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What do I do about my professional corporation or partnership if I have a trust?

If you are a doctor, lawyer, accountant, or other licensed professional with your own business practice in California, you are certainly aware of the many rules and regulations you must follow to assure the success of your business. However, what you may not be aware of, is that without proper planning, your successful business may be subject to probate should something happen to you.

While professional corporations, limited liability companies, and limited liability partnerships (“LLP”) provide certain protections to you during your lifetime, they do not necessarily protect your business and its assets from being frozen in probate upon your passing. So, what can you do to avoid the time-consuming and costly clutches of probate? How do you ensure that your businesses will be able to be passed down to your family members so that they can access funds, pay off debts, and keep things moving ahead?

This article answers some of the most important points to consider when dealing with a professional business and how to properly fund it to your trust. For more specifics, we encourage you to contact the attorneys at Kundani & Chang LLP to obtain additional details about your current situation.   Here are some common questions that get asked:

  • “I have a professional corporation and/or LLP – can you go over it with me to see if it is protected from probate if I die?”

If you have already incorporated or organized your entity with the State of California, chances are you have in your possession a corporate book of some kind that contains key documents you’re your entity was established. Unfortunately, it is more often the case that your business is not protected from probate because many of the formalities that needed to be done have not been done, even after you have created a trust. Like your other assets, you should likely put your business into your revocable living trust so that the business interest is passed to your beneficiaries upon your death, but doing so can be a bit tricky (we discuss some scenarios more below). By placing your business interests inside of your family trust, you will allow your beneficiaries access to your business interests in order to manage and/or sell it without the delay and expense of probate.

  • “Generally speaking, can I put my professional corporation and/or LLP into my revocable living trust? I heard I could not.”

While the answer to this question depends on your specific circumstances, generally, your professional corporation and/or LLP can only be transferred to a trust if the trustees and beneficiaries are licensed professionals as well. See California Department of Consumer Affairs Legal Opinion (79-5). This is because, only individuals who have a professional license can own shares in a professional corporation and/or interest in a professional LLP, and transfer of those shares or interests can only occur to other licensed individuals, professional corporations, and/or professional LLPs. See California Corporations Code § 13407 and California Limited Liability Partnerships Code § 16951.

  • “But what if I have a joint revocable living trust where my spouse, other trustees, and/or beneficiaries are not licensed professionals?”

On February 16, 1979, the California Department of Consumer Affairs issued Legal Opinion (79-5), which made it possible for a revocable living trusts with non-licensed spouses and/or co-trustees to become an owner of a professional corporation and/or LLP if certain conditions are met:

  • The trust must specify that the licensed spouse has exclusive control and powers in relation to the shares of the professional corporation and/or LLP and that the non-licensed spouse does not have an interest in the trust that is greater than his/her community property share;
  • If you, the licensed spouse, die first, then your surviving non-licensed spouse must sell the shares or interest and distribute the proceeds according to the terms of the trust. Generally, there is a six-month window for this to occur, but it may depend based on your profession.
  • If the non-licensed spouse dies first, then you, as the licensed spouse, have various options for how you may proceed depending on the language contained within your revocable living trust and whether it includes “disclaimer” provisions.

Moreover, your corporate documents must make provisions that adhere to these rules and, many times, amendments to the operating agreement or bylaws are necessary in our experience since most do not adequately discuss these sorts of issues.

  • “How do I decide if putting my professional corporation and/or LLP into a trust is right for me?” 

Proper estate planning requires a review of your specific business and trust documents, and family dynamics. Contact us today for a personalized review of your business and trust documents so you can have peace of mind that your business is protected from probate should something happen to you. One of the biggest mistakes people make is believing that just because their business is running smoothly financially, that everything is being done right. Many times, the corporate documents and what they say are not correct – and in the long run this leads to major problems for your family and loved ones who are left picking up the pieces.

This article is a service of Kundani & Chang LLP. We are an award-winning law firm that specializes in business and estate planning for clients like you. The goal for every family is to stay educated on all topics like this, avoid probate, avoid estate taxes, and build a legacy for you and your loved ones. What sets our firm apart is that we build lasting, lifelong relationships with our clients. They rely on us to keep them updated, provide sound legal counsel, and be there for them immediately if any problems should ever arise. The best part is we don’t charge hourly fees to our families, so you never have to worry about speaking to us. If you’re ready to keep your family out of Court, contact us today to schedule an initial consultation or visit our website at www.CaliforniaEstateLawyers.com.

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