When a trust includes an operating business, trustees often face complex decisions about whether and how to continue operations during trust administration. In Los Angeles, where many trusts hold family businesses or investment ventures, understanding the legal boundaries is crucial for trustees who want to fulfill their fiduciary duties while preserving asset value. The process of trust administration requires careful navigation of California laws, tax implications, and potential liability risks.
At Kavesh, Minor & Otis, our Los Angeles trust administration lawyers regularly advise trustees on managing business assets during trust administration. This guide explains the key considerations, limitations, and protective measures trustees should understand when overseeing business operations as part of their trust administration responsibilities.
Can a Trustee Operate a Business During Trust Administration?
California law permits trustees to operate businesses during trust administration, but with significant limitations. The trustee's authority depends primarily on the trust document's terms and the type of business involved. Most well-drafted trusts include specific provisions about business operations, but when instructions are unclear, trustees must follow California Probate Code guidelines.
Key factors determining a trustee's authority:
- Express trust terms. Some trusts explicitly require continuation of business operations, while others mandate liquidation.
- Business type. Operating a sole proprietorship differs significantly from managing an LLC or corporation.
- Duration. Temporary operation during sale preparations is more easily justified than indefinite management.
- Beneficiary interests. Courts often examine whether continuing operations aligns with beneficiaries' best interests.
The trust administration lawyers at Kavesh, Minor & Otis emphasize that trustees who choose to operate a business assume heightened legal responsibilities. Unlike passive asset management, running a business requires active decision-making that could expose the trust—and the trustee personally—to liability if not handled properly.
Legal Limitations on Business Operations by Trustees
Trustees operating businesses during trust administration must work within several legal constraints designed to protect beneficiaries:
1. Fiduciary Duty Requirements
California Probate Code §16000-16015 imposes strict fiduciary standards. Trustees must:
- Prioritize beneficiary interests over personal gain
- Avoid conflicts of interest (e.g., cannot lease trust property to themselves)
- Maintain detailed records of all business decisions
- Obtain court approval for major actions when required
A breach of these standards could look like a trustee paying themselves an excessive "management salary" or refusing legitimate buyout offers from beneficiaries could face removal or liability.
2. Prudent Investor Rule Adaptations
While the Uniform Prudent Investor Act focuses on investment decisions, its principles apply to business operations:
- Diversification requirements. Holding 100% of assets in one business may require justification.
- Risk assessment. Trustees must evaluate whether continuing operations exposes the trust to unreasonable liabilities.
- Professional consultation. Courts expect trustees to seek expert advice about complex business matters.
3. Specific Business Structure Considerations
The legal framework for operating a business during trust administration varies significantly depending on the entity type. Trustees must understand how different business structures affect their rights, responsibilities, and potential liabilities.
- Sole proprietorships. These present the highest risk for trustees, as they offer no liability protection. The trustee becomes personally responsible for all business debts and obligations.
- General partnerships. These require careful review of partnership agreements, which often contain provisions triggered by a partner's death or incapacity.
- Limited liability companies (LLCs). LLCs generally provide the most flexible structure for trust-owned businesses. However, trustees must comply with operating agreement provisions regarding membership transfers and management rights.
- Corporations. These offer clear governance structures through bylaws and shareholder agreements, but trustees may need to navigate complex stock transfer restrictions or right-of-first-refusal clauses.
Regardless of structure, trustees should immediately review all organizational documents (articles of incorporation, operating agreements, partnership contracts) to identify any restrictions on trust ownership or management authority.
The Los Angeles trust administration lawyers at Kavesh, Minor & Otis frequently assist with interpreting these documents and developing compliant management strategies.
Protective Measures for Trustees Operating Businesses
Trustees can take several steps to minimize personal liability and fulfill their duties properly during trust administration:
Documentation Practices
Meticulous record-keeping serves as the foundation for trustee protection. The trust administration team at Kavesh, Minor & Otis recommends implementing systems that:
- Create business decision logs recording the rationale behind significant operational choices
- Maintain separate accounting systems for trust and business finances to prevent commingling
- Document all beneficiary communications regarding business operations
- Preserve professional consultation records demonstrating prudent decision-making
These practices become critical evidence if beneficiaries later challenge business decisions. For example, in some cases, detailed minutes showing regular consultation with industry experts could potentially help a trustee defeat allegations of mismanagement.
Insurance Coverage Review
Trustees should immediately verify and potentially enhance insurance protections by:
- Confirming business liability policies adequately cover current operations
- Securing trustee errors & omissions (E&O) coverage that specifically includes business management activities
- Considering umbrella policies for high-risk operations or valuable assets
- Reviewing director & officer (D&O) policies for corporate entities
Insurance gaps can create personal liability exposure. Even something like an uninsured environmental risk could potentially cost a trustee millions before securing appropriate coverage.
Professional Assistance Networks
Prudent trustees assemble teams of specialists to support business operations, including:
- Industry-specific consultants to evaluate operational decisions
- CPA/tax advisors for ongoing compliance and filings
- Business valuation experts for sale or restructuring decisions
- Legal counsel to review contracts and regulatory compliance
The cost of professional advisors is typically reimbursable from trust assets when reasonably incurred.
Court Petition Strategies
When facing major decisions with potential controversy, trustees can seek court approval through:
- Petitions for instructions regarding ambiguous trust terms
- Requests for confirmation of proposed business transactions
- Applications for expanded powers when trust provisions are restrictive
Court approval provides near-absolute protection from later challenges to approved actions.
When Trustees Should Consider Selling or Winding Down
Continuing operations isn't always advisable. Our Los Angeles trust administration lawyers often recommend sale or liquidation when:
- The trust lacks sufficient liquidity. Businesses requiring capital infusions may drain other trust assets.
- Beneficiaries demand distribution. California law generally requires timely distributions unless the trust specifies otherwise.
- Specialized knowledge is required. Trustees unfamiliar with the industry risk mismanagement claims.
- Market conditions favor sale. The trustee's duty to maximize value may dictate selling rather than operating.
How Kavesh, Minor & Otis Assists With Business-Containing Trusts
The trust administration attorneys at Kavesh, Minor & Otis provide comprehensive guidance for trustees managing businesses, including:
- Initial trust review. We analyze the trust instrument to determine operational authority limits and identify any problematic clauses.
- Compliance systems. Our team develops customized record-keeping templates and decision protocols that satisfy fiduciary requirements while allowing operational flexibility.
- Beneficiary communication. We help trustees craft clear explanations about business decisions to prevent disputes. This includes coordinating family meetings for multi-beneficiary trusts.
- Court interactions. When court approval is needed for major decisions, we prepare persuasive petitions demonstrating how the proposed action serves beneficiary interests.
- Exit strategy planning. Whether preparing a business for sale, transfer to beneficiaries, or liquidation, we guide trustees through each step while minimizing tax consequences and liability exposure.
- Dispute resolution. If beneficiaries challenge business decisions, we employ mediation strategies or defend the trustee's actions in court when necessary.
Operating a business during trust administration presents unique challenges that require careful legal navigation. While continuing operations can preserve value, trustees must balance this against their fiduciary obligations and personal liability risks.
For trustees facing these complex decisions, the experienced Los Angeles trust administration lawyers at Kavesh, Minor & Otis offer practical guidance tailored to California's legal landscape. Our attorneys help trustees answer common questions they may have about the probate process, fulfill their duties confidently while protecting both trust assets and themselves.
