October 28, 2014
Dear Liza: My son and I own an S corporation. Can an S corp be put into a trust? If not how would an S corp be put into a trust? Yes! You can put your S corporation into your living trust by transferring your ownership of your shares to yourself, as Trustee of your living trust. As you know (but not all of my readers will), an S Corporation is a special kind of corporation, limited to 100 shareholders, in which the profits and losses of the corporation are passed through to the individual shareholders, to be reported on their individual returns.
Most of my clients who have S corporations are small business people and are the sole shareholders of their S corporations. If that’s the case with you, then you need to get your corporate binder out and follow the formal procedures to reissue those shares to yourself as Trustee. If you have a corporate attorney, then ask that person to help you make sure that you observe the required formalities to transfer the shares.
While you are alive, there’s not a problem with holding the S Corp shares as Trustee. That’s because during your lifetime, your living trust is what’s called a “grantor trust.” After your death, though, your trust isn’t a “grantor trust” any more. At that point, the shares can be held by the trust for only two years withhold jeopardizing the S Corporation status for the other shareholders. For many of my clients, this two year limit is not a problem, because the business won’t continue after the death of the owner.
If you want the trust to hold the shares longer than that, however, you need to have special S Corporation provisions added to your trust, so that the trust can be a permitted shareholder under the IRS’s regulations–only certain kinds of trusts are allowed to hold stock in S Corps. Click here for a good summary of these rules.