Estate Planning for Small Business Owners and Real Estate Investors: Why Your LLC Should Be in a Trust

Jennifer Georgianne
Jul 6, 2025
5 min read

If you own a small business or investment property through an LLC, you’re already thinking ahead about asset protection and liability. But have you planned for what happens to those business or real estate interests if you become incapacitated or pass away?

At East County Estate Planning, PC, we help entrepreneurs, landlords, and professionals in Kirkland, Redmond, Bothell, Woodinville, Sammamish, and King County, Washington, as well as La Mesa, Santee, El Cajon, and San Diego County, California, integrate their LLCs and small businesses into a comprehensive estate plan—usually through a revocable living trust.

Let’s walk through how this planning works, why it matters, and how it can help reduce tax and probate headaches for your loved ones.

Why Estate Planning for LLCs and Small Businesses Is Crucial

Your LLC or closely held business isn’t just a line on a balance sheet—it may be one of the largest and most complex assets in your estate. And without proper planning, it could create major legal and financial problems for your family.

Without a trust or succession plan in place:

Your heirs may need to go through probate to transfer LLC membership interests
The business could be frozen while the court processes your estate
Disputes may arise between family members or co-owners
Valuable tax planning opportunities may be lost
Your real estate or rental income stream could be disrupted

In contrast, when your LLC is held in trust and properly structured, it can continue operating smoothly—without court delays or unnecessary taxes.

Example: The Real Estate Investor Without a Plan

Consider this example:

Maria owns three rental properties in La Mesa and El Cajon, all titled under her single-member LLC, “Maria Homes, LLC.” She earns consistent rental income and has built significant equity in each property.

But when Maria unexpectedly passes away, her LLC membership interest wasn’t in a trust. The probate court must now:

Determine the rightful heir to the LLC interest
Assign value to the properties
Address potential capital gains and depreciation recapture
Re-title the LLC membership
Possibly require the LLC to dissolve, depending on the operating agreement

This process delays rental income to her children for months (or longer), creates tax complications, and puts her carefully managed portfolio at risk.

The Better Approach: Holding Your LLC in a Revocable Living Trust

A revocable living trust is one of the best tools for business and real estate owners. Here’s how it works:

You create a revocable trust and transfer your LLC membership interest to the trust
You remain in full control of the business as the trustee during your lifetime
Upon your death or incapacity, a successor trustee takes over
The LLC continues uninterrupted, and ownership passes outside of probate

You can also include specific instructions in the trust for managing, selling, or winding down the business—customized to your goals.

Creating LLCs for Real Estate: Why It’s a Smart Move

If you own real estate outside your primary residence—like a rental in San Diego, a vacation cabin in Sammamish, or a duplex in Redmond—placing those properties into LLCs is a smart asset protection strategy.

Why?

It limits personal liability: If someone is injured on the property or sues, they can only reach the LLC’s assets—not your personal savings or home.
It organizes income and expenses for tax purposes
It makes succession planning easier when paired with a trust
It may help separate liabilities between multiple properties (by using one LLC per property or series LLCs in certain jurisdictions)

Once the LLC is formed, the ownership interests (not the property itself) are transferred to your revocable trust, keeping the LLC in the estate plan and ensuring continuity.

Tax Considerations of Trust-Owned LLCs

Trusts, LLCs, and taxes can get complicated—but here are the basics:

1. No Tax Change During Lifetime

If you’re the trustee and beneficiary of your revocable trust, there’s no change in how the LLC is taxed when you move it into the trust. You’ll still report income on your personal return (Form 1040 and Schedule E for rental income).

2. Step-Up in Basis at Death

One of the most powerful tax benefits of trust planning is the step-up in basis. When you pass away, your beneficiaries receive a new cost basis in the LLC’s underlying assets—typically the fair market value at the time of death.

This can eliminate capital gains taxes if they sell shortly after inheriting. Without trust planning, the ownership may pass in a way that delays or complicates this tax advantage.

3. Avoiding Gift Tax

If you plan to transfer interests in an LLC to children or other family members during your life, your trust can include gift strategies that take advantage of annual exclusions, discounting, or even intentionally defective grantor trust (IDGT) planning. These advanced strategies help you transfer wealth tax-efficiently.

Trust Planning for Business Succession

A trust also allows you to create succession plans that guide what happens to your business or rental properties after you’re gone:

Should the company be sold or continue operating?
Who will manage it?
Should beneficiaries receive equal shares, or should ownership reflect involvement in the business?
Can a surviving spouse or child buy out others?

By addressing these questions now—through your trust and operating agreements—you prevent family disputes and financial uncertainty later.

Serving Small Business Owners and Investors in California and Washington

At East County Estate Planning, PC, we help business owners and real estate investors across:

California: La Mesa, Santee, El Cajon, San Diego County
Washington: Kirkland, Redmond, Bothell, Woodinville, Sammamish, King County

We’ll help you:

Form and structure LLCs properly
Draft or update operating agreements
Fund your trust with LLC interests
Plan for tax efficiency and business continuity
Keep your family out of probate court

Build a Plan That Works for Your Business and Your Family

Don’t let your hard work disappear in a cloud of taxes, court delays, or family tension. By creating the right LLC and trust structure, you ensure that your business and real estate investments continue to support your family—on your terms.

📞 Contact East County Estate Planning, PC today to schedule your consultation. We’ll help you build an estate plan that protects your business, avoids probate, and minimizes taxes—while giving your loved ones the clarity they’ll need.

Office Locations

📞 Call us today at (619) 566-8084 or visit www.ecestateplanning.com to schedule your free consultation.

Disclaimer: The information provided in this blog is for general informational purposes only and does not constitute legal advice. Reading this blog or contacting our firm through this website does not create an attorney–client relationship. You should not act or refrain from acting based on any content included in this blog without seeking appropriate legal or other professional advice specific to your situation.