Can business income or profits be directed into a family trust, and how would that work? – North Carolina

Short Answer

Yes—under North Carolina law, business income can be directed into a family trust, but the “how” depends on what is actually being transferred. In most cases, the trust either (1) becomes the owner of an interest in the business so it receives distributions, or (2) receives money after the business owner is paid and then contributes that money to the trust. The cleanest approach is usually to transfer an ownership interest (like LLC membership units or shares) rather than trying to “assign” profits without changing ownership.

Understanding the Problem

In North Carolina estate planning, the key question is whether business profits can be routed into a family trust in a way that matches the family’s goals and the business’s legal structure. The decision point is whether the trust will own part (or all) of the business, or whether the business owner will keep ownership and simply move money into the trust after profits are received. This matters because the business’s governing documents and the trust’s terms control who can receive distributions and who can manage the business interest.

Apply the Law

North Carolina generally allows property to be held in trust, and business interests (like LLC membership interests or corporate shares) are a type of property that can be transferred to a trust. Once the trust owns the business interest, the trust can receive distributions the same way any other owner would. Separately, a person can also contribute cash to a trust over time, but that usually means the person receives the income first and then transfers money into the trust.

Key Requirements

• Transfer the right asset (not just “profits”): Usually the trust must own an interest in the business (membership interest or shares) to receive business distributions directly.
• Follow the business’s governing rules: Operating agreements, shareholder agreements, and entity statutes often restrict transfers or require consents before an ownership interest can be moved into a trust.
• Trust administration and accounting: The trustee must keep trust assets separate, track distributions, and follow the trust’s terms when using or distributing money received from the business.

What the Statutes Say

• N.C. Gen. Stat. § 39-6.7 (Transfers to or by trusts) – Treats transfers “to a trust” as transfers to the trustee(s), which helps with titling and conveyancing when assets are moved into trust.
• N.C. Gen. Stat. § 31-47 (Testamentary additions to trusts) – Allows a will to pour assets into an existing trust at death, which is often used alongside a family trust plan.
• N.C. Gen. Stat. § 105-160.2 (NC income tax on estates and trusts) – Explains that North Carolina taxes estates and trusts based on taxable income as determined under federal rules, with state adjustments.

Analysis

Apply the Rule to the Facts: The stated goal is for parents to create wills and a family trust primarily to hold a family home, with an adult child potentially serving as executor and/or trustee. If the parents also want business profits to flow into the same family trust, the practical question becomes whether the trust will own a business interest (so distributions can be paid to the trust) or whether the parents will keep the business in their own names and periodically contribute cash to the trust. Either way, the trust plan should coordinate with the wills so that, at death, any remaining assets intended for the trust can be directed there.

Process & Timing

1. Who sets it up: The business owner (often the parent) as the trust maker/settlor. Where: Typically handled through a North Carolina estate planning attorney; entity changes may also involve filings with the North Carolina Secretary of State depending on the business type. What: A written trust agreement plus an “assignment” or transfer document for the business interest (and updated entity records). When: Before changing payment instructions or distribution routing, because the trust must exist and be properly funded first.
2. Update the business records: For an LLC, this often means documenting the transfer of membership interest to the trustee and updating the company’s membership ledger and operating agreement records. For a corporation, it often means reissuing shares (or updating the stock ledger) in the trustee’s name and confirming any transfer restrictions are satisfied.
3. Route distributions and keep clean accounting: After the trust becomes an owner, the business can make distributions to the trustee (as owner). The trustee deposits funds into a trust bank account and uses or distributes them only as the trust document allows, keeping records for beneficiaries and tax reporting.

Exceptions & Pitfalls

• Trying to assign “profits” without transferring ownership: Many businesses cannot simply redirect profits to a trust unless the trust is actually an owner entitled to distributions, or the owner receives the money first and then contributes it to the trust.
• Transfer restrictions and consents: Operating agreements and shareholder agreements commonly restrict transfers to trusts or require approval. Ignoring those rules can trigger a dispute or make the transfer ineffective.
• Mismatch between trustee role and business management: If the trust owns a business interest, the trustee may have voting/management responsibilities (or at least oversight duties). The trust should address who controls business decisions, what happens if the trustee is not involved in the business, and how conflicts are handled.
• Tax reporting complexity: Trust-owned business interests can change how income is reported. North Carolina taxes trusts based on taxable income determined under federal rules, with state adjustments, and trust distributions can affect who ultimately bears the tax. A tax attorney or CPA should review the structure before implementation.

Conclusion

In North Carolina, business income can be directed into a family trust, but it usually works best when the trust owns an interest in the business so it can receive distributions as an owner. Otherwise, the business owner typically receives the income first and then contributes money to the trust. A practical next step is to create and sign the family trust and then complete a written transfer of the appropriate business interest to the trustee (and update the business’s records) before changing any distribution routing.

Talk to a Estate Planning Attorney

If you’re dealing with setting up a family trust and coordinating how family assets (including possible business distributions) should flow into that trust, our firm has experienced attorneys who can help you understand your options and timelines. Call us today at (919) 341-7055.

Disclaimer: This article provides general information about North Carolina law based on the single question stated above. It is not legal advice for your specific situation and does not create an attorney-client relationship. Laws, procedures, and local practice can change and may vary by county. If you have a deadline, act promptly and speak with a licensed North Carolina attorney.