Probate
Probate is the legal process through which property is transferred after a property owner’s death. Generally, the probate process requires the gathering of all assets, paying off debts, and distributing the remaining assets in accordance with the deceased person’s estate plan and the law. The probate process is facilitated by a court-approved, or appointed, a person known as the administrator, executor, or personal representative of the estate.
If a person passes away with a will with assets held in his or her sole name, the estate must go through probate. The court will oversee the distribution of assets according to the terms of the will. As you might imagine and may know from experience, probate can be a tremendous burden and very expensive as the personal representative of the estate deals with the technicalities of the court system.
Following are some key disadvantages of having an estate go through probate:
· The time required for probate and administration of the estate
· The cost of estate administration is significantly increased with an additional cost of probate
· Court involvement is time-consuming and expensive
· The probate process is public
Living Trusts and Avoiding Probate
If a business owner’s goals include the stable and uneventful continuance of the business and a peaceful and expedient transfer of ownership in the event of their premature death or permanent incapacity, the owner should, with legal counsel, consider a Living or Revocable Trust as a planning tool in their overall estate plan. Living Trusts can help in minimizing taxes and legal fees, affording privacy and flexibility, avoiding probate, and making the entire process of business transfer and continuance much easier. If a business owner passes away with their business titled in the name of the Living Trust, the distribution of assets will go much more smoothly.
With all the positives, there are reasons that a Living Trust may not be the best solution for avoiding probate in the estate distribution of your business. They include the following:
· Transferring S-Corporation business interests to certain types of trusts could result in negative tax consequences.
· Once your business passes to your heir(s), planning steps must be taken to prevent the S-Corporation from reverting to a C-Corporation.
· Some business interests may lose marketability when transferred to a trust.
· It could become more challenging to secure bank debt.
· Depending on the type of trust selected, your interest in the business might be diluted.
· Transferring interests to a trust could possibly trigger provisions in your buy-sell agreement (if applicable).
In summary, if a smooth and expedient transfer of your business at death or your permanent incapacity is a goal, a Living Trust may be the solution. As with all legal matters, we advise that you seek legal counsel as to the pros and cons and whether it would be a wise strategy for your plans for business continuity and estate distribution.
