Can you waive worker’s compensation if your shares are in a family trust? With the new law change, the answer has changed! Use our flow chart to help determine if you are eligible to waive!

You, like most small business owners, took the prudent action of creating an estate plan. You formed a revocable trust, and then formally transferred the ownership of the stock from yourself over to your family trust. What was good foresight then, could now block you from being able to waive worker’s comp.

How is your trust preventing you from waiving worker’s comp? What can you do about this situation? You have a right to know the facts because you deserve the chance to protect your small business. In this article, we break down this oversight in the recent California worker’s compensation law change and explain what solutions are available to you.

How Family Trusts Relate to Waiving Worker’s Compensation

At the start of 2017, California implemented a change in the law about who could waive workman’s comp. This change affected officers, directors, and shareholders.

Changes in a Section of the Law

Previously, the law allowed any owners who had any percentage of stock to waive worker’s compensation and specifically addressed the ownership of stock that was held in a trust. It included a specific way to determine who was the employee and whether you would or would not be able to waive the necessity of workman’s comp.

With the new law, the state legislature removed that section and replaced it. One of the changes in that section states that if he/she [the officer or director] owns 15% of the issued outstanding stock of the corporation and executes a written waiver, then you can forgo worker’s comp coverage. Here, important wording has been changed to indicate a 15% stock minimum and specifically states ‘he or she’ in the new section. As well they must stand under penalty of perjury that they are a qualifying officer or director.

The rub—Does ‘He or She’ Own the Stock or Does the Family Trust Own It?

The law doesn’t say “15% of stock held in your family trust”—and it doesn’t address an exclusion if you do have a family trust. As well, it doesn’t account for the relationship of the beneficiaries or the trustees—it doesn’t address anything like that.

Many, many people have prepared their stock certificates so that the ownership is in the name of the trust—and that’s something that most lawyers previously recommended. If you hold your stock in your family trust’s name, you are technically no longer an owner of the stocks—your trust is actually the owner. So, if you have transferred your share of the stocks over to your family trust, you cannot sign the waiver under penalty of perjury for worker’s compensation because you technically don’t own the stocks.

So, What Can You Do about Waiving Worker’s Compensation?

If you want to waive coverage from workman’s comp—and if your stock is in the family trust—you need to retitle that family trust over to your name. This change will ensure you are in compliance with the new section of the law. And subsequently, you need to prepare an assignment assigning the stock over to your family trust. You’ll complete a schedule of assets which lists the stock to be transferred into the trust as intended by the creator (you).

All of this legal paperwork must be documented correctly to stand as valid. That means updating your corporate records to reflect any changes in stock ownership and changes of the estate. If properly notated, you are ensuring protection from any audits by the state for adequate worker’s comp coverage.

My Name or the Family Trusts Name—California Government Will Understand!

Some people may just take the opinion that ‘Oh well, it won’t be a problem. If it is in my name, or if it is in the name of my trust, I still control all of it so what is the difference?’

However, the state may not see that the same way. And if they don’t, it’s a costly mistake. You are putting yourself at risk because all it takes is for you to get the wrong person with the state to audit your small business. They could determine that you are not in compliance with the law and that you owe them worker’s compensation premiums for the many past years plus the penalty.

The problem is you are not strictly following the letter of the law: you no longer own the stock. They didn’t issue new legislature about this—and further—they changed a law that previously use to address ownership of stock in a trust. Because they removed the section that related to ownership of stock in a family trust, they possibly don’t consider stock in a family trust equal to owning the stock in your own name.

Adjust Your Family Trust Corporate Records to Waive Worker’s Compensation in California

In the event of your death, you don’t want your family scrambling with the court while your business disappears. That’s why you established the family trust in the first place. But you also know the cost to cover yourself for worker’s comp could potentially sink your small business over time. To keep you covered on both sides, but still protected under the new section of California law, retitle your stocks and document it in your corporate records.

Work with lawyers that specialize in small businesses, and do the navigating and interpreting of the law so you don’t have to guess. Contact us now to draft and update your corporate records, and add complete legal protection to your small business and stocks!