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Lev
Lev, Tax Advisor
Category: Tax
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Experience:  Taxes, Immigration, Labor Relations
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A 100% C corp shareholder is doing estate planning. The question

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A 100% C corp shareholder is doing estate planning. The question is: what are the pros/cons of giving the shares to the children individually or to the corporation owned by the children. Will the basis be calculated the same either way?

- The shareholders worth (individual and business) is less than 5 million.

Lev :

Hi and welcome to our site!
"giving" - means gifting - correct?
The basis of gifted asset is determined as the lesser of a donor's basis and the fair marker value at the time of gifting.
Assuming gifted shares are appreciated - the donor's basis should be used.
There is no difference if shares are transferred to a physical person or to a corporation.
However the gift to the corporation - for gift tax purposes - is generally treated as a gift to shareholders of that corporation.

Lev :

In this case - the basis of gifted shares will be added to the basis of shares owned by the children. That will be same as if shares are gifted to children who would contribute then to the corporation.
But in case shares are transferred directly to the corporation there will be less paperwork.

Customer:

When I say give, I guess I mean he is setting up a trust and wants to "leave it to them when he dies".

Customer:

When you say less paperwork, do you mean because it goes to one entity as opposed to 8? (8 children)

Lev :

If that is a transfer to the trust - the situation will be different.
In this case - we need to know if that is a revocable living trust or an irrevocable trust.

Lev :

When I mentioned "less paperwork" - I did not meant the number of children, but a number of registered transaction to change the ownership.

Customer:

I think it will be a revocable living trust.

Customer:

Also, he just found out the land the building sits on is in his personal name, not the corporation name.

Lev :

Using a revocable living trust is more common. In this case - the trust is ignored as long as the grantor is alive. But when the grantor dies - the trust becomes irrevocable - and all assets - including shares of C-corporation - get stepped up basis equal to their fair market value at the time the decadent passes away.
That include all assets owned by the decedent directly and those owned by a revocable living trust.

Customer:

So just to be clear, the shares of the C corp are valued the same whether or not they go to an individual or a business. Correct?

Lev :

If shares are transferred because of the death of the original owner - yes - their basis will be determined regardless to whom shares are transferred.

Customer:

If the shares go to the kids corporation, they would "go" to each shareholder based on their percentage ownership in the kids corporation. If the shares go to the kids individually, they would just go to them. Either way the basis is the same. So there is no difference?

Lev :

If shares are transferred because of the death of the original owner - yes - their basis will be determined regardless to whom shares are transferred.

Lev :

If shares are transferred because of the death of the original owner - shares (or any other assets) are considered as inherited - and the basis is determined as for inherited assets.

Customer:

What would happen the the shareholder dissolved the corporation (while living) and continued to operate the business as an individual (using schedule c)

Lev :

For shareholders for income tax purposes - the dissolution is treated as a sale of shares.
The corporation might recognize income on distribution of appreciated assets and a shareholder might recognize a gain or loss on dissolution - based on his/her basis in shares and total value of distributed assets - cash and properties.
Business assets may be transferred to a revocable living trust - that will not make any difference.
After the owner dies - all inherited assets will get stepped up basis.

Customer:

Thank you

Lev :

You are welcome.

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