Business Ownership and Estate Planning

A common theme that I see as an experienced Folsom estate planning lawyer is business ownership among my clients.  Sometimes this is in the form of owning a traditional storefront or internet business, but sometimes it is in the less obvious form of being a landlord.  This article will explore how estate planning and business ownership work hand-in-hand to create an effective legacy for clients. 

Business Ownership

When most individuals think of business ownership, they generally think of an e-commerce website or a retail store.  These are the most conventional forms of business ownership, and when analyzing the business’ legal protections, it is important to note the form of business ownership and its structure.  Namely, some businesses are set up as limited liability companies (“LLCs”), whereas others may be corporations or sole proprietorships.  As an estate planning attorney working with clients in the Folsom area, my primary concern is that the business compliments the client’s estate plan.  The business is an asset of the client just like a home or an investment account, and therefore must be accounted for in the plan.  

Let’s take the example of Caroline who is the sole owner of an LLC that sells custom jewelry and is in the process of creating a living trust.  For Caroline, we would need to revise the LLC’s operating agreement and state filings so that the business is no longer owned in her name, but rather in the name of her living trust.  By doing so, the succession of the business ownership will pass according to her living trust.  If the business were left as simply having Caroline as the owner, the business would need to go through probate after she passes away; a process which is best to avoid.

Real Estate Ownership and Rental

As stated above, real estate ownership can also be considered business ownership.  Many of my clients hold real estate investments, however many have not legally structured these investments correctly. Namely, they own the properties in their individual name, as opposed to a corporate entity.  This is a problem for many reasons, but the main problem is legal liability.  If anything were to happen on that property, they would be personally liable for the damages. 

On the other hand, if the property is held in a corporate entity, there is “limited liability” to the owner.  This means that the liability for the owner is limited to the assets held by the business.  For example, let’s take the example of Jeff who owns a residential property in Folsom.  As it currently stands, Jeff’s name is on the deed as the sole owner of the property.  This is not a recommended scenario because if something damaging were to take place from a criminal or civil standpoint, Jeff could be financially liable for those damages.  However, if he were to form a corporate entity (generally an LLC) that holds this property as its sole asset, then Jeff has ensured limited liability to himself.  The maximum liability to Jeff would be the value of the property. 

After setting up a corporate entity to hold the real estate, the next step would be to correctly designate the corporate entity within Jeff’s estate plan.  Assuming that a living trust has been set up for Jeff, the corporate documents would need to reflect his living trust as the owner as opposed to himself.  This is similar to the example of Caroline above.  With the corporate entity in place and the correct estate designations, Jeff ensures himself of legal protection and proper estate succession. 

Summary

The interplay between estate planning and business succession is a common theme as seen from the viewpoint of an experienced Folsom estate planning lawyer.  When you have business ownership included in your estate plan, it is recommended that you seek competent legal counsel so that these related areas of the law are properly addressed.