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The S Corporation and the Revocable Living Trust

The S Corporation and the Revocable Living Trust

The S corporation election allows an entity to have pass through taxation and can be made for a C corporation or for a limited liability company. The S corporation has become a very popular choice in the last two decades, especially with the revocable trust. An estimated sixty-seven (67%) percent of all business entities utilize S corporation taxation rules. However, such tax advantages come at a steep price. Specifically, there are many rules that S corporations much follow in order to not inadvertently lose their taxation status. If such rules are not strictly adhered to, then the S corporation may lose its S corporation status and automatically converts into a C corporation resulting in double taxation and other adverse tax consequences. Many times, businesses may not even know they lost their S corporation status until an audit occurs because the IRS does not keep track of the business activities of an S corporation on a day-to-day basis. Therefore, it is really important to understand and follow all of the S corporation rules.

The Revocable Trust and S Corporation Shares

Such restrictions especially make estate planning with S corporations and the revocable trust more challenging. Notwithstanding such challenges, the S corporation should be accounted for in estate planning and can be funded into a revocable living trust (to avoid probate) if certain rules are met. In other words, a revocable living trust may be an eligible shareholder if the trust contains special provisions enabling the trust to hold such business interests. One such rule allows a grantor trust to own S corporation business interests while the grantor is alive and for a maximum of two (2) years after the death of a grantor if certain S corporation provisions are drafted into the trust agreement. Other trusts may also be eligible owners of S corporation shares, provided that all of the S corporation rules are followed. Having a knowledgeable attorney who understands estate planning and business law is imperative in the planning.

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