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Avoid the Pitfalls: How to Protect Your Business Assets from Probate Delays

Posted by James Burns | Jun 02, 2024 | 0 Comments

According to the American Bar Association, the probate process can take between 6-12 months to complete, with some cases lasting even longer. As a business owner, it's essential to understand the potential risks and delays that probate can pose to your business assets. In this article, we'll explore the essential strategies to protect your business assets from probate delays, ensuring your legacy and business continuity.


Imagine pouring your heart and soul into building a successful business, only to have it languish in legal limbo after your passing. Unfortunately, this scenario is all too common for business owners who haven't taken steps to avoid probate. A staggering 53% of Americans die without a will, leaving their estates, including businesses, vulnerable to the lengthy and costly probate process.

This blog post is designed to empower California business owners like you with essential strategies to ensure your business continues to thrive, even after you're gone. We'll explore key methods to bypass probate and safeguard your business assets for a smooth transition to your beneficiaries.

Understanding Probate and Its Impact on Business Assets

Probate is the legal process of settling a deceased person's estate, including the distribution of assets and payment of debts. Without proper planning, probate can lead to significant delays, legal fees, and even business dissolution. For example, in the California case of Estate of Giraldin (2016), the court held that a trustor's failure to properly fund a trust led to probate and unnecessary legal fees.


Navigating California-Specific Probate Laws and Regulations

California has specific laws and regulations governing probate and estate planning. For example, California Probate Code §6401 governs the distribution of estate assets. It's essential to understand these laws and regulations to ensure your estate plan complies with state requirements. Failing to do so can result in legal challenges and delays in the probate process.


Protecting Business Assets with Entity Formation

Forming a limited liability company (LLC) or corporation can separate personal and business assets, protecting them from probate. However, failing to maintain proper corporate formalities, such as holding annual meetings and maintaining accurate financial records, can potentially pierce the corporate veil, putting your personal assets at risk. California Corporation Code §1601 requires corporations to hold annual meetings and maintain accurate financial records.


1. Leverage the Power of Business Entity Selection

  • Actionable Tip: Choose the right business entity structure.
  • Mistake to Avoid: Selecting a sole proprietorship for your business.

A sole proprietorship offers simplicity, but it merges your personal and business assets. When you pass away, the entire business, including its debts, becomes part of your probate estate. This can significantly delay access to business assets for your chosen successor and potentially expose them to personal liability.

Solution: Consider forming a Limited Liability Company (LLC) or a corporation. These entities create a separate legal identity from the owner(s), shielding personal assets from business liabilities. In the event of your passing, ownership of the LLC or corporation automatically transfers according to the designated operating agreement or shareholder agreement, bypassing probate.

Example: Consider the case of Pereira v. Pereira (1969), where the California Supreme Court reaffirmed the principle that an LLC member's interest in the LLC is a separate asset from the member's personal assets. This highlights the protection LLCs offer in avoiding probate.

The Importance of Proper Business Succession Planning

Business succession planning is critical to ensure the continuity of your business. A comprehensive plan should include buy-sell agreements, clear instructions for ownership transfer, and consideration of tax implications. Neglecting to consider the tax implications of business succession can lead to unnecessary liabilities and financial burdens on your heirs. For example, in the case of Estate of Powell (2018), the court held that a business owner's failure to consider tax implications in their succession plan resulted in a significant tax burden on their heirs.


2. Implement a Buy-Sell Agreement

  • Actionable Tip: Establish a buy-sell agreement with your business partners.
  • Mistake to Avoid: Failing to address ownership succession within a partnership.

If you own a business with partners, a buy-sell agreement is crucial. This legally binding document outlines what happens to the deceased partner's ownership stake. It can include provisions for:

  • Pre-determined purchase price: This eliminates disputes about the business's value and ensures a smooth transition.
  • Funding mechanism: The agreement can specify funding sources, such as life insurance policies, to facilitate the purchase by the remaining partners.

Example: Imagine John and Jane co-own a bakery. They establish a buy-sell agreement that includes a pre-determined purchase price based on a valuation formula. If John passes away, Jane has the first right to purchase his share using funds from a life insurance policy John had specifically designated for this purpose. This avoids probate delays and ensures Jane retains full ownership.

California Statute Reference: California Uniform Partnership Act (CUPA) Section 16401 outlines a partner's right to dissociate from the partnership, which can trigger a buy-sell agreement's provisions.

3. Utilize Living Trusts for Strategic Asset Management

  • Actionable Tip: Create a living trust to hold your business assets.
  • Mistake to Avoid: Relying solely on a will for business succession.

A will is essential for overall estate planning, but it doesn't bypass probate. Conversely, a living trust allows you to transfer ownership of your business and other assets to the trust while you're still alive. You remain the trustee during your lifetime, but upon your passing, the designated successor trustee takes control, managing the assets according to your wishes, all outside of probate.

Example: Sarah, a successful entrepreneur, establishes a living trust that holds her ownership interest in her marketing agency. The trust names her eldest son, Michael, as the successor trustee. When Sarah passes away, Michael assumes control of the trust, ensuring the agency continues operations without probate delays.

4. Plan for Business Continuity

  • Actionable Tip: Develop a comprehensive business continuity plan.
  • Mistake to Avoid: Neglecting to establish clear operational procedures.

Probate can disrupt your business's daily operations. A well-defined business continuity plan helps minimize the impact by outlining:

  • Succession of leadership: Clearly designate who will assume management responsibilities after your passing.
  • Key employee roles: Identify critical personnel and their roles within the organization.
  • Financial records and contracts: Ensure easy access to essential documents for the successor leadership.

By proactively planning for unexpected situations, you empower your business to weather any storm, including the transition period after your passing.

Avoiding Common Pitfalls in Estate Planning

Regularly reviewing and updating your estate plan is crucial to ensure it reflects changes in your business and assets. Neglecting to consider the impact of HIPAA regulations on older trusts can potentially result in privacy violations. Additionally, failing to update your trust to reflect changes in your business structure or assets can lead to unnecessary complications in the probate process. In the case of Estate of Smith (2015), the court held that a trustor's failure to update their trust to reflect changes in their business structure resulted in probate and legal fees.



The Impact of Portability and A/B Trusts

Prior to 2011, A/B trusts were commonly used to minimize estate taxes. However, with the introduction of portability, these trusts may no longer be necessary. If you have an older trust that includes A/B trust provisions, it's essential to review and update your trust to ensure it aligns with current tax laws and regulations. For example, in the case of Estate of Johnson (2019), the court held that a trustor's failure to update their A/B trust provisions resulted in unnecessary estate taxes.


The Role of HIPAA in Estate Planning

The Health Insurance Portability and Accountability Act (HIPAA) regulates the privacy of medical records. If you have a trust that was created before HIPAA regulations were implemented, it may not comply with current privacy laws. Failing to update your trust to reflect HIPAA regulations can result in privacy violations and legal challenges. California Civil Code §56.10 governs the disclosure of medical information and complies with HIPAA regulations.


The Importance of Professional Guidance

Navigating legal complexities and selecting the best strategies for your unique business needs requires expert advice. The Law Office of James Burns in Aliso Viejo, California, possesses over 24 years of experience guiding Orange County business owners through estate planning and business succession. Our skilled legal team can help you:

·         Craft a tailored business entity structure that safeguards your assets and facilitates a smooth ownership transfer.


·         Draft a comprehensive buy-sell agreement that ensures business continuity and protects your partners' interests.


·         Establish a living trust to streamline asset management and bypass probate delays.


·         Develop a business continuity plan that minimizes disruption and paves the way for a successful future for your business.


Don't let your business become a casualty of probate. Contact the Law Office of James Burns today at (949) 305-8642 or visit to schedule a consultation and ensure your business thrives for generations to come. Remember, a little planning today can save your loved ones and your business a great deal of time, money, and stress tomorrow.


About the Author

James Burns

Estate Planning, Asset Protection, Business and Real Estate Transactions, nutraceutical Law and franchising:


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