The Advantages of a Living Trust

An entrepreneur hopes to pass on the family business to his child. It's a simple goal, but the process requires careful planning

By Karen E. Klein

Q: Two questions: Can a Sub S-corporation be placed into a revocable living trust without losing its S-corp status? Is this a good way to pass our company on to our son? -- B.M.B., Jacksonville, Fla.


Yes, Sub S-Corp. stock can be placed into a revocable living trust. In fact, such trusts are a standard estate-planning technique commonly used in states with high probate costs. Experts say that the revocable trust is useful because assets can be put in and taken out as the trustholder wishes and at his or her death, the fees, expenses, and potential complications of probate court are not incurred.

After the owner's death, the trust is permitted to own S-corp stock for up to two years, during which time the trustee may be responsible for collecting assets, paying funeral bills, settling debts, and filing income- and estate-tax returns. After such administrative business is completed, the trustee is free to transfer the stock to your heirs.


  If you choose a revocable trust as a vehicle for family business succession, keep a few things in mind:

You may want to make your son the trustee after you so that he can vote the stock of the corporation immediately, and keep the company operating without a hitch, says Brian T. Whitlock, an attorney and CPA with Blackman Kallick Bartelstein, LLP of Chicago. "These tasks can be complex if the value of your business and other trust assets is large," Whitlock says. Having your son take charge may make administration of the trust, and the business, that much easier.

Talk to an estate planner who works with closely held companies and put together a plan for transferring the company gradually over your lifetime, recommends Gary Zwick, a partner in the law firm of Walter & Haverfield LLP of Cleveland. "Generally speaking, transfers during your lifetime are the best way to leave a business to a child," he says. "If you hold all the stock until your death, it will be at full value when your son inherits it and the estate taxes will be high. If you've been retired for a number of years, and your son has been running the company, he will wind up paying estate tax on all the value he created."


  An estate planner will help you plan to make gifts of stock during your lifetime and invest in life insurance that will help cover the estate tax bill, says Gerald E. Wilson, an attorney based in San Juan Capistrano, Calif. "Gift taxes are cheaper than estate taxes, so most of my clients give away pieces of their company gradually, and by the time they die, they've given all or most of it away so the inheritors will not have to pay estate tax at all."

Other vehicles for passing stock in your corporation on to your heirs include grantor-retained annuity trusts, preferred-stock recapitalization, private annuities, and self-cancelling installment notes, Zwick says. A qualified federal tax specialist who does estate planning will be able to discuss these options and advise you on which is the best for your situation, depending on your age, health, and the size of your business.

Karen E. Klein writes the Smart Answers column for BusinessWeek Online

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