From SCorp to 4 LLC's

[ea_rva aka acctgtaxmatters]

Hello,

My client has an SCorp, he is the sole shareholder. The entity is not an LLC with SCorp election status but rather incorporated as an SCorp.

He is working with a lawyer for estate planning purposes. Wants to leave 2 of the 4 properties to his daughter, the other 2 to his son and form 4 separate LLC's.

They are recommending:

1) in 2023 dissolve the SCorp and create 4 separate LLC's for each property 

2) daughter/son will become co-members with my client in their respective LLC's so that when he dies the LLCs revert to his kids

(and BTW his wife gets left with nothing under this scenario - the income generated under the SCorp is their livelihood...I was like AND what about your wife....)

3) the rental properties held by the SCorp have been depreciating for over 15 years so basis is minimal compared to FMV.

My questions are:

1) He will incur capital gains on the conversions and the new basis to kids will be FMV correct?

2) Will he avoid capital gains if LLCs have SCorp election status and if so, basis would be his basis under SCorp?

3) Could this also qualify as a reorganization under section 368(a)(1)(F) where the LLCs can maintain the tax status of the SCorp?

Thank you in advance for your support of this and all my other questions that you all help me with!!

) 

[Skylane]

I would think this should all be handled by Will and corporate resolution. I would want to preserve a stepped up basis for the heirs. I don’t think this plan will do that.

An S Corp gives some pretty good protection and was probably formed along time ago. With an LLC it’s pretty easy to pierce the corporate veil commingling of funds, etc.. Better to just buy more liability insurance…

my other issue with an LLC is that it is too easy to change ownership. You don’t have to record a deed just sign a few forms and it’s done. Think fraud

your questions 1,2,3 are above my pay grade. There are a few around here that may be able to help…. Otherwise, think tax attorney.  

[qbteachmt]

Wow. It is recommended to never put real property into an S Corp. "Wants to leave 2 of the 4 properties to his daughter, the other 2 to his son and form 4 separate LLC's" specifically shows the problem. He doesn't own them. He owns shares in the entity that owns the property; all of it belongs to the S Corp.

"so basis is minimal compared to FMV"

Others will have to step up, now, but I believe your client might be facing some taxable event with this dissolution.

And S Corps require payroll, which is another reason Property and Services under payroll do not mix well.