August 16, 2021
Can a Trust Hold Ownership of a Law Firm? Nope.
A common question in our practice is whether a trust can hold an ownership interest in a California law firm. This issue arises because partners who have a revocable living trust as part of their estate planning wish to hold all of their assets, including law firm ownership, in the trust to obtain its tax, administrative, and other benefits.
Unfortunately, an ownership interest in a California law firm cannot be held in a trust. For either limited liability form of a law partnership—LLP or professional corporation—the State Bar Rules, Business and Professions Code, and the Corporations Code all prohibit ownership of a law firm by a trust, which of course is not a licensed person and not a person at all. Put another way, there is no authority from the State Bar of California, which is the entity from which the limitations on liability flow and that regulates lawyers and law firms, to support the position that ownership in a law firm can be held in a trust.
Neither is the trust the same as the lawyer, as some might suggest. The fact that the trust is a separate legal entity is more or less the whole point. Sub-trusts, or other contraptions and contortions, don’t solve the problem.
If your ownership interest is held in a trust in your firm’s governing documents, this issue will require a close analysis and a potential correction. The risk is that the limited liability protections of the LLP or the PC will be destroyed because the transfer—to a trust—is invalid. That’s a big risk, obviously, and one that requires careful attention if you have transferred, or are considering transferring, your ownership interest in a law firm into a trust.