Can I leave SCorp shares to a trust

I recently had a client, Bradley, discover a significant problem with his estate plan—his S-Corp shares were bequeathed to a trust that lacked the necessary provisions to handle them, costing his estate over $30,000 in unexpected tax implications and legal fees. It’s a surprisingly common issue, and one we need to address proactively. Leaving S-Corp shares to a trust requires careful structuring to avoid triggering adverse consequences.

What Complicates S-Corp Shares in a Trust?

Unlike leaving cash or publicly traded stocks, S-Corp shares aren’t a simple transfer. The S-Corporation election itself hinges on shareholder eligibility. Specifically, shareholders must generally be U.S. citizens or resident aliens, and the trust needs to be a permissible type. A standard revocable living trust, while excellent for many assets, may not automatically qualify. The IRS scrutinizes trusts receiving S-Corp shares to ensure compliance with Subchapter S regulations. Improper structuring can result in the S-Corp election being terminated, leading to unwanted tax ramifications, potentially including a loss of pass-through income treatment and forced liquidation.

What Types of Trusts Are Permissible?

Generally, a Qualified Subchapter S Trust (QSST) is the most straightforward option for a revocable trust scenario. A QSST is specifically designed to hold S-Corp shares and meet the IRS requirements. However, it demands strict adherence to the QSST rules, which include limitations on distributions and complexities regarding beneficiaries. Grantor trusts—where the grantor retains significant control—can also be permissible, but require careful drafting. Irrevocable trusts are more complex and often necessitate advanced planning to ensure they don’t disqualify the S-Corp status. Importantly, even with a QSST, the trust document must explicitly state the intention to comply with Section 1362(c) of the Internal Revenue Code.

Why Your CPA is Crucial Here

As an Estate Planning Attorney and CPA with over 35 years of experience, I emphasize that valuing S-Corp shares accurately is critical. Unlike publicly traded stock, there’s no daily market price. We need a formal business valuation performed by a qualified appraiser to establish the fair market value for estate tax purposes. This valuation isn’t just about the shares themselves; it’s about the underlying assets of the corporation, potential earnings, and growth prospects. Furthermore, we need to consider the step-up in basis available to the trust upon inheriting the shares. A proper valuation allows the trust to benefit from a higher cost basis, minimizing capital gains when the shares are eventually sold. Without that CPA advantage, you could pay significantly more in taxes than necessary.

Don’t Forget BOI Reporting Requirements

As of March 2025, domestic U.S. LLCs are exempt from mandatory BOI reporting under the Corporate Transparency Act; however, executors managing foreign-registered entities must still file updates within 30 days to avoid fines of $500/day. This is particularly relevant if your S-Corp is owned by an LLC. Ensure your trust documents include provisions addressing these ongoing reporting obligations.

What if the Estate is Small?

If your S-Corp shares constitute a significant portion of your estate, and the total value falls below certain limits, you might explore simpler options. For deaths on or after April 1, 2025, a primary residence valued up to $750,000 qualifies for a ‘Petition for Succession’ under AB 2016 (Probate Code § 13151). However, this “Petition” that requires a Judge’s Order, NOT an “Affidavit.” It’s CRITICAL DISTINCTION to remember. Also, to qualify, the decedent’s other non-real estate assets (cash, stocks, etc.) must typically remain below the separate $208,850 Small Estate limit. The Small Estate Affidavit (strictly for real property <$69,625, used for timeshares/vacant land) won't apply to S-Corp shares.

What does a California probate court look for when interpreting testamentary intent?

In California, a last will and testament is reviewed under probate standards that focus on intent, capacity, and execution. Clear drafting reduces ambiguity, limits misinterpretation, and helps families avoid unnecessary conflict during estate administration.

When a will is drafted with California probate review in mind, it becomes a stabilizing roadmap rather than a source of conflict. Clear intent, proper authority, and compliant execution protect both families and estates.

Resources for Asset Management & Transfer

• Property Tax Reassessment: California State Board of Equalization (Prop 19)
  This page details the “Base Year Value Transfer” rules. It explains that heirs can only avoid a property tax reassessment if the inherited home becomes their primary residence and a claim is filed within one year of the date of death.
• Real Estate Probate (AB 2016): California Probate Code § 13151 (Petition for Succession)
  The specific statute for the AB 2016 process. It outlines the requirements for using a court-approved “Petition” (not an affidavit) to transfer a primary residence worth $750,000 or less (gross value) for deaths occurring after April 1, 2025.
• Small Estate Affidavit: California Probate Code § 13100 (Personal Property)
  Access the statutory language for the “Small Estate Affidavit.” This procedure is strictly for Personal Property (cash, stocks, vehicles) and is limited to estates with a total value of $208,850 or less (effective April 1, 2025).
• Federal Estate Tax: IRS Estate Tax Guidelines
  The authoritative federal resource for estate valuation. It reflects the 2026 exemption increase to $15 million per person established by the One Big Beautiful Bill Act (OBBBA), which is critical for high-net-worth asset planning.
• Unclaimed Assets: California State Controller – Unclaimed Property
  The primary portal for executors and heirs to search for “lost” assets—such as forgotten bank accounts, uncashed dividends, and insurance benefits—that have been remitted to the State of California for safekeeping.
• Business/LLC Compliance: FinCEN – Beneficial Ownership Information (BOI)
  The official portal for corporate transparency reporting. While many domestic U.S. LLCs received exemptions in 2025, executors managing foreign-registered entities or specific non-exempt structures must still consult this resource to ensure compliance.