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Estate Planning: Is There Anything Special to Consider When Transferring an S Corporation Interest?

An S corporation offers certain tax advantages. Being classified as an S corporation allows income to "passthrough" to its shareholders, meaning profits and losses are reported on the individual tax returns of the shareholders and not at the corporate level.

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As part of your estate planning, you may need to transfer ownership of your S corporation to an entity or trust. S corporations have a special tax status, and if they are transferred to an entity that is ineligible for S corporation status, that status could be lost.

When the transfer of an S corporation is part of estate planning, it is important to note that there are certain rules regarding who can be an S corporation owner. Not just anyone or any type of entity can be an owner. If the transfer of ownership is made to an entity that doesn't meet the eligibility criteria, the S corporation election can be invalidated, and the business may lose its favorable tax treatment.

If ownership goes to your estate after you die, there is a specific timeframe during which the eligibility issue can be fixed, such as transferring the shares to an eligible entity or individual. If S corporation status is lost, it becomes a C corporation. This could result in double taxation.

First, the corporation itself would be taxed on its earnings, and then the shareholders would be taxed again when they receive their portion of the profits. This double taxation can substantially reduce the after-tax income distributed to shareholders.

Proper estate planning is important to ensure that S corporation election is inadvertently voided.

To learn more about S corporation interest in estate planning, please contact Richard Kollauf, a Principal at SVA Certified Public Accountants.

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Biz Tip Topic Expert: Richard Kollauf - JD, CPA, CFP, AEP

Richard Kollauf - JD, CPA, CFP, AEP

Richard is a Principal for SVA Certified Public Accountants and has more than 35 years of experience working in financial, accounting, and legal operations. Richard’s expertise in the multi-faceted financial environment includes business succession planning, tax, investments, finance, mergers and acquisitions, estate planning, and trust administration. He also has experience in estate planning and distribution for complex operational and investment multi-state businesses. Richard provides income tax consulting services to closely-held and family-owned businesses, as well as high net worth individuals.

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