I had the same problem. This what worked for me:
- Go to SQL Server Management Studio and run it as Administrator.
- Choose Security -> Then Logins
- Choose the usernames or whatever users that will access your database under the Logins and Double Click it.
- Give them a Server Roles that will give them credentials to create database. On my case, public was already checked so I checked dbcreator and sysadmin.
- Run update-database again on Package Manager Console. Database should now successfully created.
Here is an image so that you can get the bigger picture, I blurred my credentials of course: