Pub. 2 2012-2013 Issue 1

10 O V E R A C E N T U R Y : B U I L D I N G B E T T E R B A N K S - H E L P I N G C O L O R A D A N S R E A L I Z E D R E A M S FEATURE ARTICLE “A review of the applicable restrictions is advised before preparing your will or trust agreement bequeathing your bank stock to any individual or trust.” Estate Planning for Bank Owners Not a “Do it Yourself” Project M ost banks are wholly owned by hold- ing companies that are corporations, so owners of a bank are actually owners of the holding company stock. These holding company corporations can be either a “C” corporation or an “S” corporation for tax purposes. An S corporation is a state regis- tered corporation that elects with the IRS to be a “pass-through entity” or “Subchapter S” for taxation purposes. The C corporation is a state registered corporation that doesn’t make the S tax election. The S tax status avoids double taxation at the corporate and shareholder levels, but comes with certain shareholder restric- tions. You will know that your stock is in an S corporation if you receive K-1 statements from an 1120S corporate return, instead of 1099s for your personal income tax reporting. Both the S and the C shareholdersmay be subject to restric- tions under state law or the corporate Bylaws or shareholder agreements. All of these possible shareholder restrictions will impact who may be a successor shareholder upon the death or incapacity of a current bank owner. Every shareholder of an S corporation must meet certain requirements to be a “qualified” shareholder. If even one shareholder does not qualify as an S shareholder, the holding com- pany’s S corporation status will be terminated. Having more than 100 shareholders will also cause a loss of S corporation status. This loss of S corporation status would impose the double taxation on all shareholders and the holding company – a very bad result. Estate planning for owners of S corporation stock must take into consideration the special measures required to assure that all successive shareholders are also qualified S corporation shareholders, and that the 100-shareholder limit is not exceeded as estates divide among heirs. Multiple family members can count as CONSTANCE D. SMITH, ESQ. Director Fairfield and Woods, P.C.  Estate Planning  continued on page 12