Delivering News and Updates on Wills, Trusts, and Estate Administration Matters
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In this edition, discover the planning trick of tying your LLC to your Trust, treat yourself to our next Facebook Live event on 11/9, beware of the dangers of accessing a deceased person's bank account prematurely, and see what sorts of fall fun you and your family can enjoy in the Triangle area. 🎃🎃🎃
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Why Putting Your LLC into a Trust is a Recipe for Success
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Limited Liability Companies (LLCs) are a popular business structure that offers liability protection and avoidance of double taxation. Revocable living trusts (RLTs) are popular asset transfer vehicles that allow you to avoid probate and have more control over how and when assets are passed to your heirs. By marrying the LLC and the RLT (effectively transferring LLC membership interests to the trust), business owners can combine the two types of legal entities and enjoy the best of both worlds.
Transferring an LLC to a trust and locking in these benefits requires more than the wave of a magic wand. There is a bit of paperwork involved and, in multi-member LLCs, securing the consent of the other members or managers of the company may be necessary. Still, a well-planned transfer can help reduce risks, keep your business affairs out of government hands, and fit into your broader estate planning goals.
Benefits of Placing LLC Interests in a Trust
Whether you own a single-member LLC or are a co-owner of a multi-member LLC, your LLC interest is considered personal property, and that means it is an asset that needs to be accounted for in your estate pln. In fact, your business interests are probably one of your most valuable assets. As such, you will want to ensure that you are safeguarding the company here in the present while also having a plan for what will happen to the business when you are not around or can no longer manage the day-to-day affairs.
The following are some of the key benefits of placing LLC interests in a trust:
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Probate Avoidance. Probate is the legal process of settling an estate when somebody passes away. This process is overseen by the court (i.e., the government) and is designed to ensure that your debts are paid off and your assets—including business interests—are allocated to the beneficiaries specified in your Will. In our area, probate takes months to complete. In fact, we have not seen a probate completed in under a year since before COVID-19 came around. Yet, during the probate process, there may be nobody managing your business interests or there may be limitations placed on the access to financial resources, all of which can result in operational problems. It also bears mentioning that a proper business valuation has to be provided to the court and fees paid to the court based on that valuation. Does your estate have the kind of cash flow to cover the expense of a professional valuation plus the court's fees or will assets have to be sold off to generate sufficient cash? That's only one of the many questions facing a business owner when contemplating the effect probate can have on the company. However, when you have a trust, the assets placed in the trust are allowed to skip probate and its host of many problems!
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Privacy. Not only can probate be lengthy and cause your business to languish, but a probated estate is a matter of public record. That means anyone (like your creditors, disinherited heirs, and scammers) who knows where to look can learn details about your estate. As North Carolina courts migrate to an on-line e-filing system, estate information is accessible from anywhere in the world where there’s an internet connection. No log-in, no password, no verification of identity, no legitimate purpose for seeking out these financial details required! Trusts, on the other hand, bypass probate. As a result, the assets contained in the trust also bypass probate, allowing your resources to pass to your beneficiaries more quickly, efficiently, and privately.
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Incapacity Planning. You may already have a plan in place for what will happen to your business when you die. That plan may include having a trusted family member take over, or there may be an agreement allowing other LLC members to buy out your ownership stake upon your death (side note: make sure the buy-out is properly structured to avoid probate too!). But what happens if an accident or illness renders you incapable of fulfilling your business duties? If your business plan only takes into account your death, then there's still exposure. However, if your LLC interests are held in a trust, the trust can be structured so that your incapacity immediately triggers the authorization of another person (for example, your Trustee or a key employee) to take over on your behalf during your period of incapacitation.
Other Considerations for Placing Your LLC in a Trust
Placing your LLC interests in a trust means that the trust—not you as the business owner—is legally an LLC member and a party to the LLC’s operating agreement. Although the law permits a trust to own an LLC, the LLC operating agreement may not. In small family-owned companies, it is not uncommon for the operating agreement to prevent members from freely assigning or transferring membership interests. After all, you may not want to be in business with your brother’s third wife if your brother dies before you. Therefore, you will first need to check whether the operating agreement allows for this arrangement. If you find the operating agreement restricts the transfer of membership interests, you may want to consider amending the operating agreement to allow for this particular type of transfer.
Even if the LLC operating agreement permits trusts to be members and allows for interests to be
assigned or transferred by LLC members, you may still need to obtain consent from the other members. Obtaining their consent could require a unanimous or majority vote, a notice period, or a corporate resolution. In order to properly secure the benefits of putting your LLC into a trust, you must follow the rules of the operating agreement.
If you can proceed with the transfer of your LLC into a trust, you will need to take the following steps:
- Follow any preliminary steps required by the operating agreement (such as giving advance notice to the other members of your intent to transfer).
- Transfer the LLC into the trust with the appropriate documentation prepared by an attorney.
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Update LLC documents, including the operating agreement, buy-sell agreements, and any relevant documents filed with the Secretary of State’s office (e.g., Articles of Organization, schedule or chart of members and each member’s corresponding percentage ownership interest) to reflect the fact that the trust (not an individual) is now a member.
- Even if not required by the operating agreement, have the LLC members sign a resolution that formally recognizes the change of LLC ownership (this reinforces the validity of the transfer of your LLC interests).
- Update your trust, as needed, to incorporate business succession terms from the operating agreement or buy-sell agreement and to include appropriate business powers for your Trustee.
- If the LLC has elected S-Corp status with the IRS, then check with your attorney to make sure your trust meets the requirements established by the IRS for who can own S-Corp shares.
The advantages of having a trust-owned LLC should be weighed against the disadvantages, including any unforeseen consequences that can only be uncovered through a careful evaluation of the LLC’s operating agreement, buy-sell agreements, and transfer restrictions. If your business is a PLLC (professional limited liability company), such as those owned by lawyers, CPAs, physicians, dentists, etc., then you must also be sure to follow any requirements set out by your licensing board for business ownership.
We can help you decide if transferring an LLC interest to a trust is the right move for your situation. If you do not presently have a trust, we can set one up and make sure the transfer of your membership interest is documented appropriately. For assistance with these and other business-related matters, you can schedule a business strategy session online or contact the office at (919) 678-5761.
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The results from our July poll revealed that you are interested in more Facebook Live events. You asked for it, so here it is! Join Amy as she addresses the #1 issue plaguing young parents. It's a discussion you cannot afford to miss!
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We invite you to share this learning opportunity with your friends who may not already have guardianship arrangements put in place. They are sure to thank you!
NOVEMBER 9 | 6:30 p.m. | FACEBOOK LIVE | Click to go to Facebook
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One of the most problematic mistakes family members make in the immediate aftermath of a loved one's death iis accessing the deceased person's bank account. We've had cases where people have withdrawn cash from the ATM using the deceased person's debit card. We've also had cases where people have used the debit card to buy groceries, fill up the car with gas, and pay for family meals. None of this is legal--no matter how well-meaning your intent. It does not matter if you had power of attorney for the deceased person because your authority under that document ends upon death. It does not matter if your loved one gave you permission to do it with their dying breath. As soon as that person dies, you cannot touch that person's money, access their account, or use their card until the court appoints an Executor for the estate.
When we are working on the accountings for probate cases, we have to reconcile every single penny spent from the bank account after the date of death. The more activity after death, the more suspicious the Clerk and the more of an uphill battle we face defending your actions. Do yourself--and us--a favor. Do not spend from the account.
Once you are approved as the Executor of the estate, you will have the legal authority needed to set up an estate bank and transfer funds from the personal bank account of the deceased into the estate. Then, you'll be in a better legal position to spend money for legitimate estate expenses. If there is something that absolutely must be paid before the estate account is established (for example, the funeral), the proper way to handle it is to pay the expense yourself and wait to be reimbursed once the probate estate is up and running. There may be other bills that you would like to pay (like the mortgage payment or the car insurance bill) to avoid late fees, but again, the proper thing to do is to wait until the estate account is up and running.
If the person who died had a trust and you are the successor Trustee, you will be able to access the money much more quickly than in cases where there is no trust. But you still need to be careful that money is being used for legitimate trust-related expenditures.
When in doubt, contact us before you take action. Otherwise, you may find yourself having to pay back to the estate the money you spent! If that horse has already left the barn and the money has already been spent, let's talk!
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There are so many fun fall things to do around the Triangle! Here are just a few of the things you can enjoy with your family and friends around our local communities:
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