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09.15.21

Use of a revocable living trust to avoid probate for business interests

BY Brian S. Roth

Properly structuring the ownership of a closely held business can avoid complications upon the death of the owner. The use of a revocable living trust can help ease the burden of transferring the business and avoid probate.

Businesses are often structured as limited liability companies (LLCs) or corporations in order to achieve limited liability. If the business interests are held in the owner’s name at death, the business interests must be probated. This process can be burdensome and drawn out.

Instead of owning the business interests directly, an owner can transfer his or her business interests to a revocable living trust. In doing so, the business interests will be considered a non-probate asset, and court approval will not be required for any transfer to the owner’s heirs. The revocable living trust is an attractive vehicle because it is essentially a “non-entity” during the owner’s lifetime. The owner will have free access to the business interests and may amend or revoke the trust agreement for any reason. The owner can even be the sole trustee of the trust.

Under Section 417 of the New York Limited Liability Law, a written operating agreement is required for every New York LLC. In order for the LLC structure to work properly, a provision should be included in the operating agreement that allows for transfers to permitted transferees without the consent of the other LLC members and/or the manager of the LLC. Permitted transferees can include a member’s estate, a member’s family members, or trusts created for the benefit of the member or the member’s family members. All that would be required to transfer the LLC interests would be a simple assignment to the transferee and a joinder agreement in which the transferee agrees to be bound by the operating agreement. The member schedule of the LLC would also need to be updated. It is important to note that if there are conflicting disposition provisions in the operating agreement and the member’s testamentary documents, the operating agreement will likely control. Therefore, it is imperative that the LLC operating agreement is properly aligned to the business owner’s estate planning documents.

Moreover, if the business is held in an LLC taxed as an S-corporation, and if the LLC interest is transferred to a trust, the trust agreement must have appropriate language allowing the trust to be an S-corporation shareholder in order to preserve the LLC’s S-corporation election.

In summary, a revocable living trust is a simple but effective tool to avoid probate and ensure that the closely held business is transferred efficiently and in accordance with the owner’s intent.

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Brian S. Roth

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