The shareholder retains the income stream as shareholder distributions from the S-Corporation to the shareholder. The transaction in this case would certainly be structured as a gift of S-Corporation assets to a CRT and then a CRT asset sale to the third party buyer. So the shareholder still gets all of the S-Corporation income as the CRT will make distributions to the S-Corporation over the 20-year period. One must be mindful of the excess net passive investment income issues (best avoided by eliminating any further active trade or business inside the S-Corporation).

It would be great if the shareholder could be the unitrust beneficiary, but there are several challenges. First, we might have a constructive dividend, triggering undesirable tax consequences, upon funding the CRT with a beneficiary other than the S-Corporation. Second, although PLR 9340043 explicitly blessed an S-Corporation settlor/beneficiary (as long as the term does not exceed 20 years), PLR 200203034 specifically held that a trust cannot qualify as a CRT if the S-Corporation settlor names the corporation's shareholder as a beneficiary. Whether the Service is correct or not is perhaps another issue. But the PLR at least causes the cautious practitioner to be very thoughtful in ultimate structuring of the transaction.

Matt Brown Partner

Brown & Streza LLP Attorneys at Law Estate Planning - Business Planning - Income Tax Planning - Charitable Sector - Mergers & Acquisitions 8105 Irvine Center Drive Suite 700 Irvine, California 92618

Telephone: (949) 453-2900 Facsimile: (949) 453-2916

http://www.brownandstreza.com m.brown@brownandstreza.com