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Jun
19 • 2017
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Why It Is Important to Assign Shares to Family Trusts

Most of our clients probably have family trusts. Yet 99% of the 20,000 entities in our system are not owned by trusts, but by the individuals who formed the entities. We want to take this break from our regularly scheduled programming to remind our clients that if you have a trust, you can only realize its full benefit by insuring that all of your assets, including shares in corporations and membership interests in LLCs, are transferred to the trust.

The benefits of establishing a trust for estate-planning purposes are well documented and include avoiding probate to save time and money and to keep estate matters private.[1] But these benefits are lost if the trust is not properly “funded,” that is, if the assets of the person establishing the trust (known as the “settlor”) are not transferred into the trust before his or her death. As one estate-planning practitioner has explained,

[t]he most important step is funding the trust. It is an estate planning attorney’s imperative to communicate to clients the importance of funding the inter vivos trust[2] during the life of the settlors. A well-funded inter vivos trust does not typically require court oversight; however, a trust that has not been fully funded may require court petitions in order to transfer property into the trust after the death of the settlor, defeating the purposes of avoiding probate.[3]

In other words, the settlor’s property (including corporate shares and LLC membership interests) has to be in the trust in order for the advantages of the trust, including maintaining privacy, to be realized.

Although there are ways of getting property into a trust after the settlor has died, none of these options desirable. In particular, most estate plans involving the creation of a trust also call for the execution of a “pour-over will.” A pour-over will provides that all of the decedent’s “forgotten assets,” that is, those assets that were not successfully transferred to the trust during the settlor’s lifetime for whatever reason, should be paid to the trust.[4] The problem is that a pour-over will, like any other will, is ineffective until it has been probated,[5] which defeats the probate-avoidance purpose of establishing a trust.

Most states also have a small estate exemption that can be used to avoid probate for some amount of a settlor’s forgotten assets that did not make it into the trust before the settlor died. It is unwise, however, to rely on the small estate exemption as a post hoc method of funding a trust for various reasons, including the hassle and expense involved and, more importantly, the limited nature of the exemption. In New York, for example, a “small estate” is defined as the estate of a person who dies leaving personal property having a gross value of $30,000 or less, exclusive of various enumerated items, including “marketable securities” and other “money” not exceeding $25,000 in value.[6] Corporate shares and LLC membership interests are personal property,[7] but are probably not marketable securities in the context of the type of closely held corporation or LLC with just a few members that we are talking about here. So any corporation or LLC having a modest value of more than $30,000 will bust the small estate exemption. The limit is higher in California—$150,000—but that includes real and personal property in the state and provides for fewer excluded items than in New York,[8] so again the small estate exemption should not be relied on in California as a probate-avoidance technique.

Why are some assets “forgotten” when it comes time to fund a trust? One commentator in the area suggests that

the most common reason for the settlor’s failure to transfer property to his or her revocable trust is a simple lack of information regarding the necessity that they do so. A large portion of individuals who execute revocable trusts do not understand how the trusts work or how they “avoid probate.” Correspondingly, they are unaware of the requirement that they transfer their property to the trust. Moreover, estate planning attorneys generally do not assist their clients with transferring assets to their trust and may not even mention the need to do so to the client. Although the process of transferring most assets to a revocable trust is not complicated, it may be somewhat daunting for a lay-person.[9]

The process of transferring shares to a trust is incredibly easy. We prepare two documents (an Assignment Separate From Certificate and a new share certificate) and then update the stock ledger.

But you have to know to ask. And given that almost all of the shares in our system are individually owned, even though a majority of our clients probably have family trusts to, among other things, achieve privacy in their estate planning, it appears that many of our clients simply do not know to request that shareholding or membership interests in the businesses we form or maintain for them be assigned to their trusts, rather than to themselves individually,[10] which is why we wrote this article.

[1] See, e.g., David J. Feder & Robert H. Sitkoff, Revocable Trusts and Incapacity Planning: More Than Just A Will Substitute, 24 Elder L.J. 1, 16 (2016) (“Unlike a will, which upon probate becomes a public record, a revocable trust need not be filed with a court unless a dispute arises. So there is a privacy advantage to a revocable trust relative to a will, one that persists even in a state that has reformed probate to make it cheaper and faster.” (footnote omitted)); Bradley E.S. Fogel, Trust Me? Estate Planning with Revocable Trusts, 58 St. Louis U. L.J. 805, 817 (2014) (“Revocable trusts are quite effective at maintaining the privacy of an individual’s estate plan after his or her death.”); Frances H. Foster, Trust Privacy, 93 Cornell L. Rev. 555, 557 (2008) (“[R]evocable trusts, including those that continue for decades after the settlor’s death, are private.”).

[2] “Inter vivos trust” is merely the technical term for a trust that “is created during the [settlor’s] lifetime and becomes effective upon creation.” Aastha Madaan, The Basics of Inter Vivos Trusts, 33 No. 4 GPSolo 20, 21 (July/Aug 2016).

[3] Madaan, supra note 2, at 23 (emphasis added).

[4] Fogel, supra note 1, at 810.

[5] Id. at 811.

[6] See N.Y. Surr. Ct. Proc. Act Law § 1301(1); N.Y. Est. Powers & Trusts Law § 5-3.1(a).

[7] See, e.g., Cal. Corp. Code § 17705.01; N.Y. Ltd. Liab. Co. Law § 601.

[8] See Cal. Prob. Code § 13100.

[9] Fogel, supra note 1, at 813 (footnotes omitted).

[10] There is one caveat in that a trust may not own every type of corporate stock or LLC interest. For example, in California, shares of capital stock in a professional corporation may be issued only to a person who is licensed to render the same professional services offered by the corporation. See Cal. Corp. Code § 13406(a).