If you don’t already have a living trust in place, then it’s a good idea to have your business assigned to one in order to avoid probate and clarify your wishes.

If your family already has a living trust, then you can assign or transfer the business ownership interest to the pre-existing trust so long as it has adequate provisions within the trust to account for such business interests. For example, if there is a buy-sell provision related to the business, then you want to make sure the trust reflects the terms of such agreement.

If you feel your pre-existing trust is inadequate, you may modify or amend the trust accordingly.

A brief background on businesses and trusts:

Back in the Rockefeller / Standard Oil days, trusts were used like holding companies (in fact, you would often hear the word “business trusts” to describe a company), but that all came to an end with the antitrust laws and the use of more modern business structures: corporations, partnerships, and LLCs (with most small businesses now using LLC’s or S Corps).

But, sometime the standard LLC operating agreement doesn’t cut it, so here are some ways business owners use trusts to optimize their estate planning:

Tax Planning Opportunities

In the past, I’ve seen clients set up a trust for each of their children (or grandchildren), with each trust having partial ownership in the family business. To do this type of trust structuring, you would need a good CPA who can make sure all your tax filings are in order. Generally, this approach can help spread the income tax liability and create a lower overall tax impact on the family as a whole (assuming some family members are in a lower tax bracket than others).

In other words, you’d most likely see the greatest tax benefit if/when your children are young adults (ages 18-29) and haven’t yet reached the higher tax rates.

Also, from an estate tax perspective, you may be able to argue that the minority shares held in each trust qualify for additional discounts, which could be helpful in reducing your overall estate tax further. However, if you do this approach, then you should have a qualified business appraiser involved to help you determine whether it’s worth the hassle of setting up and administering separate trusts.

Advanced Estate Planning Opportunities

Having one or more trusts set up for a specific business entity can also provide a greater degree of protection if you are interested in doing irrevocable trusts. Similar to the prior section, by having ownership split or partially owned by a third-party trustee or other family member acting as trustee - you may be able to take a portion of that asset out of your name for asset protection purposes.

Of course, the simpler approach would be to just make sure you have adequate insurance on the business and/or an umbrella insurance policy, but some clients like to go the extra mile (assuming they have someone they trust absolutely to be the trustee of that trust).

Remember: this approach really only works for asset protection purposes when you are not serving as the trustee.

Seamless transition of ownership interest.

Making the business transition seamless could be accomplished by incorporating the appropriate provisions in your family trust, but if for some reason you would like a different person to serve as trustee of your business trust (as opposed to your spouse or whoever is the successor trustee of your family trust), then you could set up a separate trust to clarify controls and distribution of your ownership interest in the business.

For example, you may want the business to go to a specific child or person at the exclusion of others. Sometimes it’s easier to avoid family tension by having a separate trust carved out for that purpose. Whereas if the business was bundled into the family trust, then all beneficiaries of the trust would be on notice as to the business, its valuation, and the details of its distribution.

Put differently, if you want to make the transition of your business more private and streamlined, with only those in the “need-to-know” being a part of the transition process, then it may make sense for the business to have its own trust separate from your family trust.

For those of you who want to keep things simple:

For most LLC / partnerships / S Corps, you can simply assign or transfer membership interest to your personal revocable trust to ensure a streamlined transition of wealth.

Some of my business-owning clients who want to keep things as simple as possible, but also want estate tax provisions and controls in place (for example, to minimize problems associated with remarriage risk) may do a personal revocable trust for themselves and a personal revocable trust for their spouse.

By using revocable trusts (as opposed to irrevocable trusts) you would continue to be in control of the business and have the flexibility to change things down the road.

It should also be noted that if your business has multiple owners (persons other than you and your spouse), then you will want a buy-sell agreement in place and properly funded to make sure you and your partners know exactly what to do if one of you unexpectedly dies.

You need to make sure the buy-sell has proper funding provisions because the last thing you want is your family getting into a contract dispute with your former partners. For example, how is the payout of the deceased owner’s share going to be financed? What if there is insufficient financing or cash flow available? How do you deal with a potential liquidity crisis when the equity is tied up in the closely held business? These are all things that should be sorted out now while everyone is alive (ideally).

So, when it comes to owning a business, proper estate planning can avoid a lot of headaches and hassle down the road for the benefit of you and your family.