Estate Planning Facts Small Business Owners Need to Know

Mikkela Sweet, Senior Trust Officer, First Republic Trust Company

July 22, 2016

Estate Planning for Professional Services

As a small business owner, running your business or professional practice likely takes up most of your day. But, no matter the length of your to-do list, it’s important that you make time for your estate planning and consider how your business fits into your estate. It's quite likely that a big portion of your wealth — and possibly your family's biggest source of income after your death — stems from your business. That means a successful estate plan for you hinges upon the successful transition of your business to the next generation, or its sale to a new entity or individual outside of your family. Either result requires sound planning and advanced preparation; it’s important to see a professional to devise the appropriate business succession plan within your estate planning. But first, let’s discuss the fundamental, simple step to including your business in your estate plan: funding your revocable trust.

Your business assets — including ownership of a sole proprietorship, partnership interests or corporate stock — all require funding. If you do nothing, your family may be subject to the headache-inducing probate process, which is the public legal procedure to distribute a deceased person’s assets. In most states, if your business assets are held in your name alone, they’re subject to probate.

To avoid probate, most business owners work with estate planning attorneys to develop an estate plan that includes a revocable living trust agreement (“trust”). Properly creating and funding your trust avoids the necessity of the probate process by placing the administration of your estate into the hands of the “Trustee” — a private person or company serving in a fiduciary capacity. While living and able, you will be the trustee of your trust, owning and managing your assets for your own benefit. The type of business you own, or business interest you have, will determine how it should be included in your trust. Here are a few small business types and the corresponding estate planning methods typically used to fund the owner’s interest into their trust.

Sole Proprietorship

An unincorporated sole proprietorship can’t legally be separated from the person who owns it. Therefore, upon the owner’s death, his or her estate is responsible for any obligations of the business, and the business’ assets become part of the owner’s probate estate. Although you can't transfer a sole proprietorship into a trust at death - once a sole proprietorship has a new owner, it’s legally no longer the same business - you can make sure that the business’ assets and proprietary information are owned by your trust. That way, they can be passed to your beneficiaries to ensure the long-term well-being of the endeavor you founded.

The easiest way to include your sole proprietorship into your estate plan is to create a simple “Assignment of Proprietorship Interest,” which essentially transfers your proprietary interest to your trust. Some estate planning practitioners will simply list your business in a “Schedule of Assets” referenced in and attached to your trust agreement. Either way is a simple means to ensure that your sole proprietorship is properly incorporated into your estate plan and will avoid the need for the probate of its assets. 

General Partnership

 A general partnership is two or more proprietors running a business for profit. Like a sole proprietorship, a general partnership is unincorporated and its owners cannot be legally separated from the debts and obligations of the business. Even though this business structure doesn’t require any formal documentation, it’s important to have a partnership agreement so you and your partner(s) can contractually set the terms of your relationship: who gets paid what, who is responsible for what, what happens if a partner dies or wants to exit the business, etc. If a general partnership without a partnership agreement dissolves, many states will equally divide responsibilities, liabilities and compensation among the partners.

To include a general partnership in your estate plan, first have an attorney review your partnership agreement and ensure that its provisions reflect your estate planning intentions. Then, you’ll want to transfer your interest in the partnership to your trust. Similar to a sole proprietorship, you would create an “Assignment of General Partnership Interest” to transfer your interest to your revocable trust. 


An S-Corporation is a small corporation that is treated as a partnership for tax purposes. This structure gives the shareholders of small and family-owned businesses (with 100 shareholders or less) more protection against corporate creditors, while still avoiding the double taxation of C-Corporations. Provided it’s permissible in the corporation’s controlling documents, a shareholder of S-Corporation stock may certainly transfer their ownership to him or herself as trustee of their revocable trust. To do so, estate planning practitioners normally prepare an assignment and assumption agreement that not only transfers the shares’ ownership to the trustee, but that also declares that the new owner will be subject to the corporation’s Bylaws, Articles of Incorporation, and Shareholder Agreement, if applicable.

The key to transferring S-Corporation stock to your trust is the preservation of the corporation’s “S election.” Only certain kinds of trusts with certain trust terms may be shareholders of S-Corporation stock beyond an administrative period. Your estate planning attorney can advise you regarding the provisions needed to qualify your trust under Subchapter S. An ineligible shareholder can cause the corporation's “S election” to terminate, which has detrimental tax consequences — the proper planning and monitoring of your trust’s Subchapter S provisions will ensure that your trust continues to qualify.

Limited Partnerships and LLCs

Limited Partnerships (LPs) and Limited Liability Companies (LLCs) are two distinct types of registered businesses, taxed as partnerships while still offering liability and creditor protection to their limited partners and members. These business structures require operating agreements (or partnership agreements) to control their terms, management and tax attributes. LPs and LLCs are often small businesses, real estate partnerships, and other non-cash equivalents. Because of their illiquidity, LPs and LLCs are frequently used in estate tax planning to enable clients to gift their interests to the next generation at a discounted value, while still maintaining managerial control of the entity if the owner wishes to do so.

Short of gifting, to transfer your LP or LLC interest to your trust, your estate planning attorney will first review your entity’s operating agreement for transfer restrictions; and if permissible to do so, will prepare an assignment and assumption agreement that transfers your interest to your trust and declares that the new transferee assumes the obligations and responsibilities outlined in the operating agreement. Typically, the transfer of LP or LLC interests requires the consent of the other partners or members. Your estate planning attorney can advise you through that process.

The key takeaway is that proper estate planning can prevent your assets from being probated, and in some cases, it can even prevent taxation upon your death. How your business is organized determines the method by which you integrate your business into your simple estate plan. It’s important to make that next appointment with an estate planning professional to impact how the business is treated, taxed, and administered after you’re no longer here to run it. A well implemented plan will bring you one step closer to your retirement and business succession goals, and most importantly, will provide stability and comfort to those you love most after you are gone. 

The strategies mentioned in this article will often have tax and legal consequences; therefore, it is important to bear in mind that First Republic does not provide tax or legal advice.  This information is provided to you “AS IS”, does not constitute legal advice, is governed by our Terms and Conditions of Use, and we are not acting as your attorney. We make no claims, promises or guarantees about the accuracy, completeness, or adequacy of the information contained here.  Clients’ tax and legal affairs are their own responsibility – Clients should consult their own attorneys or other tax advisors in order to understand the tax and legal consequences of any strategies mentioned in this article.

©First Republic Bank 2016