Securing Your Legacy: Why Business Owners Should Consider a Revocable Trust

As a business owner, you’ve spent years building something of value through hard work and late nights. When we sit down to discuss estate planning at Franklin & Frankel, my goal is to ensure that what you’ve built is protected for the next generation.

While our firm doesn’t believe that a trust is a “one-size-fits-all” requirement for every single client, we almost always recommend them for our clients with business holdings or interests. Here is why a trust can be a game-changer for entrepreneurs and practice owners.

Avoiding the Public Eye and the Probate Delay

One of the primary purposes of a revocable trust is to manage your assets during your lifetime and provide for their distribution after you’re gone, often avoiding the involvement of the probate court.

For a business owner, the probate process can be particularly cumbersome. In Connecticut, for example, the full probate process (which usually applies when you have significant business interests in your estate) can take anywhere from six months to over two years. During that time, a fiduciary must secure and manage valuables, file inventories of assets, and handle various court requirements. If your business interests are tied up in probate, it can create significant operational disruptions and it is often those business interests that cause the delay in finishing up a probate estate.

A trust provides privacy and allows for a much smoother transition. Because the trust “owns” the business interest, your trustee can step in immediately to manage the assets according to your specific instructions without probate court involvement.

Ensuring Business Continuity

When you own a business, dental practice or medical practice, “business as usual” needs to continue even if you are no longer there to steer the ship. A trust allows you to:

• Appoint a Successor Trustee: This is the person or institution who takes over management if you become incapacitated or pass away.
• Provide Clear Instructions: You can outline exactly how the business should be managed or eventually distributed to your beneficiaries.
• Protect Against Disputes: For businesses with multiple owners, a trust works hand-in-hand with a buy-sell agreement to prevent external parties from becoming unintentional co-owners.

Potential Income Tax Benefit for Heirs

A revocable trust can also preserve an important tax benefit in many cases. Because revocable trusts are typically treated as “grantor trusts” during the owner’s lifetime, the assets are generally still treated as the owner’s assets for federal income tax purposes. As a result, when those assets pass at death, beneficiaries may receive a stepped-up basis to fair market value as of the date of death, which can reduce capital gains tax if the business interest or related assets are later sold. Of course, the exact tax result depends on the nature of the asset and each family’s circumstances, so owners should review this with their estate-planning attorney and CPA.

A Special Note About Real Estate LLCs

Like any other type of business, if you own investment real estate in an LLC, transferring ownership of your LLC into a revocable trust can provide the same continuity and predictability as owning any other business interest in a trust. For many owners, the best approach is not to transfer the real estate itself out of its LLC and into a trust, but instead to transfer the ownership interest in the real-estate-holding LLC to the revocable trust. That can help preserve the LLC’s liability and management structure while still avoiding probate on the membership interest. Before doing so, however, the owner should review the LLC operating agreement, any lender requirements, and related title or insurance considerations to be sure the transfer is handled correctly.

A Piece of a Larger Puzzle

Protecting your business is just one part of a comprehensive plan. We often find that for business owners, combining a trust with a well-drafted Operating Agreement and a Buy-Sell Agreement is the best way to define management structures and protect the business’s continuity.

If you have business holdings in Connecticut or Massachusetts and want to make sure they are handled correctly for your family’s future, we are here to help. We’ve advised countless entrepreneurs as they grow and eventually transition their businesses. Contact us today to learn more.