Thinking about putting your LLC in a trust? It might seem like a smart move, especially when planning for the future of your business. But before you take that step, it’s worth looking at the possible downsides. In California, placing your LLC in a trust can create unintended complications. In this blog, we’ll explain why this option may not be right for every business owner—and what other steps you can take to protect your company long-term.
Loss of Control Over the Business
When you transfer ownership of your LLC into a trust, you’re giving legal ownership to the trust—even if you still run the business day-to-day. That shift in ownership can limit how much control you actually have over important decisions.
Let’s say you’re no longer serving as trustee. That role might pass to a successor who doesn’t understand the business or who follows a more conservative approach. You could also be working alongside co-trustees or beneficiaries with different views on how things should be handled.
These limitations can be frustrating if:
- You want to sell, restructure, or expand your business in the future
- You need to act quickly on business decisions
- You want to preserve flexibility during your lifetime
By giving up direct ownership, you’re also giving up some of the control that comes with it. That’s something to think through carefully before moving your LLC into a trust.
Tax Complications and Reporting Issues
Transferring your LLC into a trust may affect how the business is taxed. While a revocable living trust typically won’t trigger immediate tax consequences, it can change how profits are reported—especially after you pass away or if the trust becomes irrevocable.
If your LLC owns real estate in California, a transfer to a trust could result in a reassessment of property taxes. That means higher annual tax bills for your heirs or beneficiaries.
There are also reporting considerations. You may have to:
- Update your tax ID numbers
- File different returns for the trust
- Track distributions and income more closely
These tax and reporting complications are reasons to consider whether this route adds more work than it’s worth.
Potential Conflict Among Beneficiaries
A trust is often used to pass down assets evenly—but that doesn’t always work well when a business is involved. An LLC can’t be split the same way a bank account can.
If you have two or more children and only one wants to manage the business, you could be setting the stage for conflict. One might want to sell, while the other wants to keep it going. Disagreements over profit distribution, management decisions, or the timing of a sale can lead to legal disputes.
Without clear instructions, the trust may leave beneficiaries with more questions than answers. Instead of creating peace of mind, it can lead to tension and even court involvement.
Not Always the Right Fit for Active Businesses
If your LLC is active and still generating income, moving it into a trust may create other unnecessary complications.
You might find yourself dealing with added paperwork when dealing with banks, lenders, or new business partners. Some institutions are hesitant to work with trust-owned entities, especially if they aren’t familiar with your structure. You could be asked to provide additional documents proving authority or ownership, which slows things down.
This can be especially frustrating when:
- You’re negotiating contracts
- You’re applying for financing
- You’re dealing with time-sensitive business opportunities
In these situations, having the business in your own name—or under a clearly defined agreement—can make day-to-day operations simpler.
Smarter Alternatives for LLC Owners
If your goal is to protect your business and make things easier for your family down the road, there are other options worth considering. We often help clients explore:
- Business succession plans – Outlines who will take over the business and how
- Buy-sell agreements – Useful when multiple owners are involved
- Assigning membership interests – Rather than putting the entire LLC into a trust, you can assign interests, which helps maintain control
- Detailed instructions in a revocable trust – If you do use a trust, we can include specific terms for how to manage or distribute the LLC
Each situation is different, and there’s no one-size-fits-all answer. But with the right plan, you can safeguard your business and reduce stress for your loved ones.
Protect Your Business the Right Way
Placing your LLC into a trust can work for some people, but it’s not always the best solution. At OC Wills & Trust Attorneys, we help California business owners think through the pros and cons of each estate planning strategy. We’ll take the time to understand your goals, your business, and your concerns—and we’ll help you find a smarter path forward. Contact us today to start the conversation. We’re ready when you are.
