assignment of partnership interest to trust

Assignment of Partnership Interest to Revocable Trust | Practical Law

Assignment of Partnership Interest to Revocable Trust

Practical law standard document w-005-7334  (approx. 11 pages).

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You Don’t Lose Your Status as a Partner if You Assign Your Partnership Interest to Your Revocable Trust

HNW August 6, 2020 Estate Planning , Partnership Rights Litigation

The trial court concluded the trust was not a separate legal entity, and that the decedent was a partner at the time of his death.  The court followed a published case that found “when a trustee of an traditional revocable trust enters into a partnership relationship in his capacity as trustee, it is he, and not “the trust” which is the party to that agreement”.

While a trust cannot act in its own name and must always act through its trustee, a trust is a “person” that may associate in a partnership under the Uniform Partnership Act (UPA) based on the plain language of the UPA’s definition of “person”.  The clear statutory language is reinforced by other provisions of the statute, as well as by its legislative history.

Under UPA, a partnership is “an association of two or more persons,” and the term “person” is defined to include a “trust”.  Specifically, the UPA defines a person as “an individual, corporation, business trust, estate, trust, partnership, limited partnership, limited liability partnership, limited liability company, association, joint venture, government, governmental subdivision, agency, or instrumentality, or any other legal or commercial entity.”  ( Id., subd. (13).)   Thus, the statute on its own face includes both a “business trust” and a “trust” among the “person[s]” that may associate in a partnership.

The plain definitional language of the UPA and other provisions of the UPA – specifically the provisions identifying the events that dissociate a partner from the partnership further show that the statute contemplates no termination of partnership status when the trustee of a trust is replaced or dies.

To discuss your NJ Trust matter, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at [email protected] .  Please ask us about our video conferencing consultations if you are unable to come to our office.

By Fredrick P. Niemann, Esq., of Hanlon Niemann & Wright, a Freehold Township, Monmouth County NJ Trust Attorney

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How to Put Business Interests into a Trust

Cari Rincker May 8, 2023 Business Law 4 Comments

When forming your business, you may choose to structure it as a sole proprietorship, partnership, limited liability company (LLC), or corporation. Each type of structure offers different levels of asset protection and affects how much you pay in taxes. But owners can exert further control over their business—both while alive and after they pass away—by placing business interests in a trust.

Typically associated with estate planning, trusts can hold business interests. Except for a sole proprietorship, most types of business interests can be transferred to a trust if the transfer is permitted by the operating agreement. In the case of a sole proprietorship, which is not a separate legal entity, you may simply transfer the assets used for the business into the trust. Holding business interests in a trust can provide benefits for you and your heirs, but before creating a business trust, the consequences should be considered.

Reasons to Hold a Business in Trust

A trust is a legal entity that holds assets for and transfers them to beneficiaries. Although not a business entity, a trust can hold business assets, such as real estate and property. Ownership interests in a business, which are considered personal property, can be held in a trust, too.

Indeed, business ownership interests are often among an individual’s most valuable assets. Like other assets, they must be carefully managed and safeguarded. In addition, plans should be in place to avoid disruptions in the business’s operations when the current owner departs the business.

These goals—and more—can be achieved by placing a business in a trust. When a trust holds a business, it can provide the following advantages:

• The business interests are not subject to probate upon the owner’s death
• Estate taxes can be reduced or eliminated
• Trusts are not public and therefore can maintain a business’s privacy
• Business assets are separated from personal assets, providing more protection from creditors’ claims
• It allows for succession planning in the event of incapacity or death by having beneficiaries inherit business interests without interrupting operations
• It provides flexibility due to many types of trust structures

Placing a Company in a Trust

Transferring assets such as ownership interests to a trust is commonly known as funding a trust. Once an asset is transferred to a trust, that asset is the legal property of the trust, not of the person (i.e., the grantor or settlor ) who creates and funds the trust.

The assets held in trust are managed by a trustee—an individual or company named by the grantor. They are managed for the benefit of the trust’s beneficiaries in accordance with the wishes of the grantor and any specific rules that apply to the type of trust created.

A business owner can act as the trustee of the trust and be its beneficiary, although state law may not allow the same person to be the sole trustee and sole beneficiary . This can be avoided by naming a co-trustee and co-beneficiary (or beneficiaries).

Putting business interests into a trust can be done at formation or after the company is an established entity by following these steps:

• With the help of an attorney, draft trust documents to set up the trust. This includes choosing a name for the trust, identifying beneficiaries, selecting a trustee, and determining the trust’s rules.
• If forming a new business, issue the stock certificates (corporation) or membership interests (LLC or partnership) in the name of the trust.
• If transferring membership interests of an existing LLC or partnership to a trust, a document of transfer—called an assignment of interest—is required.
• If transferring stock certificates to a trust, an assignment of stock agreement or a similar contract is needed.

As mentioned, sole proprietorships do not involve ownership interests, because there is no legal separation between the owner and the business. While a sole proprietor cannot transfer business interests to a trust, they can transfer the assets that make up their business, such as bank accounts and office equipment.

Before Putting Business Interests in a Trust

Setting up a trust and funding it with business interests is not overly complicated. However, anyone who is considering putting business interests into a trust should keep these potential complications in mind:

• The LLC, partnership, or corporation may have specific terms and conditions established by contract at its formation or in its governing documents for transferring business interests to a trust, such as a majority or unanimous vote of the other members or
• The business might have rules in its operating or shareholder agreement that prohibit a trust from holding ownership interests.
• Placing interests in a trust could be a triggering event in a buy-sell agreement.
• Costs related to trust set up and administration could be high.
• Business interests may lose marketability when placed in a trust.
• Depending on the type of trust, the transfer could dilute ownership interests or lead to unintended tax consequences.
• Funding a trust with business interests could draw the attention of the Internal Revenue Service as an “abusive” trust scheme if it is used to avoid taxes. [1]
• Setting up a business interest trust requires the trustee to act in the best interest of the beneficiaries (fiduciary duty), which could establish legal duties different from those applicable to owners of the business entity.

Numerous trust options provide flexibility, but different types of trusts have unique implications and requirements that must be considered, not only for the current business owner, but also for their heirs down the road.

Transfer Your Business Interests with Help from an Attorney

Creating a trust to hold business interests can enable you to maintain control over the business and provide protection for the company you worked so hard to build, as well as increase your peace of mind about the business’s future. The consequences of transferring your business interests to a trust may vary depending on the type of trust, so some business trusts may be more beneficial to you and your heirs than others.

The pros and cons of a business trust should be discussed with an attorney along with the outcomes you want to achieve from a trust. During an initial strategy session, you can consult our attorneys about your situation and how a trust can be used to meet your business and estate planning goals. Call or contact us today to take the next steps.

[1] Abusive Trust Tax Evasion Schemes – Facts (Section III) , IRS.gov, https://www.irs.gov/businesses/small-businesses-self-employed/abusive-trust-tax-evasion-schemes-facts-section-iii (last visited March 10, 2023).

I have a living trust and my property deeds are in the trust. I also have a small business, a DBA. How do i place the DBA i have now into my trust.

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Legal Templates

Home Business Assignment Agreement Partnership Interest

Assignment of Partnership Interest Form

Use our free Assignment of Partnership Interest to sell a stake in a partnership to a new partner.

Updated February 5, 2024 Reviewed by Brooke Davis

A partner uses an Assignment of Partnership Interest form to sell their interest in the partnership to a new partner. Through the Assignment of Partnership Interest, the potential new partner (known as “the assignee”) agrees to pay the current partner (known as “the assignor”) in exchange for all the financial interests and obligations included in the partnership rights.

Keep in mind that in some cases, full partnership rights cannot be sold to the new partner unless all current partners also agree. Economic partnership rights, however, can still be sold without the agreement of all partners.

What is an Assignment of Partnership Interest?

When is a partnership assignment needed, the consequences of not having a partnership assignment, common uses for an assignment of partnership interest, what should be included in a partnership assignment, assignment of partnership interests sample.

An Assignment of Partnership Interest is a legal document that transfers the rights to receive benefits from an original business partner (“Assignor”) to a new business partner (“Assignee”).

It’s essential to learn about the types of partnerships and potential advantages and disadvantages of a partnership before entering into this business relationship.

This document will identify the following essential elements:

• Partnership Details : legal name of the business, its purpose, and date established
• Assignee : name and address of the new partner receiving the business interest
• Assignor : name and address of the old partner giving the business interest
• Partners : name and address of the remaining partners of the business
• Consideration : the amount of money exchanged for the business transfer
• Closing Date : when the assignment will end
• Signatures : all members of the original partnership and the assignee must sign

This document is needed to formally document a business transaction between the old and new partners.

Some partnership agreements contain a right of first refusal so that the original partners have a right to purchase the interest before an outside party. [1]

What happens if I do not have one?

Without this document, neither the old nor new partners are legally obligated to follow through with their promises to buy or sell the business’s shares. The Assignment may also clarify whether the new partner has the right to participate in the business’s operation, finances, or management.

For example, a full-fledged partner usually has the right to inspect the books, take possession of partnership property, and make decisions with other partners.

Otherwise, the new partner only has the right to receive a share of the profits and any distributions if the partnership ends.

Most partnership agreements only allow the transfer of the partner’s interest in the business so that the new partner can only receive the old partner’s share of the money but not have a say in the business operations or finances.

An Assignment of Partnership Interest is usually just one of several legal documents needed during the sale process. A Confidentiality Agreement plus a Purchase Order are also used to complete the transaction.

Here are just a few of the situations when this document is commonly used:

• Cash flow needs of the business change [2]
• Business assets are allocated differently
• The strategy of the partnership changes
• The regulatory environment presents new challenges

An Assignment of Partnership Interest should generally address the following:

• Who will be giving and receiving the business interest
• What rights does the assignee have in terms of operation or management
• Where is the business partnership located
• When was the partnership first established
• How much will the old partner receive in return for giving a part of their interests

Here’s what an assignment of partnership interests typically looks like:

Use can download the free template in PDF & Word format or use our document builder to help guide you through the writing process.

Legal Templates uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial guidelines to learn more about how we keep our content accurate, reliable and trustworthy.

• Assignment of Partnership Interests. http://delcode.delaware.gov/title6/c017/sc07/index.shtml
• ADAM HAYES. Cash Flow. https://www.investopedia.com/terms/c/cashflow.asp

Related Documents

• Purchase Agreement : Outlines the terms and conditions of an item sale.
• Business Purchase Agreement : A legally enforceable contract that documents the sale of a business.
• Stock Purchase Agreement : Record the purchase of stock and protect the buying and selling parties.
• Shareholder Agreement : Use this document to explain the structure and nature of shareholders' relationships to the corporation and to one another.
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Assignment Of Partnership Interest

Jump to section, what is an assignment of partnership interest.

• Information about the partnership like the name of the business
• The type of interest being transferred
• The names and information of both the assignor and the assignee
• Information about the remaining partners

Common Sections in Assignments Of Partnership Interest

Below is a list of common sections included in Assignments Of Partnership Interest. These sections are linked to the below sample agreement for you to explore.

Assignment Of Partnership Interest Sample

Reference : Security Exchange Commission - Edgar Database, EX-10.37 15 dex1037.htm FORM OF AGREEMENT AND ASSIGNMENT OF PARTNERSHIP INTEREST , Viewed October 25, 2021, View Source on SEC .

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ContractsCounsel is not a law firm, and this post should not be considered and does not contain legal advice. To ensure the information and advice in this post are correct, sufficient, and appropriate for your situation, please consult a licensed attorney. Also, using or accessing ContractsCounsel's site does not create an attorney-client relationship between you and ContractsCounsel.

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How to Transfer Business Interests into a Trust

After you create a trust, your next step is to transfer your assets into your trust. But what if you own a business interest? Should you transfer that into your trust too? Transferring business interests into a trust can be complicated, but here’s an overview of the basics.

Why Transfer Business Interests into a Trust?

Some people who create a trust choose to transfer their business interests into it for the following reasons: 

• Avoiding Probate: Just like any other asset, business interests that exceed the California probate threshold can trigger a lengthy, expensive, and public probate proceeding. Assets that are placed in a trust do not need to be probated.
• Incapacity Planning: A trust ensures that your business can continue operating not only upon your death, but also if you become incapacitated due to an accident or illness. If your business interests are placed in a trust and you become incapacitated, your successor trustee can immediately take over your duties to keep your business operating during your absence. 

What to Know Before Transferring Assets

Before transferring your business interests into a trust, you should always consult an experienced estate planning attorney . Depending on what kind of business interest you own, they can help ensure that this transfer won’t violate a corporation’s bylaws, an LLC operating agreement, or a shareholders’ buy-sell agreement. 

Your attorney can also draft a trust that specifically grants the trustee powers to manage your business. Each type of business interest has its own requirements so working with an attorney is key to avoiding any potential missteps. 

How to Transfer a Business Interest into a Trust 

The process for transferring your business interest into a trust varies depending on what kind of business interest you own and how it was set up. Here are a few of the most common types. 

Sole Proprietorship

In a sole proprietorship, you are the only business owner. Because of this, you do not need the agreement or permission of anyone else to transfer your business interest into your trust. You would simply assign your business assets and interests into the trust. This is accomplished with an Assignment of Interest agreement. Just like it sounds, this agreement assigns your interests into your trust so that it becomes a trust asset. 

Corporations

If you own stock or shares in a corporation, you should contact the corporation and fill out any necessary documents to transfer your stock or shares to a trust. Often this document is called an “Assignment of Stock”. Submit this document to the corporation and have them file it. 

Next, the corporation will re-issue you new stock documents listing the trust as the owner. Check with your corporation on any additional terms or conditions when making trust transfers. 

LLC or General or Limited Partnership

When it comes to a Limited Liability Company (LLC) or a general or limited partnership, you may own a complete or only a partial interest in the business. You’ll want to first review the terms and conditions of your LLC or partnership agreement to review the requirements for transferring your portion into a trust. If there are other partners, they may need to vote on and approve the change.

Next, seek counsel from your attorney on the best way to transfer your portion of the business into your trust. This will vary, depending on how your business was set up. For an LLC, you may need to execute an “Assignment of Interest”, notify your partners, and sign a document agreeing to the change. For a partnership, you may need to change your partnership ownership certificate to you as the owner of the share. 

When transferring business interests into a trust, an experienced estate planning attorney can provide legal advice on how to best achieve your goals. If you have any questions about transferring business interests into a trust, feel free to contact our law firm.

Law Offices of Daniel A. Hunt

The Law Offices of Daniel A. Hunt is a California law firm specializing in Estate Planning; Trust Administration & Litigation; Probate; and Conservatorships. We've helped over 10,000 clients find peace of mind. We serve clients throughout the greater Sacramento region and the state of California.

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Tax issues to consider when a partnership interest is transferred.

By Colleen McHugh - Co‑Partner‑in‑Charge, Alternative Investments

There can be several tax consequences as a result of a transfer of a partnership interest during the year. This article discusses some of those tax issues applicable to the partnership.

Adjustments to the Basis of Partnership Property Upon a transfer of a partnership interest, the partnership may elect to, or be required to, increase/decrease the basis of its assets. The basis adjustments will be for the benefit/detriment of the transferee partner only.

• If the partnership has a special election in place, known as an IRS Section 754 election, or will make one in the year of the transfer, the partnership will adjust the basis of its assets as a result of the transfer. IRS Section 754 allows a partnership to make an election to “step-up” the basis of the assets within a partnership when one of two events occurs: distribution of partnership property or transfer of an interest by a partner.
• The partnership will be required to adjust the basis of its assets when an interest in the partnership is transferred if the total adjusted basis of the partnership’s assets is greater than the total fair market value of the partnership’s assets by more than $250,000 at the time of the transfer.

Ordinary Income Recognized by the Transferor on the Sale of a Partnership Interest Typically, when a partnership interest is sold, the transferor (seller) will recognize capital gain/loss. However, a portion of the gain/loss could be treated as ordinary income to the extent the transferor partner exchanges all or a part of his interest in the partnership attributable to unrealized receivables or inventory items. (This is known as “Section 751(a) Property” or “hot” assets).

• Unrealized receivables – includes, to the extent not previously included in income, any rights (contractual or otherwise) to payment for (i) goods delivered, or to be delivered, to the extent the proceeds would be treated as amounts received from the sale or exchange of property other than a capital asset, or (ii) services rendered, or to be rendered.
• Property held primarily for sale to customers in the ordinary course of a trade or business.
• Any other property of the partnership which would be considered property other than a capital asset and other than property used in a trade or business.
• Any other property held by the partnership which, if held by the selling partner, would be considered of the type described above.

Example – Partner A sells his partnership interest to D and recognizes gain of $500,000 on the sale. The partnership holds some inventory property. If the partnership sold this inventory, Partner A would be allocated $100,000 of that gain. As a result, Partner A will recognize $100,000 of ordinary income and $400,000 of capital gain.

The partnership needs to provide the transferor with sufficient information in order to determine the amount of ordinary income/loss on the sale, if any.

Termination/Technical Termination of the Partnership A transfer of a partnership interest could result in an actual or technical termination of the partnership.

• The partnership will terminate on the date of transfer if there is one tax owner left after the transfer.
• The partnership will have a technical termination for tax purposes if within a 12-month period there is a sale or exchange of 50% or more of the total interest in the partnership’s capital and profits.

Example – D transfers its 55% interest to E. The transfer will result in the partnership having a technical termination because 50% or more of the total interest in the partnership was transferred. The partnership will terminate on the date of transfer and a “new” partnership will begin on the day after the transfer.

Allocation of Partnership Income to Transferor/Transferee Partners When a partnership interest is transferred during the year, there are two methods available to allocate the partnership income to the transferor/transferee partners: the interim closing method and the proration method.

• Interim closing method – Under this method, the partnership closes its books with respect to the transferor partner. Generally, the partnership calculates the taxable income from the beginning of the year to the date of transfer and determines the transferor’s share of that income. Similarly, the partnership calculates the taxable income from the date after the transfer to the end of the taxable year and determines the transferee’s share of that income. (Note that certain items must be prorated.)

Example – Partner A transfers his 10% interest to H on June 30. The partnership’s taxable income for the year is $150,000. Under the interim closing method, the partnership calculates the taxable income from 1/1 – 6/30 to be $100,000 and from 7/1-12/31 to be $50,000. Partner A will be allocated $10,000 [$100,000*10%] and Partner H will be allocated $5,000 [$50,000*10%].

• Proration method – this method is allowed if agreed to by the partners (typically discussed in the partnership agreement). Under this method, the partnership allocates to the transferor his prorata share of the amount of partnership items that would be included in his taxable income had he been a partner for the entire year. The proration may be based on the portion of the taxable year that has elapsed prior to the transfer or may be determined under any other reasonable method.

Example – Partner A transfers his 10% interest to H on June 30. The partnership’s taxable income for the year is $150,000. Under the proration method, the income is treated as earned $74,384 from 1/1 – 6/30 [181 days/365 days*$150,000] and $75,616 from 7/1-12/31 [184 days/365 days*$150,000]. Partner A will be allocated $7,438 [$74,384*10%] and Partner H will be allocated $7,562 [$75,616*10%]. Note that this is one way to allocate the income. The partnership may use any reasonable method.

Change in Tax Year of the Partnership The transfer could result in a mandatory change in the partnership’s tax year. A partnership’s tax year is determined by reference to its partners. A partnership may not have a taxable year other than:

• The majority interest taxable year – this is the taxable year which, on each testing day, constituted the taxable year of one or more partners having an aggregate interest in partnership profits and capital of more than 50%.

Example – Partner A, an individual, transfers his 55% partnership interest to Corporation D, a C corporation with a year-end of June 30. Prior to the transfer, the partnership had a calendar year-end. As a result of the transfer, the partnership will be required to change its tax year to June 30 because Corporation D now owns the majority interest.

• If there is no majority interest taxable year or principal partners, (a partner having a 5% or more in the partnership profits or capital) then the partnership adopts the year which results in the least aggregate deferral.

Change in Partnership’s Accounting Method A transfer of a partnership interest may require the partnership to change its method of accounting. Generally, a partnership may not use the cash method of accounting if it has a C corporation as a partner. Therefore, a transfer of a partnership interest to a C corporation could result in the partnership being required to change from the cash method to the accrual method.

As described in this article, a transfer of a partnership interest involves an analysis of several tax consequences. An analysis should always be done to ensure that any tax issues are dealt with timely.

If you or your business are involved in a transfer described above, please contact your Marcum Tax Professional for guidance on tax treatment.

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Can a Trust Own My Business After I Die?

In general, the answer to the title question is yes, your trust can own your business after you die. However, there are a number of considerations that may impact the answer to this and the following questions. One consideration is the type of business interest you own. Is your business a limited liability company (LLC), a partnership, a corporation, or a sole proprietorship? Another consideration is how your business is managed. Is your business managed as an LLC, a partnership, or a corporation?

How Does the Trust Get Ownership of the Business?

• LLC: If your business is an LLC, a trust can receive ownership of your business interest when you execute an assignment of interest. If you are the LLC’s sole member, then after you have executed the transfer document assigning your interest to the trust, the trust will own 100 percent of your business. If your LLC has other members, your trust will own only the percentage of the business that you own. For example, if you have a 25 percent ownership interest in an LLC, your trust will own 25 percent. It is important to review the LLC’s operating agreement to see what restrictions, if any, there are on transferring your interest. Also, some operating agreements will require the other members’ consent prior to any transfer. If your LLC issues membership certificates, you should submit your assignment document to the LLC and have new membership certificates issued in the trust’s name.
• Partnership: As with an LLC, a partnership interest is transferred to a trust by an assignment of interest. Again, it is important to review any partnership agreement to determine if there are restrictions or other conditions, such as consent requirements, to a transfer.
• Corporation: If your business is a corporation, you should contact the corporation to determine what documentation will be needed to transfer your stock to your trust. For closely held corporations without specific documentation requirements, you can transfer your stock to your trust by executing an assignment of stock. You should submit this document to the corporation so that new stock certificates can be issued showing that the trust owns the stock. As with other types of business interests, you should check the corporate governing document, if any, to determine if there are restrictions or other conditions on making a transfer to your trust.
• Sole Proprietor: If you own your business as a sole proprietor, you have not created any separate legal business entity that needs to be transferred. To transfer ownership of your business’s assets to your trust, you will simply transfer ownership in the same way as you would any other assets that are in your personal name.

How Is the Business Managed?

How the business is managed after it has been transferred to the trust is very fact specific and will depend on several factors, such as what kind of business has been transferred and how that business was managed prior to the transfer.

• LLC: After a business interest has been transferred to a trust, the trustee will own the interest. If the interest is a single-member LLC where the member runs the business and is also the trustee, the trustee would continue to run the business’s day-to-day affairs, just like prior to the transfer. After the member’s death, the successor trustee would manage the business unless the trust and operating agreements have specified otherwise or the trustee has delegated their business management duties to another person. If, however, the business interest is a manager-managed multimember LLC where the member has not participated in day-to-day management decisions and such decisions have been delegated to a manager, the LLC would continue to be managed by the manager both prior to and after the member’s death.
• Partnership: In a partnership where the partner participated in day-to-day management and has now transferred their ownership portion to a trust of which they are the trustee, the trustee will continue to manage the business as before the transfer. As with an LLC, after the partner’s death, the successor trustee will step in to manage the business unless the trust and partnership agreements specify otherwise or the trustee has delegated their management duties to another person. If the partnership has delegated these duties to its officers or employees, then depending on what the trust and partnership agreements direct, the trustee will most likely continue to allow the other officers/employees to manage the business, both prior to and after the partner’s death.
• Corporation: After transferring the corporate stock to the trust, the trustee, as the owner, will be entitled to vote that stock according to the terms and conditions of the corporation’s governing documents. Normally, a transfer of stock to a trust will not change the corporation’s management.

What Do the Beneficiaries Receive?

The trust’s terms will determine what the beneficiaries are entitled to receive. The trust is entitled to receive income or profit distributions to owners or stockholders. Whether that income is distributed to the beneficiaries, and on what terms, will depend on the trust agreement’s terms.

Special Note About S Corporations

If your business is taxed as an S corporation (and you do not have to actually be a corporation to be taxed as an S corporation), there are special rules about who can own an S corporation. It is important to seek the advice of a qualified legal or tax professional prior to transferring ownership of your S corporation business interest to a trust and after the death of the grantor/trustmaker.

Although your trust can own your business after you die, you must consider many factors when transferring your business ownership interest to your trust. Therefore, it is important to consult a qualified professional who can ensure that you have considered all the factors and help you properly complete the transfer.

Posted in: Legacy , Probate

Free Assignment of Partnership Interest Template for Microsoft Word

Download this free Assignment of Partnership Interest template as a Word document to make it easy to assign your interest in a partnership to a third party.

Assignment of Partnership Interest

THIS ASSIGNMENT (the “Assignment”) made and entered into on [Insert Date]

AMONGST: [Insert Name] of [Insert Address] (the “Assignor”)

– AND- [Insert Name] of [Insert Address] (the “Assignee”)

– AND-

[Insert Name] of [Insert Address] (the “Remaining Partner”)

A. The Assignor is the holder of a partnership interest (the “Interest”) in [Insert name of partnership interest] (the “Partnership”), a partnership previously established on [Insert date of initial partnership agreement] for the purpose of  and formed in accordance with an agreement (the “Partnership Agreement”).

B. The Assignor desires to assign the Interest to the Assignee and the Assignee desires to acquire the Interest from the Assignor.

C. The Interest acquired by the Assignee will include all rights in the Partnership previously afforded to the Assignor including the status as partner. The Remaining Partner has agreed and gives consent to such assignment according to the terms and conditions of this Assignment.

IN CONSIDERATION OF and as a condition of the parties entering into this Assignment and other valuable consideration, the receipt and sufficiency of which consideration is acknowledged, the parties to this Assignment agree as follows:

Sale and Purchase

1. By this Assignment the Assignor withdraws from the Partnership and to the fullest extent permitted by the Partnership Agreement, assigns all its rights, interests, title and benefits in the Partnership to the Assignee. The Assignee will become a partner in the Partnership taking the place of the Assignor in the Partnership with all the rights and obligations previously afforded to the Assignor. The Assignee, as a partner in the Partnership, will be bound by the terms and conditions of the Partnership Agreement as amended. On assignment of the Interest to the Assignee, the Assignor will cease to be a partner in the Partnership.

Consideration

2. As full consideration for the assignment of the Interest the Assignee has submitted and the Assignor has accepted the following consideration: [Enter consideration]

3. The closing of the purchase and sale of the Interest (the “Closing”) will take place on [Insert closing date] (the “Closing Date”) at the offices of the Assignor or at such other time and place as the Assignor and Assignee mutually agree.

Representations and Warranties of the Assignor

4. The Assignor warrants that the Assignor has a general partnership interest in the Partnership and that the Assignor has the legal right to execute and perform an assignment of the Interest exclusive of the Assignor’s status as partner.

5. The Assignor warrants that the Interest is free and clear of all liens, encumbrances, restrictions and claims.

6. The Assignor warrants that on completion of this Assignment the Assignor will retain no residual interest or interests in the Partnership.

7. The Assignor warrants that the Assignor is not in any way in default of any of the expressed or implied terms and conditions of the Partnership Agreement. The Assignor also warrants that this Assignment is in full compliance with all terms and conditions of the Partnership Agreement.

8. The Assignor warrants that the Assignor is not bound by any other contractual agreement or legal requirement that would be violated by this Assignment.

9. The Assignor warrants that it has provided the Assignee with the most current copy of the Partnership Agreement inclusive of all amendments.

10. The Assignor warrants that no other consent is required from any third party or government entity authorising this Assignment except for those consents of the Remaining Partner contained in this Assignment.

Assignee’s Obligations

11. On Closing of this Assignment, the Assignee will observe and perform any and all terms and conditions of the Partnership Agreement, relating to the newly acquired rights, that were previously binding on the Assignor. Transitional Rights and Obligations

12. To the full extent permitted by the Partnership Agreement, all income, rights, benefits, obligations and liabilities of the Interest will belong to the Assignor before the Closing and will transfer to the Assignee after the Closing. Consent of Remaining Partner

13. The Remaining Partner consents to the terms and conditions of this Assignment with the intent that the Assignee will become a partner in the Partnership with all of the rights, benefits, obligations and liabilities previously afforded to the Assignor under the Partnership Agreement as amended.

Governing Law and Jurisdiction

14. This Assignment will be construed in accordance with, and exclusively governed by the laws of the [Insert state or country].

15. The Assignor and the Assignee submit to the jurisdiction of the courts of the [Insert state or country] for the enforcement of this Assignment or any arbitration award or decision arising from this Assignment.

Miscellaneous

16. Time is of the essence in this Assignment.

17. This Assignment may be executed in counterpart. Facsimile signatures are binding and are considered to be original signatures.

18. All warrants and representations of the Assignor and the Assignee connected with this Assignment will survive the Closing.

19. This Assignment will not be assigned either in whole or in part by any party to this Assignment without the written consent of the other party.

20. Headings are inserted for the convenience of the parties only and are not to be considered when interpreting this Assignment. Words in the singular mean and include the plural and vice versa. Words in the masculine gender include the feminine gender and vice versa. Words in the neuter gender include the masculine gender and the feminine gender and vice versa.

21. If any term, covenant, condition or provision of this Assignment is held by a court of competent jurisdiction to be invalid, void or unenforceable, it is the parties’ intent that such provision be reduced in scope by the court only to the extent deemed necessary by that court to render the provision reasonable and enforceable and the remainder of the provisions of this Assignment will in no way be affected, impaired or invalidated as a result.

22. This Assignment contains the entire agreement between the parties. All negotiations and understandings have been included in this Assignment. Statements or representations which may have been made by any party to this Assignment in the negotiation stages of this Assignment may in some way be inconsistent with this final written Assignment. All such statements are declared to be of no value in this Assignment. Only the written terms of this Assignment will bind the parties.

23. This Assignment and the terms and conditions contained in this Assignment apply to and are binding upon the Assignor, the Assignee, the Remaining Partner and their respective successors, assigns, executors, administrators, beneficiaries, and representatives.

24. Any notices or delivery required here will be deemed completed when hand-delivered, delivered by agent, or seven (7) days after being placed in the post, postage prepaid, to the parties at the addresses contained in this Assignment or as the parties may later designate in writing.

25. All of the rights, remedies and benefits provided by this Assignment will be cumulative and will not be exclusive of any other such rights, remedies and benefits allowed by law.

IN WITNESS WHEREOF the Assignor, the Assignee and the Remaining Partner have duly affixed their signatures under hand and seal on [Insert date]

_____________________________ WITNESS: ___________________________ Address: _____________________________ Occupation: __________________________ _____________________________ ______________________________

_____________________________ WITNESS: ___________________________ Address: _____________________________ Occupation: __________________________ _____________________________ _________________________

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How to Transfer Your LLC into a Trust

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Are you an executor or trustee, want to get organized, want to offer estate planning, need a will or trust.

Limited Liability Companies (LLCs) are flexible business structures that offer personal liability protection to their members. Transferring LLC membership interests into a trust can be a smart move for various reasons, such as protecting the LLC membership interests from creditors, ensuring a smooth transition of business ownership, or incorporating estate planning strategies . This post will guide you through the process of transferring LLC membership interests into a trust.

Understanding LLCs and Trusts

An LLC is a business structure in the United States that combines the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation. Trusts, on the other hand, are legal arrangements that allow a third party, or trustee , to hold assets on behalf of beneficiaries. Trusts can be either revocable or irrevocable, offering different levels of control and tax benefits.

Transferring an LLC to a Trust: Benefits and Drawbacks

Transferring ownership of a Limited Liability Company (LLC) into a trust can be a strategic estate planning move, offering several benefits while also presenting certain drawbacks. This section examines the implications of such a transfer, focusing on its impact on estate planning, asset protection, and business continuity.

Benefits of Transferring an LLC to a Trust

• Estate Planning and Probate Avoidance : One of the primary benefits of transferring an LLC into a trust is the facilitation of estate planning and avoidance of probate. When an LLC is owned by a trust, the business can be passed to beneficiaries without the need for probate, which can be time-consuming and costly. This ensures a smoother transition of control and can maintain the confidentiality of the estate's assets.
• Continuity of Business Operations : By placing an LLC in a trust, the grantor can outline specific instructions for the business's operation and succession, ensuring continuity. This is particularly important for family-owned businesses or sole proprietorships where the sudden loss of the owner could disrupt operations.
• Asset Protection : Trusts, especially irrevocable ones, can offer enhanced asset protection from creditors and legal judgments. When an LLC is held within such a trust, its assets can be shielded, providing an extra layer of security against personal liabilities.
• Tax Planning Advantages : Transferring an LLC into a trust can also facilitate certain tax planning strategies. For instance, an irrevocable trust may help in minimizing estate taxes, as the assets transferred into the trust are removed from the grantor's taxable estate.
• Flexibility in Management and Distribution : Trusts allow for detailed instructions regarding the distribution and management of the LLC among the beneficiaries. This can include specifying who manages the business after the grantor's death and how profits are to be distributed, allowing for tailored estate planning.

Drawbacks of Transferring an LLC to a Trust

• Complexity and Cost : The process of transferring an LLC into a trust involves legal complexities and costs. Setting up the trust, drafting the transfer documents, and potentially restructuring the LLC's operating agreement to comply with trust ownership can require significant legal expertise and expense.
• Limited Control : For revocable trusts, while the grantor retains some level of control, transferring an LLC into an irrevocable trust means relinquishing direct control over the business. This might not be desirable for business owners who wish to maintain hands-on management.
• Potential Tax Consequences : Depending on how the trust is structured, there could be immediate or future tax implications, including changes in how the LLC's income is taxed. If not carefully planned, this could lead to unfavorable tax treatment or unexpected tax liabilities.
• Impact on Financing and Business Relationships : Changing the ownership structure of an LLC to a trust can affect the business's ability to secure financing, as lenders may have reservations about lending to a business owned by a trust. Additionally, it may impact relationships with vendors, clients, and partners who may require reassurance regarding the continuity and management of the business.
• Regulatory and Compliance Requirements : Trust ownership of an LLC may trigger additional regulatory and compliance obligations, depending on the jurisdiction and the nature of the business. This can include changes in reporting requirements, business licenses, and registrations.

Steps to Transfer LLC Membership Interests into a Trust

• Choose the type of trust: Depending on your needs and objectives, you can choose between a revocable trust (which can be altered or cancelled by the grantor) or an irrevocable trust (which cannot be modified without the permission of the trustee).
• Select a trustee: The trustee will be responsible for managing the trust's assets, so choose someone trustworthy and competent.
• Create a trust agreement: This is a legal document that outlines the terms and conditions of the trust, identifies the trustee and beneficiaries, and provides instructions for managing the trust assets.
• Assign the LLC membership interests to the trust: This process typically involves completing an assignment form and may also require an amendment to the LLC's operating agreement.

Process of Transferring LLC Membership Interests into a Trust

• Review the LLC's operating agreement: This document may contain specific rules about transferring membership interests that must be complied with.
• Prepare an assignment of membership interests: This is a legal document that transfers the LLC membership interests from the member to the trust.
• Amend the LLC's operating agreement: This step may be necessary to officially recognize the trust as a member of the LLC.
• Record the transfer: This involves updating the LLC's membership ledger to reflect the transfer.

Costs Involved in Transferring an LLC to a Trust

Transferring ownership of a Limited Liability Company (LLC) into a trust is a decision that comes with various costs. These costs are multifaceted, encompassing legal, administrative, and potentially tax-related expenses. Understanding these costs is essential for anyone considering this estate planning strategy to ensure it aligns with their financial and operational goals.

Here's a breakdown of the potential costs involved:

1. Legal Fees

The most significant expense in transferring an LLC to a trust is likely to be legal fees. This process requires the expertise of an attorney who specializes in estate planning and business law to ensure the transfer complies with state laws and serves the intended estate planning purposes. Legal fees can vary widely based on:

• The complexity of the trust structure and the LLC's operating agreement.
• The jurisdiction in which the LLC and trust are established.
• The attorney's experience and billing rates.

Typically, legal fees for setting up a trust and transferring an LLC into it can range from $2,000 to $5,000 or more.

2. Trust Setup Costs

Setting up a trust itself involves costs, separate from transferring the LLC. These costs include drafting the trust document, which outlines the terms, beneficiaries, and trustees, among other critical details. If a revocable living trust is chosen, the cost might be on the lower end of the spectrum, while more complex trusts, such as irrevocable trusts designed for specific tax advantages or asset protection, can be more expensive to establish.

3. Document Preparation and Filing Fees

Transferring an LLC to a trust requires preparing and filing various documents, including:

• Amendments to the LLC's operating agreement to reflect the trust as the new owner.
• Assignments of membership interest, transferring the owner's interest in the LLC to the trust.
• Possible state filings to update the LLC's records regarding the new ownership structure.

These document preparations can incur fees, both from the professionals drafting them and from any filing fees required by state agencies or registries. While these fees may be relatively minor compared to legal fees, they can add up, especially if the LLC operates in multiple states.

4. Appraisal and Valuation Costs

In some cases, especially with irrevocable trusts, it may be necessary to obtain a formal valuation of the LLC to properly document the transfer for tax purposes. The cost of a business valuation can vary significantly based on the size and complexity of the LLC, ranging from a few thousand dollars to tens of thousands for larger enterprises.

5. Tax Advisory Fees

Given the potential tax implications of transferring an LLC into a trust, consulting with a tax advisor is advisable. This consultation can help identify any immediate tax liabilities triggered by the transfer, such as gift taxes, and plan for efficient tax treatment of the LLC's income going forward. Tax advisory fees will vary based on the advisor's expertise and the complexity of the tax planning required.

6. Ongoing Trust Administration Costs

Once the LLC is transferred to the trust, there may be ongoing costs related to administering the trust. These can include annual trustee fees (if a professional trustee is appointed), tax preparation fees for trust tax returns, and any other expenses associated with managing the trust's assets. These costs will depend on the size of the trust, the complexity of its assets, and the terms outlined in the trust agreement.

Transferring Your LLC to a Trust: the Differences Between States

LLC trust transfers vary a lot between states. There are differences in documentation, tax implications, approval requirements, and registration/public records adjustments. Here are a few examples.

• Documentation Requirements : California generally requires a formal amendment to the LLC's operating agreement to reflect the change in membership to a trust. Additionally, an Assignment of Membership Interest form should be executed and kept with the LLC's records.
• Tax Implications : Transferring an LLC into a trust in California may have implications for property taxes if the LLC owns real property, due to Proposition 13. The transfer could potentially be seen as a change in ownership that triggers a reassessment of property value unless a specific exclusion applies.
• Approval Requirements : No state-level approval is typically required for transferring membership interest to a trust, but the LLC's operating agreement may require the consent of other members.
• Registration and Public Records : California does not require the trust to be registered or the change in LLC ownership to be made public beyond the internal records of the LLC and potentially county records for property tax purposes.
• Documentation Requirements : Similar to California, New York requires an assignment document to transfer the LLC membership interest to the trust. The operating agreement should also be reviewed and possibly amended.
• Tax Implications : New York State might impose income tax considerations on the transfer, especially if the LLC is profitable. Consultation with a tax advisor is advisable to navigate these complexities.
• Approval Requirements : New York LLCs generally require the consent of all members for a transfer of membership interest unless the operating agreement specifies otherwise.
• Registration and Public Records : New York does not mandate that this transfer be registered with the state, but the operating agreement and any amendments should be updated and kept with the LLC's records.
• Documentation Requirements : Florida requires the execution of an assignment document to transfer LLC membership interest to a trust. This document should be notarized and kept with the LLC's official records.
• Tax Implications : Florida does not have a state income tax, which simplifies the tax implications of such a transfer. However, documentary stamp taxes may apply if the LLC holds real property and a mortgage.
• Approval Requirements : The transfer of membership interest usually requires adherence to the LLC's operating agreement, which might necessitate approval from other members.
• Registration and Public Records : While Florida does not require the trust itself to be registered, any changes affecting the LLC's management or the information on file with the Florida Department of State must be updated through annual reports or amendments.
• Documentation Requirements : Texas also requires an assignment of membership interest to transfer ownership into a trust, along with potential amendments to the LLC's operating agreement.
• Tax Implications : Texas does not impose a personal income tax, but the franchise tax implications for the LLC should be considered, especially if the transfer changes the management structure.
• Approval Requirements : Depending on the LLC's operating agreement, member consent may be required for the transfer.
• Registration and Public Records : Texas requires the LLC's public records to be updated if there is a change in the management structure. This is done through filings with the Texas Secretary of State.

Consider Seeking Professional Assistance

The process of transferring LLC membership interests into a trust can be complex, involving legal considerations, tax implications, and potential changes to the operation of the LLC. Therefore, it is highly recommended to seek advice from a qualified attorney or tax advisor who is familiar with these matters. They can provide guidance tailored to your specific situation and help ensure the transfer is carried out correctly and in line with your objectives.

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Assignment of Partnership Interest to Revocable Trust

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• PARTNERS & PARTNERSHIPS

Special Issues Related to Distributions of Partnership Interests by Estates and Trusts

• Partnership & LLC Taxation
• Taxation of Estates & Trusts

Editor: Greg A. Fairbanks, J.D., LL.M.

With the popularity of family limited partnerships, it is not uncommon to find a partnership interest held by an estate or trust. However, eventually the estate or trust must distribute the partnership interest. The complex rules governing the tax treatment of distributions from estates and trusts are further complicated when a partnership interest is distributed.

General Rule

When an estate or trust distributes cash or property, the distribution is taxed to the beneficiary to the extent that the trust or estate has distributable net income (i.e., generally taxable in come not including capital gain) (Sec. 662). This means that the beneficiary, rather than the estate or trust, is taxed on the entity’s income up to the amount of the distribution. In the case of property, the distribution amount is the lesser of the property’s tax basis or its fair market value (FMV) (Sec. 643(e)(2)). Nevertheless, regardless of how the property distribution is measured, the beneficiary’s tax basis in the property will be the same as the estate or trust’s cost basis prior to the distribution.

In addition, there are situations in which an estate or trust will recognize gain as a result of the distribution of appreciated property, which will re quire an adjustment to the property’s basis: (1) the property is distributed in satisfaction of a specific pecuniary be quest; (2) the property is subject to liabilities in excess of basis; or (3) the fiduciary elects (under Sec. 643(e)(3)) to treat the distribution as a sale to the beneficiary for the property’s FMV. Further, if the property distributed is a partnership interest and the estate or trust has a negative tax capital account (this occurs when the liabilities of the partnership allocable to the interest ex ceed the estate or trust’s share of the partnership basis of its assets), then a gain will be recognized equal to the negative capital as a result of the requirement of Sec. 752(d) to include the partner’s liabilities in the amount realized.

Sec. 761(e)

Sec. 761(e) provides that any distri-bution of an interest in a partnership that is not otherwise treated as a sale or ex change, as discussed above, will still be treated as a sale or exchange for purposes of Secs. 708 and 743.

While the legislative history of this provision indicates that the IRS might issue regulations providing that estates and trusts would not be subject to this provision, no regulations have been issued to date. It seems relatively certain that any distribution by an estate or trust is a sale or exchange for Secs. 708 and 743.

Not all transfers of partnership in terests to a beneficiary are treated as distributions. For example, a transfer of a partnership interest specifically be queathed to a beneficiary is not a distribution and is therefore not subject to Sec. 761(e).

Under Sec. 708(b)(1)(B), a partnership terminates if 50% or more of the total interest in partnership capital and profits is sold or exchanged in any 12-month period. If the partnership terminates, the old partnership is deemed to contribute its assets and liabilities to a new partnership in ex change for a partnership interest and immediately distributes the new partnership interest in liquidation of the old partnership.

A partnership’s termination can result in both favorable and unfavorable tax consequences. The termination of the old partnership results in the creation of a new partnership that can choose its own tax accounting method and tax year end and does not inherit the old partnership’s elections (e.g., Sec. 754).

One particularly bad consequence of a termination for partnerships containing a significant amount of depreciable property is that the step-into-the-shoes rule of Sec. 168(i)(7) does not apply in the case of a Sec. 708(b)(1)(B) termination. As a consequence, the adjusted basis of the depreciable property would be depreciated over the applicable asset life as if it were newly acquired property. This provision is a trap for the unwary, but if recognized it can be easily avoided by ensuring that distributions are planned over a greater than 12-month period so as not to violate the 50%-or-more rule.

A distribution of a partnership interest by a fiduciary is treated as a sale or exchange for purposes of Sec. 743. Therefore, if the partnership has a Sec. 754 election in place, the transfer of the interest will require the partnership to adjust the basis of partnership property for the benefit of the transferee partner (i.e., beneficiary).

However, if the partnership does not have a Sec. 754 election in place, it will need a thorough review of inside basis of the partnership assets and their estimated FMVs to determine if a Sec. 754 election should be made or if the partnership has a substantial built-in loss that requires negative basis adjustments under Sec. 743(b). If Sec. 743(b) applies, then consideration should be given in these circumstances not to make a Sec. 754 election, since the election would affect future transfers of partnership interest.

Sec. 1245 Recapture

Sec. 1245(a)(1) requires taxpayers to recapture depreciation on tangible personal property as ordinary income on disposition of the property, not withstanding any other provision. Sec. 1245(b) provides exceptions to this general rule. One of the exceptions applies to “transfers at death,” but distributions from estates and trusts are not on the list. Applying the general rule of Sec. 643(e), without the Sec. 643(e)(3) election, should result in the estate or trust’s not recognizing re capture income. Regs. Sec. 1245-4(b) states that the transfer-at-death exception applies if the basis of the property to the beneficiary is determined under Sec. 1014. However, as discussed above, the beneficiary’s tax basis for in-kind distributions is determined under Sec. 643(e).

The uncertainty of distributions of Sec. 1245 assets held directly by the estate or trust is compounded when the recapture property is owned by a partnership. This determination will involve whether the aggregate theory of partnership taxation should be applied. Under this theory, each partner would be viewed as the owner of a direct undivided interest in each partnership asset. This is an issue that the IRS needs to clarify for taxpayers.

EditorNotes

Greg A. Fairbanks, J.D., LL.M., works for Grant Thornton LLPWashington, DC

Unless otherwise indicated, contributors are members of or associated with Grant Thornton LLP.

If you would like additional information about these items, contact Mr. Fairbanks at (202) 521-1503 or [email protected] .

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How to Put Business Interests into a Trust

When forming your business, you may choose to structure it as a sole proprietorship, partnership, limited liability company (LLC), or corporation. Each type of structure offers different levels of asset protection and affects how much you pay in taxes. But owners can exert further control over their business—both while alive and after they pass away—by placing business interests in a trust.

Typically associated with estate planning, trusts can hold business interests. Except for a sole proprietorship, most types of business interests can be transferred to a trust if the transfer is permitted by the operating agreement. In the case of a sole proprietorship, which is not a separate legal entity, you may simply transfer the assets used for the business into the trust. Holding business interests in a trust can provide benefits for you and your heirs, but before creating a business trust, the consequences should be considered.

Reasons to Hold a Business in Trust

A trust is a legal entity that holds assets for and transfers them to beneficiaries. Although not a business entity, a trust can hold business assets, such as real estate and property. Ownership interests in a business, which are considered personal property, can be held in a trust, too.

Indeed, business ownership interests are often among an individual’s most valuable assets. Like other assets, they must be carefully managed and safeguarded. In addition, plans should be in place to avoid disruptions in the business’s operations when the current owner departs the business.

These goals—and more—can be achieved by placing a business in a trust. When a trust holds a business, it can provide the following advantages:

• The business interests are not subject to probate upon the owner’s death
• Estate taxes can be reduced or eliminated
• Trusts are not public and therefore can maintain a business’s privacy
• Business assets are separated from personal assets, providing more protection from creditors’ claims
• It allows for succession planning in the event of incapacity or death by having beneficiaries inherit business interests without interrupting operations
• It provides flexibility due to many types of trust structures

Placing a Company in a Trust

Transferring assets such as ownership interests to a trust is commonly known as funding a trust. Once an asset is transferred to a trust, that asset is the legal property of the trust, not of the person (i.e., the grantor or settlor) who creates and funds the trust.

The assets held in trust are managed by a trustee—an individual or company named by the grantor. They are managed for the benefit of the trust’s beneficiaries in accordance with the wishes of the grantor and any specific rules that apply to the type of trust created.

A business owner can act as the trustee of the trust and be its beneficiary, although state law may not allow the same person to be the sole trustee and sole beneficiary. This can be avoided by naming a co- trustee and co-beneficiary (or beneficiaries).

Putting business interests into a trust can be done at formation or after the company is an established entity by following these steps:

• With the help of an attorney, draft trust documents to set up the trust. This includes choosing a name for the trust, identifying beneficiaries, selecting a trustee, and determining the trust’s rules.
• If forming a new business, issue the stock certificates (corporation) or membership interests (LLC or partnership) in the name of the trust.
• If transferring membership interests of an existing LLC or partnership to a trust, a document of transfer—called an assignment of interest—is required.
• If transferring stock certificates to a trust, an assignment of stock agreement or a similar contract is needed.

As mentioned, sole proprietorships do not involve ownership interests, because there is no legal separation between the owner and the business. While a sole proprietor cannot transfer business interests to a trust, they can transfer the assets that make up their business, such as bank accounts and office equipment.

Before Putting Business Interests in a Trust

Setting up a trust and funding it with business interests is not overly complicated. However, anyone who is considering putting business interests into a trust should keep these potential complications in mind:

• The LLC, partnership, or corporation may have specific terms and conditions established by contract at its formation or in its governing documents for transferring business interests to a trust, such as a majority or unanimous vote of the other members or owners.
• The business might have rules in its operating or shareholder agreement that prohibit a trust from holding ownership interests.
• Placing interests in a trust could be a triggering event in a buy-sell agreement.
• Costs related to trust set up and administration could be high.
• Business interests may lose marketability when placed in a trust.
• Depending on the type of trust, the transfer could dilute ownership interests or lead to unintended tax consequences.
• Setting up a business interest trust requires the trustee to act in the best interest of the beneficiaries (fiduciary duty), which could establish legal duties different from those applicable to owners of the business entity.

Numerous trust options provide flexibility, but different types of trusts have unique implications and requirements that must be considered, not only for the current business owner, but also for their heirs down the road.

Transfer Your Business Interests with Help from an Attorney

Creating a trust to hold business interests can enable you to maintain control over the business and provide protection for the company you worked so hard to build, as well as increase your peace of mind about the business’s future. The consequences of transferring your business interests to a trust may vary depending on the type of trust, so some business trusts may be more beneficial to you and your heirs than others.

The pros and cons of a business trust should be discussed with an attorney along with the outcomes you want to achieve from a trust. During an initial strategy session, you can consult our attorneys about your situation and how a trust can be used to meet your business and estate planning goals. Contact Norton Pelt to schedule a consultation .

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Assignment of Interest In LLC: Everything You Need to Know

Assignment of interest in LLCs happens when a member communicates to other members his/her intention to transfer part or all of his ownership rights in the LLC to another entity. 3 min read updated on February 01, 2023

Updated October 28, 2020:

Assignment of interest in LLCs happens when a member communicates to other members his/her intention to transfer part or all of his ownership rights in the LLC to another entity. The assignment is usually done as a means for members to provide collateral for personal loans, settle debts, or leave the LLC. The member (assignor) and the person assigned (assignee) sign a document called the Membership Assignment of Interest.

Why a Member May Want to Assign Interest

A member may choose to assign interest for a number of reasons.

• The assignment of interest may happen as collateral to a loan to one of the members.
• Some members can assign interest to settle debts. The assignment will be effective until the debt is cleared.
• An assignment of interest can also' be done  to a member's legal heirs , going into effect upon the death of a member. 

The Rights and Limitations of the Assignee

The laws governing LLC membership interest assignments vary considerably from one state to another. 

• Most states prohibit the assignee from participating in the LLC's operations or decisions unless the Articles of Organization have this provision.
• An assignee is protected from liability from the assignor until the assignee becomes a member in most states. However, the law in a few states, including California and Florida, states that the assignee does get the assignor's liability.
• Should the assignee become a member after the assignment, he is only entitled to the rights and restrictions the assignor had.
• The assignment usually gives the assignee the right to receive the assignor's share of the profits — but not necessarily the other rights.

The Rights and Limitations of the Assignor

• In many states, all LLC members have the right to assign membership interest.
• In most states, assigning interest does not necessarily lead to forfeiting of voting and management rights and can be temporary. Texas law, on the other hand, states that the assignor ceases to be a member of the LLC after the assignment.

The Rights and Limitations of Other Members

• All members of the LLC have to be notified of any type of assignment.
• Some states require the assignment of interest to be approved by all members.
• The new person who has been assigned interest does not necessarily become a member even if the assigner has decided to leave the LLC. The other members can decide whether to admit the assignee as a member or not. Should a member assign interest without the input of other members, the interest is normally limited to financial benefits.
• In a two-member LLC, one member can easily transfer the interest to the other. 

The Membership Interest Assignment Document

The LLC's operating agreement should explain the rights of members on issues of transfer of interest, and the agreement should be followed during the assignment process. The Membership Interest Assignment acts as a record of the agreement, and the LLC normally keeps a copy of the document. The law in most states does not provide a formal template of the Membership Interest Assignment document but lists what should be included in the document. The document should have the following details:

• Percentage of interest that will go to the assignee 
• Whether the assignee will have voting rights
• The signatures of the assignor and the assignee

Assignment of Interest Versus Selling Ownership Stake

The assignment of interest is typically different from selling the ownership stake . Selling a member's ownership stake in the LLC requires unanimous approval by the other members. A departing member may also assign his membership to another member.

If a member is being paid to transfer interest, this is treated for tax purposes as a sale, and the selling member's gains might be liable to capital gains tax. Even if a departing member is not paid for his interest, if the departure results in the assignee getting the departing members' share of liability, the departure is seen as an exchange or sale.

Assignment of Interest Versus Abandoning an LLC

If a member wants to withdraw interest in an LLC, he/she can choose to simply legally abandon the LLC in most states. The abandoning member should give some kind of notice to the other members explaining that he is abandoning membership. Abandoning membership does not usually require the approval of other members.

Abandoning an LLC does not absolve the member of liability he/she may have incurred when still a member.

If you need help with the assignment of interest in LLCs, you can  post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.

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• LLC Membership Interest Transfer Agreement
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2007 California Corporations Code Article 7. Assignment Of Partnership Interests

Ca codes (corp:15671-15675).

Disclaimer: These codes may not be the most recent version. California may have more current or accurate information. We make no warranties or guarantees about the accuracy, completeness, or adequacy of the information contained on this site or the information linked to on the state site. Please check official sources.

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