Orange County California

Trust Attorneys


If you have a sizeable estate and one of your assets consists of shares in an S-Corporation, it is important to consider an update to your estate plan. S-Corp stock requires careful estate planning in order to preserve the company’s status as an S-Corp. People with large estates that could be subject to estate tax after they die may consider using a special trust known as a Grantor Retained Annuity Trust (GRAT) to deal with their S-Corp shares. Updating an estate plan to add a GRAT could potentially reduce the estate’s tax burden while allowing for an efficient transfer of this important asset.

Using a GRAT to Hold S-Corporation Stock

While the rules and techniques surrounding GRATs and shares of S-Corporation stock are complex, the following is a general overview of how the GRAT can be used to handle the stock:

  1. A GRAT is a specialized trust used to transfer assets, including stock, to family members in trust.
  2. If the GRAT is drafted properly, it can be a qualified S-Corporation shareholder under the IRS rules.
  3. When using a GRAT, you retain a qualified annuity interest in the stock.
  4. As a result, the value of the gift of stock to the trust is greatly reduced.
  5. When the trust term ends, the stock passes to the beneficiaries of your trust.
  6. The value of the gift at that time is the fair market value of the property reduced by the present value of the retained interest. Your attorney will help you calculate this value.
  7. A GRAT is beneficial if you expect that the asset will appreciate quickly. A successful GRAT will remove the value of the appreciation of the S-Corporation stock from your estate.

It is important to note, however, that a GRAT will not work if you do not outlive the term outlined in the trust. If that happens, the fair market value of the stock reverts back to your estate. Careful consideration under the guidance of a knowledgeable attorney should be given to your current needs and goals before updating your estate plan to add a GRAT.


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