I need some help figuring out this puzzle.
S-Corporation owns Intel stock and commercial real estate. The Intel stock is worth $2 million and the real estate is worth $2 million. To keep it simple, assume the corporation has no basis in either.
The stock of the S-Corp is owned 35% by Carol and 65% by a Bypass Trust created when Carol's husband passed away years ago. Carol has a $350K basis in the stock and the Bypass Trust has a $650K basis in the stock.
Carol has now passed away. The stock of the corporation is valued at $4 million. The Bypass Trust receives no step-up. Carol's estate gets a step up to $1.4 million (35% x $4 million)
Carol's 3 daughters are the beneficiaries of both the estate and the Bypass trust. They do not want to sell the real estate, but are trying to figure how to get their hands on that Intel stock and not pay any tax. They thought they could transfer $1.4 million of the Intel stock out of the corporation to Carol's estate. Sell it and pay no tax.
The problem here, of course, is that the transfer out of the corporation is treated as a sale. The corporation will recognize a $1.4 million gain. Everybody will get K-1's reporting their share of this gain.
Anybody have any thoughts on this?