United States

Grantor's death can compromise S corporation's status


For estate tax purposes, individuals often establish living or ‘grantor’ trusts to hold their assets. Although the assets are held in trust, the grantor is typically treated as the owner of the assets for income tax purposes.

In the case of S corporation shareholders, individuals who transfer their S corporation shares into a living trust will still be treated as the owner of the shares and, therefore, not compromise the corporation’s subchapter S status.

Once the grantor dies, however, issues often arise.

At that point, the trust generally becomes irrevocable, but will remain an eligible shareholder—but only for two years after the decedent’s death. The trust administrator must act within that two-year window to ensure the corporation’s status is not compromised, often by making either a qualified subchapter S trust or electing small business trust election for the trust.

If these steps are not taken, the S corporation status may be terminated. Especially in the case of a living trust, it is possible that an S corporation may be unaware of the death of the grantor, as the legal title to the shares is often unchanged. In addition, the individual administering the estate may not be aware of these important S corporation rules.

It is vital that S corporations monitor changes in the legal title to their shares and remain aware of events that could change the identity of a deemed shareholder for income tax purposes, such as in the case of the death of the grantor of a living trust.

Scott Ruby

Senior Director

Scott focuses on advising specialty finance companies on optimizing tax positions and preserving working capital. Contact him at scott.ruby@rsmus.com.

Areas of focus: Federal TaxSpecialty Finance

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