Thursday April 25, 2024

4.14.3 Sub S Unitrust

Sub S Unitrust
While a charity is a permissible S corporation shareholder, a split-interest trust like a charitable remainder trust ("CRT") is not. Sec. 1361(e); PLR 8922014. If a CRT receives S corporation stock from a donor or purchases S corporation stock, the S corporation will be disqualified and reclassified as a C corporation. Such reclassification will likely be upsetting to the corporation's other shareholders and will cause the corporation's income to be taxed twice (as is the case with all C corporations), once at the corporate level and once at the shareholder level.

Example 4.14.3

Charity Chesterfield creates a CRT and contributes her stock in Caftans Unlimited, an S corporation, to the trust. As a result of her contribution of Caftans Unlimited stock to the CRT, Caftans Unlimited is disqualified as an S corporation and converted a C corporation. The other shareholders of Caftans Unlimited are very unhappy with Charity Chesterfield for causing this result and she decides to move to the Caribbean to avoid their censure. Charity Chesterfield wishes she had consulted with a qualified professional before she gave her Caftans Unlimited stock to the CRT and will never contribute S corporation stock to a CRT again!

While S corporation stock cannot be used to fund a CRT, S corporation assets can be used to fund a CRT. See GiftLaw Pro 4.14.5 to learn more about gifts of S corporation assets to CRTs.

Case Studies on Sub S Unitrust

S Corporation Gifts - Strategies and Hurdles Every Advisor Should Know, Part 3 - The Oil & Vinegar CRT:   Tommy Ely, 58, owns and operates eight car dealerships spread throughout the city and surrounding areas. Founded in 1977, Tommy is the sole shareholder of Ely Motorsports, Inc., an S corporation. The eight car dealerships represent mainly high-end, luxury car lines.

S Corporation Lease Unitrust:   Bill Lee is age 64 and owns three car dealerships spread throughout the city. Founded in 1977, Bill and his spouse Amy are sole shareholders of Lee Motorsports, Inc. (LMI), an S corporation. The car dealerships represent mainly high-end, luxury car lines. Specializing in providing unparalleled customer service before, during and after the sale, Lee Motorsports has flourished and grown. It produces over $30 million annually in sales and consistently ranks among the best dealerships.

George's "Green" Sub S Unitrust:   George Green was a man of humble beginnings. He was born in Bulgaria and lived with his parents on their farm. But George was a diligent student and was determined to become a successful business owner. After high school he obtained permission to come to America to go to college.
S Corporation Unitrust:   Mary Smith, age 50, is the sole shareholder of an S corporation which has a current fair market value of $2 million. The corporation currently holds various business assets and, in addition, a parcel of property valued at $1 million with a cost basis of $200,000. Mary is contemplating selling the real estate but has not done so because of the capital gains taxation. The real estate is leased on a 'net-net-net' basis and the corporation receives a monthly lease payment of $5,000 per month. The property is very marketable, and a number of prospective buyers have expressed interest. Mary has also been approached by her favorite charity to make a substantial gift to an endowment campaign. She feels that the real estate would make a nice gift to the campaign, but she would like to continue to receive income from the property for a period of at least 15 years until she retires. Upon reaching age 65, she would begin to draw her substantial retirement funds.

Private Letter Rulings

PLR 200912005 Trust is Eligible S Corp. Shareholder, Not a CRT:   Trust1 is the sole shareholder of a C corporation intending to elect S corporation status. There are a number of income and remainder beneficiaries of Trust1.

Related Topics on Sub S Unitrust

3.10.1  Unitrust Duration and Recipients:    A charitable remainder unitrust (CRT) pays a fixed percentage for a life, lives, a term of up to 20 years, or a combination of a life or lives and a term up to 20 years. Reg. 1.664-3(a)(5)(i). In most circumstances, the income is paid to the donor for one life or to donor and spouse for two lives. Alternatively, the unitrust amounts may be paid for a term of no more than 20 years, or for a combination.

4.14.1  Sub S Taxation:    The most common type of corporation is a traditional "C corporation." All companies whose stock is publicly traded are C corporations. C corporations pay tax on their net income at the corporate level and then when that income is distributed to shareholders in the form of dividends, the shareholders also pay tax. The result is that C corporation income is taxed twice - once at the corporate level and once at the shareholder level.

4.14.5  Asset Sale Strategy:    Another strategy for avoiding the rules that require charities to pay tax on S corporation income or sale proceeds and that prevent CRTs from owning S corporation stock is the use of an asset sale. Rather than having a shareholder transfer S corporation stock to charity or a term of years CRT, the S corporation itself contributes assets to charity or to a term of years CRT.

      Quiz-Basic



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