Can You Place a Sole Proprietorship in a Revocable Living Trust?

By John Stevens J.D.

The primary purpose of a revocable living trust is to pass property to heirs without a probate proceeding. A sole proprietorship is an unincorporated business owned by a single person and, as with most other assets, a sole proprietorship can be transferred to a revocable living trust. Transferring a sole proprietorship to a revocable living trust ensures that the beneficiaries of the trust receive the business after the death of the trust creator.

Transferability of Sole Proprietorships

Unlike corporations or limited liability companies, a sole proprietorship is not a business entity that exists independently of its owner. Even so, the assets of a sole proprietorship can be transferred to a revocable living trust. For example, the business may have tangible assets such as real property, inventory, furniture, appliances, machinery and other equipment. Intangible, but valuable assets, may include a good reputation, a recognizable business name and accounts receivable, money owed to the business. All of these assets, both tangible and intangible, can be transferred to a revocable living trust.

Creating an Assignment

The transfer of a sole proprietorship to a revocable living trust is initiated with an assignment form, a document that identifies the business owner, the business and the tangible and intangible items that make up the business. For example, the assignment form may begin with language, such as “I, Betty Smith, herein assign and transfer all right, title and interest to the following assets of the business known as “Betty’s Bakery, located at 1234 Main Street, Pleasantville, California ….” This information should be followed by a list of all business assets, such as “All of the furniture, equipment, appliances and all other tangible assets, as well as the goodwill, accounts receivable, business name and all other intangible assets of the above described business.” The business owner signs and dates the assignment form. Because the assets are held in trust, the owner must use the word “trustee” after the signature to signify he is acting as the trustee of the trust, or name a third-party trustee of his choosing. Although not required, the signature should be notarized.

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Trust Document

A requirement of creating a revocable living trust is that the person who creates the trust must express the intent that the property be held in trust. For this reason, language in the trust document usually refers to an attachment called “Schedule A,” and declares that the person creating the trust intends to hold all of the property listed on Schedule A in trust. To avoid potential future claims that the trust did not hold the sole proprietorship, the person creating the trust should list the business on Schedule A using the language from the assignment form. From the above example, the language on Schedule A might read: “All right, title and interest to the following assets of the business known as “Betty’s Bakery, located at 1234 Main Street, Pleasantville, California: All of the furniture, equipment, appliances and all other tangible assets, as well as the goodwill, accounts receivable, business name and all other intangible assets of the above described business.”

Other Business Types

A sole proprietorship differs from other business types in two primary areas: liability and taxation. A corporation shields its owners from liability if it loses a lawsuit; only the corporation is liable for damages. Corporations are separate entities and the business and its employees are taxed on income received. A limited liability company, or LLC, offers the benefit of protecting its owners from liability, but without the double taxation assumed by corporations -- an LLC pays no income tax, but its members do. By comparison, a sole proprietorship offers no protection against lawsuits for its owner, who is personally liable if the business loses a lawsuit, and is not an independent entity like a corporation, so not subject to separate taxation. Due to the complexities involved in transferring assets of corporations and LLCs to revocable living trusts, owners should consult an estate planning attorney.

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Is a Living Trust Liable or Subject to Probate?

References

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