Avoid Probate WithTrustIf 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.)

11 Comments
  1. I already have a S Corp, But want to put it into a trust, Does by doing that change the registered name of business or change of Business Ownership? I have a state license for this business and if the Name changes I have to fill out different papers with the state so would I have to do that and what about liability Insurance and vehicle Insurance? Would I have to notify them that the company is now in a trust? I was going to have the business and the business checking acct put into a trust and then all our personal items put into a different trust is that needed or can all be put into same trust? Should the company vehicle also be put into the trust?

  2. Jami,
    If the trust is a revocable trust you don’t have to change the business license, insurance, or business account. You can’t change the business checking account into the name of the trust. Since the trust will be revocable, having two different trusts still won’t really give you any protection.

    The company vehicle should stay in the current name that it is, whether that’s the business or your own personal name. See my article at https://www.legalees.com/cars-into-living-revocable-trust for more on this.

  3. What happens when the ownership of a personal holding company is transferred to a revocable Grantor Trust, and the Grantor dies. The assets inside the personal holding company consist solely of cash and marketable securities. The Grantor Trust transitions to an Irrevocable Trust, upon the death of the Grantor, and the new trustee wants to sell the PHC marketable securities. Trying to avoid the capital gain tax on the PHC level, since cash proceeds are going to be distributed to the beneficiaries. So my question is: do these marketable securities, owned by the PHC, get a step-up in basis at Grantor’s death or does the PHC recognize capital gains from the original cost basis and pay the resulting capital gain tax? Alternatively, does the corporate stock of the PHC, owned by the Grantor Trust receive a step-up basis at the Grantor’s death? I know one or the other is going to pay capital gain taxes, I just want to report it on the correct entity’s tax return.

  4. Gary, please see my comments on your questions below:
    What happens when the ownership of a personal holding company is transferred to a revocable Grantor Trust, and the Grantor dies.
    The company will continue to be a taxable entity. Any profits or losses will be recognized by the trust, which is irrevocable and should have a tax id after death of grantor. The trust will distribute the profits (preferably) to the beneficiaries and they will be taxed on the income according to their tax bracket and the nature of the income in the trust.
    The assets inside the personal holding company consist solely of cash and marketable securities.
    The Grantor Trust transitions to an Irrevocable Trust, upon the death of the Grantor, and the new trustee wants to sell the PHC marketable securities. Trying to avoid the capital gain tax on the PHC level,

    hard to do, because the phc is the same as it was before the death. The grantor’s interest in the phc got a step up in basis on death, but not the stock in the phc.
    since cash proceeds are going to be distributed to the beneficiaries. So my question is: do these marketable securities, owned by the PHC, get a step-up in basis at Grantor’s death or does the PHC recognize capital gains from the original cost basis and pay the resulting capital gain tax?
    Great question. I think they keep the original basis, but I will have the issue researched.
    Alternatively, does the corporate stock of the PHC, owned by the Grantor Trust receive a step-up basis at the Grantor’s death I am sure that the phc stock will get a step up in basis. ? I know one or the other is going to pay capital gain taxes, I just want to report it on the correct entity’s tax return.
    I will have to investigate this. UPDATE 10/11/18: The phc stock owned by the grantor trust will get a step up in basis at the grantor’s death. The stock held by the phc will not get a step up in basis. Where the capital gains tax is paid will depend upon what tax structure the phc has. The following table

    Estates and Trusts Taxable Income

    $ 0 to 2,600 maximum rate = 0%

    2,601 to 12,700 maximum rate = 15%

    12,701 and over maximum rate = 20%

    is the tax rates for the trust. you want them to be passed through to the beneficiaries and have them pay the tax at their rate. The trust should be able to pass through any tax liabilities to the beneficiaries. Ben, the IRS agent auditor we now work with could help if this doesn’t answer your questions.

  5. I have a question. If my husband and I set up a revocable Family Trust and place our various LLC membership interests in the trust (some business, some real estate), then happen to sell said real estate or business while both are still alive, is there any effect upon the sale that impacts the trust in any way? Or is only upon the death of the first to die where the Trust actually comes into play? And upon sale of LLC while both still alive, its just a matter of closing out business and dissolution of LLC as typical — business as usual?

  6. Linda,
    The only difference when you are selling something like a property or business out of a trust is the way you sign the documents. Instead of signing your own name you are going to be signing as trustee. Otherwise there is not really any difference while you are both still alive. After one of you has passed away, then it may change or it may not, depending on how the trust is written.

  7. Mr Lee Phillips,
    In addition to the LLC Membership Certificate being in the name of the Revocable Trust, the Operating Agreement also needs to list the Revocable Trust as LLC member, correct?
    Thank you.

  8. Did you find an answer to the step up in basis of securities held in a PHC owned by grantor trust asked by Gary?

  9. Diane,
    Yes, and thank you for the reminder to include them in the online comments. We have added the following:

    The PHC stock owned by the grantor trust will get a step up in basis at the grantor’s death. The stock held by the PHC will not get a step up in basis. Where the capital gains tax is paid will depend upon what tax structure the PHC has. The following table

    Estates and Trusts Taxable Income

    $ 0 to 2,600 maximum rate = 0%

    2,601 to 12,700 maximum rate = 15%

    12,701 and over maximum rate = 20%

    is the tax rates for the trust. you want them to be passed through to the beneficiaries and have them pay the tax at their rate. The trust should be able to pass through any tax liabilities to the beneficiaries. Ben, the IRS agent auditor we now work with could help if this doesn’t answer your questions.

  10. JLMA,
    Yes, the membership certificate should be issued in the name of the trust. The state records (articles of organization) should be amended to reflect the change, or the annual report to the state may make the change (if you state requires an annual update). The operating agreement should be amended to reflect the change. Many operating agreements have a section outlining ownership.

  11. JLMA Followup:
    Question:
    Does the amended OA show both the original language PLUS the new language under an AMENDMENTS Section?
    Or does the amended OA remove the original language and shows only the new language (with no mention in the new OA that a change has been made)?
    Our Answer:
    If the operating agreement is restated, you can get rid of the old one. Most of the time you will simply state that section *** of the operating agreement is amended to read …… then the original language would be in the operating agreement that you keep, plus you will attach the amendment at the back. You could reprint and resign the operating agreement with the new section in it, and then discard the old operating agreement. That is probably what I would prefer, but people do it lots of different ways.
    If you are the only owner of the LLC, then just printing a new operating agreement with the new information is fine. If there are other people involved with the LLC, then you will need to make a formal amendment and keep a copy of the old one.

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