What Happens to S Corporation Stock Upon the Shareholder’s Death?
S corporation stock, whether owned individually or by a trust, merits special attention upon death. Congress presumably did not want a shareholder’s death to terminate an S election, so an estate of a deceased S corporation shareholder is a permitted shareholder during the period of administration. If the executor transfers the S corporation stock to a trust, the trust will need to qualify as a permitted shareholder, generally requiring an election as a qualified Subchapter S trust (QSST) or an electing small business trust (ESBT).
A QSST is a permitted shareholder of an S corporation during the life of the income beneficiary. If the death of the beneficiary causes the trust to fail to qualify as a QSST, it may still continue to hold the S corporation stock for a two-year period following the beneficiary’s death.
If, after the two-year period, the trust continues to hold S corporation stock and does not otherwise qualify as a permitted shareholder, the corporation’s S election will terminate.
A grantor trust is a permitted shareholder of an S corporation during the life of the deemed owner of the trust. Upon the death of the deemed owner, the trust may continue to be a permitted shareholder for the two-year period following the deemed owner’s death. After this two- year period, the trust will need to make a QSST or ESBT election to prevent the termination of the corporation’s S election.
Finally, suspended losses with respect to S corporation stock expire upon the shareholder’s death because suspended loss carryovers are personal to the shareholder and cannot be transferred. With respect to a grantor trust, the deemed owner is treated as the shareholder. Accordingly, a grantor trust’s suspended losses expire upon the death of the deemed owner. In the case of a dual settlor grantor trust, the result should be that one-half of the suspended losses with respect to the deceased deemed owner expires on death and the remaining one-half with respect to the surviving deemed owner should continue.
For more information on S corporations and dealing with S corporation stock after a shareholder’s death, please call Comiter, Singer, Baseman & Braun, LLP at (561) 626-2101 or toll free (800) 226-1484 to speak with the firm’s estate planning attorneys.