Legal Question in Business Law in California

Re: Transfer Corporation to a Revokable Living Trust

First, it sounds as though you are proposing to transfer ownership of some or all of the S-corporation's stock to the trust. The question is somewhat ambiguous because you could conceivably mean 'transfer the corporation's assets to the trust.'

The process would involve two steps. The holder of the stock must grant the shares to the trust. Then, the corporation must reflect the change in ownership in its shareholder records. Someone should verify for you that the transfer does not violate any shareholder agreement, bylaw, etc.

Be careful placing S-corporation stock into a trust. Only certain types of trusts can be S-corporation shareholders without invalidating the S election! Typically a revocable living trust would be a 'grantor trust' eligible to own S-corporation stock, but be sure. Further, the trust instrument should contain certain language such as a requirement that the income be paid to the settlor-beneficiary on a current basis.

These issues are very technical and you should not try to do it yourself. I strongly recommend seeing the attorney who set up the trust in the first place to see whether it needs some amendments in order to hold S-corp. stock.

Also note that after a grantor dies, the trust may continue to hold the stock for only two years. (IRS Code section 1361(c)(2)(A)(ii)).