Best Methods for Buying/Selling S Corp Shares Between Family Members

Thanks for these suggestions! For the installment sale option, wouldn't we still be using post-tax dollars to make those payments? And regarding the gift exclusion strategy - would that create any issues with step-up basis later on?

You're right about using post-tax dollars for the installment payments - that's unavoidable when purchasing shares personally. However, timing the payments to align with your personal tax situation can help minimize the impact. With the gift exclusion strategy, the recipient (you) would take your mother's basis in the gifted shares rather than getting a step-up. This means you'd potentially face larger capital gains taxes if you eventually sell the business. However, this might be offset by the reduced current purchase price. It's a trade-off that depends on your long-term plans for the business.

Did it actually give you specific actionable strategies or just general advice? I've tried other tools that just spit out generic recommendations that any blog post could tell you.

I'm curious about this too. How does it handle the analysis of profits that would be used for purchasing shares? Our S Corp has substantial pass-through income that would be taxed before we could use it for buying shares from our retiring partner.

It provided very specific, actionable strategies based on our documents. For example, it recommended a specific vesting schedule for our share transfer that aligned with our company's seasonal cash flow patterns. It wasn't just generic advice - it was tailored to our numbers and structure. For pass-through income concerns, it analyzed our historical distributions and tax returns to suggest an optimal payment structure that minimized the tax impact. It even flagged some potential issues with our operating agreement language that could have caused problems with the IRS down the road.

Wait, there's a service that actually gets you through to the IRS? How does that even work? I thought it was literally impossible to talk to a human there these days.

This sounds like BS honestly. The IRS isn't going to give you tax planning advice - they'll just tell you what the rules are. And why would you trust what some random phone rep says over a qualified CPA who specializes in this stuff?

The service uses technology to navigate the IRS phone system and secure your place in line - then calls you when an agent is about to be connected. It's completely legitimate and saves you from having to redial hundreds of times or wait for hours. You're right that the IRS won't give specific tax planning advice, but what they can do is clarify how certain transactions will be treated under current tax law. In my case, I needed to understand specific reporting requirements for installment sales between family members in an S Corp context, and getting those details directly from the source was invaluable for our planning.

That's an interesting approach I hadn't considered. Do you know if there were any issues with accumulated earnings tax or other penalties with this method? And were there any requirements about how the redemption needed to be structured to avoid having it treated as a dividend?

We had to be careful about the accumulated earnings tax, but our CPA helped structure it properly to avoid issues. Having a clear business purpose for the redemption (facilitating ownership transition) helped justify the retained earnings. For the redemption structure, the key was ensuring it qualified as a "substantially disproportionate redemption" under Section 302(b)(2) to receive capital gains treatment. This meant my father's ownership percentage after the redemption had to be less than 80% of his percentage before redemption, and his voting interest had to drop below 50%. Our CPA documented everything meticulously to support this treatment.

We looked into an ESOP for our S Corp with 15 employees but found the setup and administration costs were too high for our size. The minimum practical size is typically 20+ employees with stable cash flow. Otherwise, the setup costs (typically $50k+) and ongoing administration requirements don't make financial sense.

Thanks for that insight. We have about 18 employees so we're probably right on the edge. Do you know if there are any less expensive alternatives that accomplish something similar?

You might consider a phantom stock plan or stock appreciation rights (SARs) as alternatives. These give employees the economic benefit of ownership without actual share transfers, which can be much simpler for an S Corp since you avoid the 100-shareholder limit and other restrictions. Another option is a management buyout (MBO) where key employees purchase shares over time, similar to what the original poster is considering with family members. This can be structured with seller financing to make it more affordable for the employees. For your size company, these alternatives typically have much lower setup costs and ongoing compliance requirements compared to an ESOP while still providing employee incentives and an exit path for the majority owner.

This is a fascinating approach I hadn't heard of before! How does the valuation process work when contributing S Corp shares to a CRT? I'm wondering if there are any restrictions on how the trust can dispose of the shares, especially since S Corps have limitations on who can be shareholders. Would the trust need to sell the shares immediately, or could it hold them for a period of time?

Great question about the CRT structure! S Corps cannot have charitable trusts as shareholders, so the CRT would need to sell the shares relatively quickly after receiving them - typically within a reasonable period to avoid triggering prohibited transaction rules. The valuation process usually requires an independent business appraisal, which can be costly but is necessary for both the charitable deduction calculation and to ensure the transaction meets IRS requirements for fair market value. A more practical approach might be for your mother to first convert some of her S Corp shares to cash through a partial redemption or sale to the company, then contribute that cash to a CRT. The CRT could then loan money back to you and your sister for purchasing the remaining shares, creating the same economic result with cleaner tax treatment. This adds complexity but might be worth exploring if the charitable and income tax benefits are significant enough to justify the additional legal and administrative costs.

This IDGT strategy sounds incredibly complex but potentially very powerful. I'm trying to wrap my head around the mechanics - if my mother is paying taxes on trust income she's not receiving, wouldn't that create a significant cash flow burden for her? How do you typically structure the note payments to ensure the trust has enough liquidity to service the debt while still allowing for business growth? And are there any minimum interest rate requirements that could impact the economics of this approach?

You're absolutely right about the complexity and cash flow considerations. The IDGT structure does require your mother to have sufficient liquid assets outside the business to cover the income tax burden on trust earnings she won't receive - this is actually one of the key requirements for making this strategy work effectively. For the note structure, it's typically set up with interest-only payments for several years, followed by a balloon payment or conversion to principal and interest. The Applicable Federal Rate (AFR) sets the minimum interest rate, which changes monthly but has been relatively low in recent years. The trust needs to generate enough cash flow to service the note, so this works best with businesses that have predictable distributions. One common approach is to structure the sale as a partial transaction - maybe your mother sells 60% of her shares to the IDGT and gifts the remaining 15% directly to you and your sister. This reduces the note amount the trust needs to service while still capturing most of the transfer tax benefits. The key is running detailed projections with your estate planning attorney to ensure the economics work for your family's specific situation and cash flow requirements.

The QSBS strategy is interesting, but I'm wondering about the practical implications of temporarily converting from S Corp to C Corp status. Wouldn't the double taxation during the conversion period potentially offset much of the eventual QSBS benefits, especially for a service-based business that's likely generating consistent annual profits? Also, since this is a family transfer situation rather than a sale to outside parties, would the QSBS benefits even apply? My understanding is that the exclusion is for gains on sale or exchange, not for family transfers or redemptions. It seems like this strategy might be more relevant for a future exit to third parties rather than the current succession planning challenge. Are there specific circumstances where the conversion costs would be justified for a family business that's planning to stay in family hands for the foreseeable future?

You're absolutely right about the limitations for this specific situation. QSBS benefits only apply to actual sales or exchanges to third parties, not family transfers or internal restructuring, so it wouldn't help with the current succession planning challenge. The double taxation issue is also significant - for a profitable service business, the C Corp conversion could cost more in additional taxes during the transition period than any future QSBS benefits would provide, especially if the family intends to hold the business long-term. QSBS might only make sense if you're already planning a future sale to outside parties within a reasonable timeframe (say 3-5 years) AND the business has appreciated substantially since inception. Even then, you'd need to carefully model whether the conversion costs plus ongoing double taxation exceed the potential $10 million exclusion benefits. For your current family transfer situation, I'd focus on the more immediately applicable strategies others have mentioned - installment sales, partial gifting, redemptions, or trust structures that directly address the succession and tax efficiency goals you're trying to achieve.

The SCIN structure is really intriguing - I hadn't heard of that approach before. How do you typically determine the appropriate premium to add to the payments to account for the mortality risk? And are there any IRS guidelines on what constitutes a reasonable premium, or is it based on actuarial tables? I'm also curious about the family limited partnership approach. When you mention valuation discounts of 20-40%, how does the IRS typically view these discounts for family businesses? It seems like there would be significant scrutiny, especially for a service-based business where the discounts might be harder to justify compared to a business with hard assets. Do you know if there are any specific documentation requirements or safe harbors that help ensure these discounts are respected by the IRS during an audit?

Great questions about the SCIN mechanics! The mortality premium is typically calculated using IRS actuarial tables (specifically Table 2000CM) based on your mother's current age and health status. The premium usually ranges from 1-3% above standard AFR rates, but can be higher if there are health concerns. Your estate planning attorney should run these calculations to ensure the premium is actuarially sound and defensible. Regarding FLP valuation discounts, you're right that the IRS scrutinizes these heavily, especially after the 2016 Section 2704 proposed regulations (though those were never finalized). For service businesses, discounts are harder to justify since there are typically fewer hard assets and more dependence on key personnel. The key to defending discounts is demonstrating genuine business purpose beyond tax benefits - like centralizing management, facilitating succession planning, or protecting assets. You need robust partnership agreements with meaningful restrictions on transfers, distributions, and liquidation rights. Courts have upheld discounts even for family businesses when the restrictions create real economic limitations. Documentation is critical - formal business valuations, detailed partnership agreements, and evidence of legitimate business operations separate from personal activities. Consider working with an appraiser experienced in family business valuations who can properly support the discount percentages.