Inherit S Corp

[fallon12345]

What is the name of your state (only U.S. law)? NJ

Hi,
I have inherited an s-corp, from a family member who passed away in 2010, containing properties held for many years, as well as stocks and bonds. It is worth about 3 million. Since the inheritance tax is now 0%, I should be clear there. What is the NJ inheritance tax %? Also, is there a way to avoid paying gains taxes? Such as selling the assets, rolling them all into a house in FL, live in it for 2 years and sell it.

Any other creative thoughts on liquidating this?

 

[anteater]

You really, really need some professional tax advice.

NJ still has both an estate and an inheritance tax.

The estate tax is decoupled from the federal estate tax and exempts only the first $675,000 of estate value.

The inheritance tax rate depends upon your relationship to the deceased family member. If it is a parent, grandparent, child, or spouse, there is no inheritance tax. If it is a sibling, the first $25K is exempt and the remainder is taxed at 11% to 16%. If it is any other relationship, it is 15% to 16%.

You liquidate an asset, you have a taxable event.

(Oh, I would not dismiss the possibility of there eventually being a federal estate tax liability unless that $3 million is the major portion of the estate.)

 

[fallon12345]

Hi Anteater,
Thanks very much for the reply. I most definitely will seek professional counsel, just wanted to get some thoughts here before I do that. It is my father's estate. Most of his estate is in the s-corp, and most of the s-corp is real estate. I didn't know if would be possible to liquidate the real estate assets, and purchase a property within 30 days and transfer the gains to that estate. Live in it for 2 years, and declare it as cap gains free. What is this 10 year rule I have been reading about?

 

[HappyWanderer]

I hate to break things to fallon12345, but the estate tax being gone has actually COST him money! (Federally)

Last year, the $3 million would have come to him without estate tax and with a complete step-up in basis. That means if sold quickly, zero tax due.

Now, no estate tax, sure, but since fallon12345 isn't the decedent's spouse, he only gets a step up on $1.3 million. Assuming long-term capital gain rates, the expiration of federal estate tax cost him up to $405,000, not including any state gains. (Assuming zero basis. I'm sure the actual hit is less.)

 

[fallon12345]

Wow, Happy, that makes me less than happy. Unfortunately, one cannot legally control death! It is a shame our tax system is so bizarre. I also forgot to mention, I am splitting this with my sister, does that make it less bleak from a tax perspective? Does this being in an s-corp have any affect and the gains taxes? Can't I convert my gains into a new piece of real estate? Buy myself some nice ocean front property, build a shanty, live in it for 2 years and sell tax free?

 

[LdiJ]

Hi Anteater,
Thanks very much for the reply. I most definitely will seek professional counsel, just wanted to get some thoughts here before I do that. It is my father's estate. Most of his estate is in the s-corp, and most of the s-corp is real estate. I didn't know if would be possible to liquidate the real estate assets, and purchase a property within 30 days and transfer the gains to that estate. Live in it for 2 years, and declare it as cap gains free. What is this 10 year rule I have been reading about?

Ok...this is something very important for you to understand. You did not inherit the S-corp, or any of the assets in the S-corp. You inherited the SHARES of the S-corp, and the S-corp continues to own the assets as it always has. The S-corp is a separate legal entity from both you and your father.

You have a stepped up basis in the shares of the S-corp, but the S-corp does not have any stepped up basis in any of its assets.

If you liquidate the assets of the S-corp, the S-corp will have the same capital gains/losses that it would have had while your father was alive, and those capital gains/losses will pass through to you via a Schedule K-1 and be taxed at your personal level.

So, you not only have the NJ issues to deal with, but you have the issue that you don't own any of those assets, the S-corp does.

Therefore, its truly critical that you do NOT liquidate anything at all without getting professional tax advice, IN ADVANCE.

There is also the issue of your "basis" in the S-corp, both inside and outside basis. How much "basis" you have controls how you can distribute cash or assets of the S-corp to yourself, without causing other tax consequences.

Again, you NEED professional advice.

 

[HappyWanderer]

While I love LdiJ as she seems hot in a smokey way (I bet it's the eyes. I'm a sucker for eyes.), the law has changed. I am uncertain as to her post.

Can she spell it out for me? Sometimes I'm not that smart.