South Carolina S Corporation Divorced Shareholders Family Law

In many divorces, a significant asset of the union is an Southward corporation. Often, the business owned by the Southward corporation is the source that will be used to brand lifetime distributions to a spouse.

2 important aspects of Due south corporations foreclose a simple solution to this trouble.

1. One is the requirement that distributions on S stock exist pro rata, so there is no manner to have distributions directly from an Due south corp to just ane shareholder and not others.

2. Second, Southward corporations are only allowed to have one form of stock. At that place cannot be a preferred interest that pays only the amount of the pension, or contains any differences in benefits upon a liquidation.

In a recent IRS individual letter ruling, the IRS held that a trust set up under a divorce decree could qualify as the Southward corp shareholder even though one of the trust'southward beneficiaries had a right to a lifetime distribution from the trust with no rights in the trust after death, and the other spouse could take distributions from the trust to pay off sure liabilities confronting the S corporation stock.

Based on the facts outlined above, the trust was violating both the uneven distribution and having no balance interest in liquidation rules, and would announced to non qualify to be an Southward corp shareholder. The IRS, notwithstanding, ruled that the shares in the trust would not exist considered a 2d class of stock.

The Devil is in the Details

The devil is in the details of the trust and the agreement.

The trust was deemed to be a unmarried trust having two shares: i for John and 1 for Mary. Some or all distributions received by the trust from the S corporation volition be used to make required payments on the liabilities against which the South corporation stock was pledged, and those payments will exist deemed to exist made equally from John's share and Mary'south share. So how can you lot make upwards for the uneven distributions?

In exchange for Mary like-minded to take the liabilities paid from her share, John's share volition consequence to Mary's share a promissory note for amounts paid out of Mary's share with respect to the liabilities.

The IRS reasoned that a commercial contractual agreement, such every bit the loan agreement, is not a binding agreement relating to distribution and liquidation proceeds of the South corp and is therefore not a governing provision, as long as a principal purpose of the understanding is to circumvent the ane class of stock requirement.

Although a corporation is not treated as having more i class of stock so long as the governing provisions provide for identical distribution and liquidation rights, any distributions (including actual, constructive, or deemed distributions) that differ in timing or amount are to be given appropriate tax effect in accordance with the facts and circumstances.

The IRS concluded that the trust agreement is non a governing provision that is required to be taken into account in determining whether there are two classes of stock. Accordingly, the trust agreement is disregarded in determining whether the outstanding shares of S corporation stock confer identical rights to distributions and liquidation gain. Due south corporation will not be considered as having more than one class of stock, according to Reg § 1361(b)(1)(D), as a result of the trust understanding.

So What Next?

The interesting follow up question is, "Could this structure be used to assist make certain a spouse receives at least a minimum distribution from a trust?"

Let's consider an instance where a spouse is supposed to get a minimum lifetime annual income of at least $100,000 and no residual ownership. Bold distributions from the S corp are at least $200,000 a twelvemonth, you have no bug. But if distributions were $150,000, a loan could exist used to get the minimum amount to one spouse, and the loan would then be paid off in a year when distributions were greater than $200,000 in a year.

If a trust structure is a way to provide trustee protection of avails to attain your divorce goals, a private letter of the alphabet ruling is recommended to ensure that a structure like this is approved by the IRS. Yous want to make sure you do not end up losing the company'southward S corp status.

For Assist

OurForensics & Litigation Support Group works with family law attorneys on all financial and tax aspects of divorce litigation, including pension and child support calculations, business valuation and uncovering subconscious assets. If y'all have questions about the tax treatment of a concern in divorce proceedings, contact u.s.a. online or telephone call 800.899.4623.

Published on Oct xxx, 2018

charbonneauanscialtat.blogspot.com

Source: https://www.gma-cpa.com/blog/transferring-s-corporation-shares-in-a-divorce

Share this post