the trust to handle the management of the business after the business owner’s passing, these issues can also be handled by bringing in a new co-owner, creating a buy-sell agreement, and revising the LLC documents to provide for a smooth transition in the management of the business if the business owner passes away.

What If There Is a Buy-Sell Agreement In Place for the LLC?

For LLC’s with multiple members, I always recommend a buy-sell agreement.

A buy-sell agreement is a written agreement that provides a mechanism for the orderly transfer of an owner’s interest to the other co-owners on the occurrence of certain triggering events. Without an exit plan, the owners of an Arizona LLC are essentially stuck with each other indefinitely even if one of the other owners dies, becomes incapacitated, gets arrested, or files for bankruptcy. A buy-sell agreement defines what happens when these triggering events occur, sets forth the buy-out price, and states whether such buy-out is mandatory or optional for each type of event.  Although there can be several triggering events typically built into a buy-sell agreement, including disability, termination of employment, divorce, felony conviction, loss of license, and bankruptcy, this  blog focuses on death as a triggering event in addressing the transfer of a business.

After a business owner passes away, the buy-sell agreement also sets forth the price for the buy-out. Most buy-sell agreements use the appraisal method for determining the buy-out value, because it is extremely difficult for co-owners to agree upon a value for the business or on a formula to determine the value at the time of the agreement. Plus, over time, the value can go up or down. In addition to the buy-out price, the buy-sell agreement also sets forth the terms of the buy-out, so that the timing of the buy-out payments is “locked in” when the death occurs.

If there is buy-sell agreement in place for the LLC, then, as long as the buy-sell agreement is adequately funded with life insurance, I recommend that the client allow the buy-sell agreement to handle the buy-out of their LLC interest directly with their family.  In such instance, the LLC interest would not cause the business owner’s estate to go through a probate, and the business owner does not need to title the LLC interest into the name of his or her trust.  However, for multiple member LLC’s, if there is no buy-sell agreement in place, then the business owner should definitely title the LLC interest into his or her trust.

How Do You Title an LLC Interest into the Name of a Trust?

There are two steps that I recommend in order to title an LLC interest into the name of a client’s trust.  First, I recommend preparing an Assignment of Membership Interest.  Second, I recommend that the client file Articles of Amendment to their Articles of Organization and make appropriate changes to the Operating Agreement for the LLC.  I handle these changes for my clients as part of the process of drafting their trust and accompanying documents.

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