If you want to avoid having your company go through probate, you have to put the ownership certificates in the name of your living revocable trust. An extremely high percentage of companies fail when the owner dies. One of the major factors for the failures is the probate process. If it can be avoided, the company has a lot better chance of surviving.
The company’s ownership gets caught in probate when the stock certificate or membership certificate is made out in the deceased person’s name. Yes, lots of Exxon stock is in probate all the time, but the amount of stock you own in Exxon isn’t going to make any difference to Exxon, even if it is in probate for a decade. But if you are the only owner or there are only two or three other owners, when one of the owners die and the ownership certificate is probated, that is death to the company.
If your company ownership is held by your living revocable trust, your successor trustee immediately steps in and operates your business when you die. The successor trustee you have picked has full power to sell the stock, vote the shares or do whatever they have to in order to make certain your company continues operating.
Putting a company into a trust is not hard. If you are just forming your company, issue the certificates in the name of your trust. Remember the trust has three parts to the name. (1) the name of the trust – BIG TIME TRUST, (2) Date of the trust – Under Agreement 1/22/2014 or U/A 1/22/2014, (3) John Timely (use your name) Trustee or “John Timely TTEE.” Be certain to include all three parts of the trust name on your certificates.
By simply making sure your living trust “owns” your membership interests in the company, your family can avoid a lot of time, expense and frustration. If you don’t have a living trust, now is the time to get one. And fund it. This is too often overlooked and can cause huge issues for your company and family if you (or any of your partners) die unexpectedly. If you own your own small company, make certain you issue and use your company stock or membership certificates in the name of the trust in order to fund your trust. Hold a meeting and resolve to issue new stock or membership certificates and then get it done.
If you already have your trust in place and you need to change your membership interests, get the company stock or membership ledger. There will be a date entry for surrender or cancellation of the certificate. Enter the date the certificate was surrendered, and then simply issue another certificate. If you surrendered certificate #1, you will not reissue certificate #1. You will reissue the next certificate in sequence, say certificate #4. Fill out the ledger and the certificate in the name of your trust. Make sure that you cancel the certificate previously issued in your name.
Once the new membership certificate is issued, the ownership interest in your company is then owned by the living trust. You have effectively maneuvered out and around the probate problems.
Subchapter S Company Ownership Held by a Trust
One note on trust ownership – companies (either corporations or LLCs) taxed under Subchapter S of the IRS Code need to be handled with extra care. When putting a company into a trust, beware that S corporations, those corporations taxed under Subchapter S of the IRS Code, or an LLC taxed under Subchapter S of the IRS Code, can only be owned by a “Subchapter S qualified trust.” If your trust doesn’t meet the criteria of a “Subchapter S qualified trust,” then the IRS will reclassify your company as a C corporation tax structure.
Information on requirements for a Subchapter S corporation can be found on the IRS website. To qualify, the company is required to:
- Be a domestic corporation
- Have only allowable shareholders
- May be individuals, certain trusts, and estates and
- May not be partnerships, corporations or non-resident alien shareholders
- Have no more than 100 shareholders
- Have only one class of stock
- Not be an ineligible corporation (i.e., certain financial institutions, insurance companies, and domestic international sales corporations)
A living revocable trust has to be specifically written to own an interest in a Subchapter S entity. A Subchapter S qualified trust has special provisions put into the trust to qualify it with the IRS. If the trust is not qualified, the subchapter S status of the entity will be lost, and the IRS will treat it as a C corporation. (Note that all the trust templates in my Accumulation and Preservation of Wealth Set are qualified Subchapter S trusts.)