S-Corp Sale to CRT

S-Corp Sale to CRT

Forum topic posted in Forum on 22 January 2009| 5 comments
audience: | last updated: 22 January 2009
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Joined: 02/20/2006
Points: 30
I have a client who owns an S-Corp worth about 7 million. He wants to sell the business in about 5 years. Even if it stays at the same level as it is today, there will be a substantial tax on the sale since he built the business from the ground up. Would he be able to put an S-Corp in a CRT or will he have to convert to a C-Corp to do it? What would be the procedure here to be within legal guidelines. Thank you, L. Ioja

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xpanel (not verified)
great
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.
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Joined: 06/09/2009
Points: 15
Having just forwarded this
Having just forwarded this article to my colleagues, I will be very disappointed if you are incorrect about the recontribution of 2008 withdrawals
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Joined: 10/05/2005
Points: 165
Why make S-Corp the beneficiary?
It would seem that if the S-Corp is sold, the ultimate donor (the S-Corp's original owner) loses the income stream. Is there any reason the S-Corp can't name the donor as the beneficiary? If the donor were the beneficiary, it would also enable the trust to pay income for life rather than for a term of years.
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Joined: 08/29/2002
Points: 45
The S-Corp. must be the beneficiary
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
csangster's picture
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Joined: 10/05/2000
Points: 229
S-Corp stock into a CRT
The transfer of S-corp stock to a CRT will destroy the S election for the company--generally not a desireable result. Also, any distribution from a S-corporation, regardless of its character at the S corporation level, is treated as unrelated business taxable income and as such will draw a 100% income tax on the income generated. Again, not a desirable result One way to get around this problem is to have the S-corp transfer some of its assets to a 20-year CRT. The assets of the S corporation would need to be assets that don't generate trade or business income, but if there are those types of assets, then the S-Corp could be the grantor on such a CRT and the CRT payments would be payable to the S-corp which in turn would distribute the payments to the shareholders (the individuals you intend to benefit from the payments). Be sure that the transfer of assets to the CRT from the S-corporation is not "substantially all" of the assets in order to avoid triggering adverse sales consequences under section 337(d) of the IRS Code. Not a perfect solution but one that does allow some savings of capital gains taxes--on the assets transferred. Be sure to work with a an attorney who is well versed in these types of transactions because there are many mine fields to avoid.
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