A dentist, doctor, lawyer, architect, and a psychologist, all friends, are out to dinner and get to talking about the future of their respective practices. They each have been successful and want the peace of mind that their practice and their families are protected should something happen to them. Each of them holds a professional license in California, works independently (no partners), and has formed a professional corporation.
The dentist speaks up and asks,
“Will a professional corporation protect my family?”
Professional corporations do provide certain advantages under the corporate structure: limited liability protection, favorable tax treatments, and other incentives. However, it is not a substitute for estate planning, such as creating a revocable living trust.
That begs the question the (non-estate planning) lawyer then makes,
“Can I put my professional corporation into my joint revocable living trust I set up with my spouse?”
The short answer is yes.
Per California law, ownership rights of a professional corporation can be transferred to a trust if the trustee and beneficiaries are all licensed. California Department of Consumer Affairs Legal Opinion (79-5). Otherwise, only the individual who holds the professional license can own shares in a professional corporation, and transfer of those shares can only occur to another licensed individual or professional corporation. California Corporations Code § 13407.
The doctor, whose is not married to another doctor, wonders what happens then.
“But what if my spouse or beneficiaries are not licensed professionals?”
Transferring a professional corporation is still possible when there is a non-licensed spouse, but certain conditions must be met:
- The trust must specify that only the licensed spouse has exclusive control and powers in relation to the shares of the professional corporation.
- If the licensed spouse is the first to die, then the shares must be sold and proceeds will be distributed according to the terms of the trust. There is generally a six-month timeline for this to occur. However, a dental practice may be kept open and running by a non-licensed successor trustee for up to twelve months following the death of a licensed dentist.
- If the non-licensed spouse dies first, then the licensed spouse maintains legal title to she shares of the professional corporation and their children or other beneficiaries do not have any equitable title to those shares but only a beneficial interest received from the sale of the shares of the professional corporation in the future.
The architect, feeling a bit overwhelmed by this conversation speaks up next to ask,
“What’s the benefit?”
The main reason is to avoid probate. As with any other asset you put into your trust, it allows that asset to pass to your designated beneficiaries without having to pass through probate (which is time-consuming and costly). Avoiding probate allows your heirs and beneficiaries to handle the business efficiently upon your passing and without wasting time where business value could diminish. Instead your heirs can sell the business during its peak value horizon.
By this point, the psychiatrist has been nodding along eagerly and interjects,
“How can I put my professional corporation into a revocable living trust quickly?”
Hold on, and take a pause. Just because you can does not mean you should. Remember, estate planning is not a one-size-fits-all model. It is customized and all solutions are not created equal.
If you are a dentist, doctor, lawyer, architect, psychiatrist or other licensed professional in California and have an ownership interest in a professional corporation, it is important that you first consult with an estate planning attorney in your area before taking any action. They can best explain the consequences and ramifications of putting your professional corporation into your revocable living trust. Depending on your circumstances, a different strategy might make more sense.
If you Need Help, It Would Be Our Pleasure…
Kevin Snyder is a husband, father, and an Orange County estate planning attorney and elder law attorney at Snyder Law, PC in Irvine, California. He’s all about family and passionate about estate planning, elder law, and veterans. He founded Snyder Law to help families from Orange County, Los Angeles County, and Southern California plan to protect what matters most: their loved ones, their dignity, and their legacy.