Protect Your California Business: Trusts for Succession

Why business owners consider trusts for succession

Trusts separate legal ownership from day-to-day control, providing a private roadmap for who manages and who benefits from the business when the owner retires, becomes incapacitated, or dies. With a properly drafted instrument, a successor trustee can accept authority without a court appointment, which supports operational continuity, banking access, and timely decision-making (see Probate Code § 15660 and § 18100.5). Property held in a trust generally avoids probate in California (California Courts Self-Help: Trusts).

Core benefits of using a trust

• Continuity: A named successor trustee can step in under the trust terms without a court order (Probate Code § 15660), and banks/vendors may rely on a certification of trust to recognize authority (§ 18100.5).
• Privacy: Trust administration generally occurs outside public probate filings, limiting disclosure of ownership and financial details (California Courts Self-Help).
• Control and customization: Trusts can define voting rights, management succession, buy–sell triggers, and dispute-resolution processes tailored to your company.
• Asset protection (within limits): California does not provide self-settled asset-protection trusts. Revocable trusts do not protect the settlor from creditors, and transfers made to hinder or defraud creditors can be voided (Probate Code § 15304; Civ. Code § 3439.04). Carefully structured, third-party irrevocable trusts with valid spendthrift provisions can offer some protection for beneficiaries (Probate Code § 15300).
• Tax planning: Trusts can coordinate with entity elections and buy–sell terms to address liquidity for estate expenses and potential transfer-tax exposure. Specific outcomes depend on trust type, valuation, and compliance—coordinate with tax counsel.

Common trust structures for California business succession

• Revocable living trust: Often holds an owner’s LLC units, corporate shares, or partnership interests. It remains changeable during life and enables a private, non-probate transfer at death (Self-Help: Trusts).
• Irrevocable trusts: Used for longer-term transfers and potential estate/gift tax planning (e.g., IDGTs, SLATs). Requires careful drafting, valuation, and funding. Outcomes vary based on structure and compliance.
• Voting/non-voting recapitalization paired with trusts: Splitting voting and economic rights can transition value to trusts while preserving control with active managers.
• Management or directed trust: A trust may allocate business/investment decisions to an advisor or committee while an administrative trustee handles custodial and reporting functions. Availability and effects depend on the trust instrument and applicable law.

What can go into the trust

Most owners transfer equity—LLC membership interests, corporate shares, or partnership interests—into a trust. Your governing documents should permit transfers to a trust and define notice or consent requirements. For LLCs, a transfer of a membership interest does not, by itself, make the transferee a member; admission typically requires consent under the operating agreement (Corp. Code § 17705.02). For professional corporations and other licensed practices, ownership and control are restricted to licensed persons; the use of trusts may be limited and must comply with board rules (Moscone-Knox Act; CA Secretary of State guidance).

Coordinating your business documents

• Operating agreement/bylaws/shareholder agreement: List the trust as owner, recognize the successor trustee, and address voting, transfer, and death/disability provisions. For corporations, ensure transfer restrictions are properly stated or referenced to be enforceable (Corp. Code § 418).
• Buy–sell agreement: Define triggers (death, disability, retirement), pricing, and funding (e.g., insurance).
• Employment and incentive plans: Align roles and equity awards with trust ownership.
• Banking and vendor authorizations: Update resolutions and signature cards, and be ready to provide a certification of trust (Probate Code § 18100.5).

Avoiding common pitfalls

• Incomplete funding: Execute and record assignments or stock powers; update cap tables and minute books.
• Conflicting documents: Inconsistencies between the trust and governing documents cause delays. Harmonize terms in advance.
• Licensing and regulatory issues: Professional and regulated businesses have ownership/control rules; confirm compliance before transferring interests.
• Tax surprises: Trust and entity transfers can trigger income, property, or transfer taxes. Coordinate with tax and valuation advisors.
• Liquidity shortfalls: Plan for estate costs, buyouts, and tax obligations via insurance, redemption terms, or committed facilities.

Practical tips

Succession checklist

Special considerations for family businesses

• Fairness vs. equality: Allocate voting control to active members while providing economic benefits to others.
• Governance bodies: Reference family councils or advisory boards to guide culture and mission.
• Education and mentoring: Include milestones for leadership readiness and buy-in opportunities.

When a trust may not be enough

A trust is not a substitute for strong corporate governance, insurance, compliance, or lender relations. Lenders may require consents or guarantees. Clear roles, employment terms, and dispute-resolution clauses are just as important as the trust instrument.

Key California authorities

• California Courts Self-Help: Trusts
• Probate Code § 15660 (Successor trustees)
• Probate Code § 18100.5 (Certification of trust)
• Probate Code § 15300 (Spendthrift); § 15304 (Self-settled trusts); Civ. Code § 3439.04 (UVTA)
• Corp. Code § 17705.02 (LLC transfer of interests)
• Corp. Code § 418 (Share transfer restrictions)
• Corporations Code: Professional Corporations; CA SOS: Professional Corporations

FAQ

Can my revocable trust protect my business from my creditors?

No. In California, a revocable trust offers no asset protection for the settlor, and self-settled spendthrift provisions are ineffective against the settlor’s creditors.

Do I need a court order for my successor trustee to run the business?

Generally no, if the trust names a successor and you provide a certification of trust. Third parties may rely on that certification under Probate Code § 18100.5.

Can a trust own shares in an S corporation?

Yes, but only certain trusts qualify. Work with tax counsel to ensure the trust meets S-corporation eligibility rules.

How often should I update my plan?

Review after major life or business events, material law changes, or at least every 2–3 years.

Get started

Ready to protect your business and family? Contact our team to design and implement a trust-centered succession plan tailored to your California company. Get in touch.

Disclaimer: This post provides general information about California business-succession planning and trusts as of the date noted. It is not legal, tax, or financial advice and does not create an attorney–client relationship. Consult qualified California counsel about your specific circumstances.