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I own 50% of an Illinois S Corp and 50% of an Illinois LLC.

I own 50% of...

I own 50% of an Illinois S Corp and 50% of an Illinois LLC. I want to put the ownership of both into a trust that I established in Belize. Originally I did not intend to put the shares into the trust but have changed circumstances. Is this possible?

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The Belize trust is an irrevocable grantor trust, established in 2013. I am the primary beneficiary. The trust is the sole member of a Belize LLC also.

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3/14/2018
Legal Eagle
Legal Eagle, Lawyer
Category: Business Law
Satisfied Customers: 14,348
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Hello! I am a licensed attorney, admitted to practice in state and federal court. I have a nearly 100% satisfaction rating (click here for more info) so all that means is that you can count on me to help today. Because I want to provide you with the most accurate answer possible, do you mind if I take a moment to review your question?

Please keep in mind that our conversation does not include an attorney-client relationship and this is for general information purposes only.

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Thanks so much for your patience on this. The answer to your question is yes, you can put ownership of both companies into a trust, even if it is established overseas. A trust in the United States will be valid so long as it was made according to the rules and laws of the place where it was made. The law in the U.S. doesn't specifically have to recognize the formation of foreign trusts; however, if the formation of that trust was in accordance with local laws or if you make a trust just consistent with IL law (witnesses, trust property, signatures, etc.) then you will be fine.

What other questions did you have for me today that I can help you out with:-)?

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Customer reply replied 5 months ago
Thanks for your response, the question however was not about the validity of a foreign trust, rather I have read that a foreign trust cannot be a shareholder of a Subchapter S Corporation. If you can locate the irs language that gives me a definitive answer on that I can make a plan.

I'm very sorry. I think I may have misunderstood the question. Thank you for clarifying. So, you can make a trust that is valid; however, 26 U.S. Code § 1361 2(A)(vi) prohibits a foreign trust from owning shares in an S-corporation. This means that your best bet would be to simply make the trust consistent with U.S. law and you can own part of the U.S. corporation and not be in violation of the tax code. My apologize for any misunderstanding.

Did you have any other questions for me today that I can help you with?

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Customer reply replied 5 months ago
Ok, so what I have read was correct. The object of owning a foreign trust for me is to remove the ability of a US court to order actions on the part of the trust, protection from law suits or divorces (none of which are on the radar) but as a business owner for many years I consider myself lucky that I have not been the victim of a frivolous law suit.
Is it possible to either:
a. Transfer the S-Corp to the LLC, which can then be put into my foreign trust or;
b. Establish a domestic trust to hold the S-Corp but wrap that trust in my foreign trust.
Thanks again for your help.
Pat

Yes, what you read was accurate. So, to answer your question:

1. No, even if the LLC is the owner the corp, if the owner of the LLC is a foreign trust, then the code I mentioned above will still apply. The LLC would be disregarded.

2. No, the same principles would apply.

In your case, although I can understand not wanting to be subject to US courts, so long as you want ownership in the S-Corp, the law says you can't have a foreign trust be an owner at all. I think that having the LLC own the part of the S-corp is a wise idea in part because it provides that corporate shield that you need in case the S-corp is sued. Even if the corporate veil is pierced, it is your LLC's assets that would be at risk and not yours personally. So, basically, you'd have two corporate layers of protection and you would be abiding by the US tax code at the same time.

What other questions did you have for me today about this?

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Customer reply replied 5 months ago
Ha, no magic bullet, oh well I figured as much.
The end game for this will be that my son will be buying the companies from me over time, beginning next year, and I want the proceeds to go to my foreign trust but however meanwhile, I plan to marry and really want to have the companies out of harms way in the event that it doesn't work out. Having been married twice over the course of 30+ years I know that nothing lasts forever.
It has really just occurred to me that I can accomplish this with a domestic trust, A. whose beneficiary is the foreign trust, B. with language to disperse the funds from A to B according to a formula that I prescribe. Does that make sense to you?

Yes, that make sense and appears to be legally compliant as well. The foreign trust can receive the proceeds of the s-corp, but they can't be the owner of the s-corp, so that may be a better way to handle it and protect your assets.

Did you have any other questions for me today?

Legal Eagle
Legal Eagle, Lawyer
Category: Business Law
Satisfied Customers: 14,348
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Customer reply replied 5 months ago
No, thank you for your help.

You bet.

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