S Corporations in Estate Planning

Langdon Owen
July 18, 2008 — 1,796 views  
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S-corporations are very popular for operating businesses, and planning for them or with them can produce significant benefits for the client.  However, their use either as a closely-held business vehicle or as a family estate planning tool needs to be evaluated in light of the other available alternatives for such a company.  Special attention needs to be paid to S-corporation stock on the death of the owner.

S-corporations are domestic corporations with a valid S-election in place under IRC § 1361.  In order to have a valid election, certain conditions must be met, including (but not limited to) (i) no more than 100 shareholders (after 2004), (ii) all shareholders are individuals (other than nonresident aliens or, in most cases, their spouses), decedents' estates, bankruptcy estates, certain limited kinds of trusts, or charities, or the corporation's stock may be 100% owned by another S-corporation, and (iii) there is only one class of stock.  As long as the economics are the same (such as rights to dividends or liquidating distributions), there may be different classes varying only as to voting rights without violating the one class of stock requirement.  IRC § 1361(b).  If the corporation has a valid S-corp election in place, then with some exceptions, income is not taxed at the corporate level, but income, loss, deductions, and credits pass through to its shareholders.  The pass-through feature of S-corporations makes them different from other corporations without the S-corp election (called "C-corps").

Langdon Owen


Langdon T. Owen, Jr. is a member of the law firm of Parsons Kinghorn Harris, p.c. in Salt Lake City, Utah. Mr. Owen is a transactional lawyer who practices in the areas of estate and tax planning, business and commercial transactions involving both corporate and partnership taxed enterprises (including tax, employment, and benefit issues relating to such transactions), loans and creditors' workouts, pension and profit sharing plans, health care law, probate, and real estate.