Placing Your Business into a Trust


SIMPLY PUT: TO AVOID PROBATE. Probate can take anywhere form 6 months to 2 years (in California usually even longer) and can costs anywhere from 4% -10% of the total estate's value.  Normally the act of doing business will have to cease during the probate litigation process and by the time the litigation is complete, your clients and customers were have likely gone to seek other providers for their service needs.  Therefore if you have a legal, medical or dental practice, you could potentially lose all of the patients/clients you spent years cultivating.

WHAT IS THE SOLUTION? You can place your business or professional corporation into a trust.  This allows your successor trustees and beneficiaries immediate access to the business, making it easier for a resolution to occur once an unexpected passing occurs.  The successor trustees have a 6 month time period to transfer or sell the business. This allows for the trustee to sell or transfer ownership of the business during a period of full valuation.

If we are dealing with a professional corporation (i.e. dental, law, or a medical corporation) a business may only be issued to and held by a licensed member of that respective profession. California Corporations Code 13406.  As such, share in such a professional corporation may only be transferred to another properly licensed individual. CaliforniaCorporations Code 13407.

Therefore, upon the death of a qualified licensed shareholder, his/her shares must be transferred or purchased by another qualifying licensed professional within 6 months following the death of the original shareholder, otherwise, the certificate or registration for the corporation may be suspended or revoked by the government.

On February 16, 1979, the California Department of Consumer Affairs issued a Legal Opinion (79-5), which determined that shares of a professional corporation may be transferable to a revocable trust under specific conditions:

1.       The Trustee and the Beneficiaries of the Trust must be licensed; AND

2.       The non-licensedspouse of the licensed Trustee/Spouse does not have an interest in the trust, greater than his/her community property in the shares AND

a.       The Trust specifies that :

           i.      The licensed Trustee/Spouse has exclusive control and powers in relation to the shares of the professional corporation; AND

           ii.      On the non-licensed spouse’s death, the spouse’s children( or other beneficiaries) have a beneficial interest, if at all, only in the proceeds that may be received from the shares. They do not have equitable title to those shares.

3.       If the licensed spouse/trustee pre-deceases the non-licensed spouse, then the shares will be sold and proceeds will be distributed according to the terms of the trust.

4.       If the non-licensed spouse/trustee pre-deceased the licensed spouse, two separate trusts are created (a trust for the property of the living spouse and a second irrevocable trust for the property of the deceased spouse. The licensed spouse maintains legal title to the shares of the professional corporation and their children have a beneficial interest to “only the proceeds which may be received from the shares of the Professional Corporation and not equitable title to those shares.” The trust agreement should further state that the “trustee/licensed person shall have exclusive control and powers relating to the shares of the professional corporation.”  Finally, the trust should specify that if/when children of the grantors become beneficiaries of the trust, their interest in the shares of the professional corporation must be limited to the proceeds from the sale of the professional corporation’s sale.

For more specific questions regarding transferring a business into a trust, please call The Kahn Law Firm at (626) 765-4469.