Hello. We have a family living trust and now we bought a franchise business. We are going to create a corporation. Should trust be the owner of corporation or should the business entity be included in the living trust?
You are investing in a franchise and running a business—you need to have a lawyer on retainer or at least a budget for one. You did not need to be using a free website when you’re playing with the big boys. You need a real attorney and you need to recognize that that’s going to be the case from now onward, as long as you’re doing business.
I agree with Attorney Straus that this question requires a careful, detailed discussion with an experienced corporate law attorney, or estate planning attorney with a niche practice in advising the owners of closely held corporate entities. In short, whether you place corporate stock in a living trust will largely come down to whether it is a C corporation or an S corporation. If C, there will be comparatively few difficulties in its stock being held by a trust controlled by the corporation's founder or majority shareholder; however, with an S, there can be unintended consequences should the living (revocable) trust ever become irrevocable under state law--the two most likely reasons being death or permanent incapacity/incompetency of the settlor. If that happens, the trustees should be aware that the IRS may impose a default C corporation election on the theory that the trustees, who are now actual or potential heirs of the trust property (including corporation ownership) are "adverse parties" in that they did not create the trust, yet they may stand to become shareholders under operations of the trust. If/when that happens, the IRS will no longer consider the trust, as originally set up by the settlor, to be a "grantor trust," "qualified Subchapter S trust," or "electing small business trust." Usually there is a two-year grace period before Subchapter C status is imposed, but nonetheless, this is a complicating factor of which to beware.
I strongly suggest that you work closely with an attorney who has dealt with these issues before, and s/he can specifically advise on how to best sync your estate plan with your business plan. Attorneys who focus on small business succession planning also have the expertise needed to properly advise you. No matter what you do, be sure to avail yourself of experienced, competent legal counsel. Doing this wrong can not only bring serious tax consequences for your business, but also your heirs/beneficiaries, as well as any other shareholders in the corporation. I hope this July 4 holiday has been rewarding and meaningful to you.
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