September 5, 2013

It is important for those who hold shares in an S Corporation to carefully plan for the distribution of those shares. The stakes for these transfers are high, as a faulty transfer may result in the inadvertent termination of the corporation’s S status. A recent article discusses several considerations to make when planning for the transfer of S Corporation shares.

Individuals or entities such as estates or certain types of trusts may hold shares in an S Corporation. The types of trusts that are qualified to hold S Corporation shares include grantor trusts, qualified Subchapter S trusts, electing small business trusts, testamentary trusts, and voting trusts. All other trusts are considered to be non-qualifying shareholders.

If a shareholder’s estate plan inadvertently transfers his or her S Corporation shares to a non-qualifying shareholder, not only will the S Corporation be inadvertently terminated, but corporate level taxes may be triggered on the other shareholders. To avoid this fate, it is important to review your estate plan to ensure that your plan does not transfer S Corporation shares to a non-qualifying trust. On the other hand, the right kind of trust can be a powerful tool to achieving Estate Planning, Asset Protection & Business Succession Planning goals.

S Corporations can also work to avoid costly missteps by employing shareholder agreements, which provide that the shares may only be transferred to qualified shareholders. Additionally, S Corporation shareholders should carefully monitor shareholder trusts to ensure that the trusts remain eligible to hold S Corporation shares.