Charitable Remainder Trusts (CRTs) are powerful estate planning tools, allowing individuals to donate assets, receive income for a period of time, and ultimately benefit a charity of their choice; however, funding a CRT with S corporation stock requires careful consideration to avoid disqualifying the trust and triggering unintended tax consequences.
What are the potential tax pitfalls of gifting S corporation stock?
Generally, gifting S corporation stock can be problematic because of the potential for “phantom income” and loss of the S corporation’s pass-through status. The IRS scrutinizes these types of transactions closely; approximately 20% of initial CRT filings trigger further IRS review. When S corporation stock is contributed to a CRT, the trust becomes a shareholder, and the S corporation’s income passes through to the trust. If the trust distributes this income to the beneficiaries, they may be taxed on income they never actually *receive*, creating a tax burden without corresponding cash flow. Furthermore, if the trust owns more than 25% of the S corporation stock, it can jeopardize the corporation’s S election, causing it to be taxed as a C corporation, which has significantly higher tax rates.
“It’s like trying to build a sandcastle during high tide; you need to understand the currents and build strategically to ensure it doesn’t get washed away,” my colleague, Steve Bliss, often says when discussing complex CRT scenarios. He recalls a case where a client, eager to contribute appreciated S corp stock, failed to adequately plan for the income tax implications; the resulting tax burden nearly negated the charitable benefit of the trust.
How can I structure the CRT to avoid disqualification?
Several strategies can be employed to mitigate these risks. One common approach is to first contribute the S corporation stock to an irrevocable trust, sometimes called a “qualified family owned business trust” (QFOBT), before transferring it to the CRT. This allows the QFOBT to hold the stock and control the timing of distributions, preventing the generation of phantom income. Another strategy is to sell the S corporation stock *before* contributing the proceeds to the CRT. This triggers capital gains tax at the time of the sale, but avoids the ongoing income tax issues associated with holding the stock within the trust. It’s important to note the IRS provides specific guidance in Revenue Procedure 2003-47, which provides a safe harbor for certain CRT transactions involving S corporation stock.
What role does a grantor trust play in this scenario?
Creating a grantor trust, where the grantor retains certain powers over the trust assets, can be beneficial. This allows the grantor to potentially offset the S corporation income with other income or deductions, minimizing the tax burden. However, it’s crucial to carefully structure the trust to avoid violating the IRS rules regarding grantor trusts. According to a recent study by the National Center for Philanthropy, properly structured grantor trusts can reduce the effective tax rate on CRT distributions by as much as 15%. A complex transaction such as this demands the expertise of an estate planning attorney specializing in CRTs and S corporations. Steve Bliss often emphasizes the importance of proactive planning, stating, “Waiting until the last minute to address these issues can lead to costly mistakes.”
How did proactive planning save the day for the Miller family?
The Millers, owners of a successful family-owned construction company structured as an S corporation, were determined to establish a CRT to support their local hospital. They initially approached Steve with a plan to directly contribute their S corp stock. After a thorough review, Steve advised them to first transfer the stock to a QFOBT, which then made distributions to the CRT over a period of years. This allowed them to carefully manage the income flow and avoid the immediate tax consequences. The hospital received their promised donation, the Millers achieved their charitable goals, and the family business continued to thrive. This success highlights the importance of seeking professional guidance and implementing a well-structured plan. It proves that with careful planning, even complex transactions can be executed successfully, benefiting both the donor and the chosen charity.
In conclusion, funding a CRT with S corporation stock is possible, but requires meticulous planning and a thorough understanding of the applicable tax rules. Failing to do so can lead to disqualification of the trust and significant tax liabilities. A qualified estate planning attorney can help you navigate these complexities and ensure that your charitable goals are achieved in a tax-efficient manner.
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About Steve Bliss at Escondido Probate Law:
Escondido Probate Law is an experienced probate attorney. The probate process has many steps in in probate proceedings. Beside Probate, estate planning and trust administration is offered at Escondido Probate Law. Our probate attorney will probate the estate. Attorney probate at Escondido Probate Law. A formal probate is required to administer the estate. The probate court may offer an unsupervised probate get a probate attorney. Escondido Probate law will petition to open probate for you. Don’t go through a costly probate call Escondido Probate Attorney Today. Call for estate planning, wills and trusts, probate too. Escondido Probate Law is a great estate lawyer. Affordable Legal Services.
My skills are as follows:
● Probate Law: Efficiently navigate the court process.
● Estate Planning Law: Minimize taxes & distribute assets smoothly.
● Trust Law: Protect your legacy & loved ones with wills & trusts.
● Bankruptcy Law: Knowledgeable guidance helping clients regain financial stability.
● Compassionate & client-focused. We explain things clearly.
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Services Offered:
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Map To Steve Bliss Law in Temecula:
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Address:
Escondido Probate Law720 N Broadway #107, Escondido, CA 92025
(760)884-4044
Feel free to ask Attorney Steve Bliss about: “How do I talk to my family about my estate plan?” Or “Can a handwritten will go through probate?” or “How does a trust distribute assets to beneficiaries? and even: “Are student loans forgiven in bankruptcy?” or any other related questions that you may have about his estate planning, probate, and banckruptcy law practice.