Your Living Trust can hold an S Corporation
October 28, 2014

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.