Transferring S-Corporation Shares Requires Caution

If you hold shares in an S Corporation, it is important that you carefully plan for the transfer of your shares. Without careful transfer, it is possible for shareholders to inadvertently terminate the Corporationā€™s S election during the process of estate planning. A recent article discusses how to avoid this fate.

Subject to certain exceptions, qualified S Corporation shareholders include individuals, estates, and certain types of trusts. Qualified trusts include grantor trusts, qualified Subchapter S trusts, electing small business trusts, testamentary trusts, and voting trusts. Importantly, if you start a qualifying trust and plan to transfer S Corporation shares to it, be sure that you meet the various and specific requirements of the Internal Revenue Code.

If S Corporation shares are transferred from a qualified shareholder to a non-qualified shareholder, the corporationā€™s S status will be inadvertently terminated. Due to this termination, the transfer will trigger corporate level tax liability for the other shareholders. It is therefore important to consult an attorney or financial advisor before you transfer S Corporation shares into any trust.

In order to prevent shareholders from inadvertently transferring their shares to non-qualified entities, S Corporation shareholders should draft a shareholder agreement that limits share transfers to only qualified shareholders.

For assistance in transferring shares in an S Corporation, contact us at (626) 696-3145.

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