For many Nevada business owners, especially those who operate family-owned companies through S-Corporations, the passing of a shareholder brings more than emotional loss—it also triggers significant tax considerations. Among the most important is the step-up in basis, a powerful tool that, when used correctly, can minimize taxes and preserve wealth for beneficiaries.

Understanding the Step-Up in Basis

When a person passes away, the basis of most assets they own is adjusted to the asset’s fair market value on the date of death. This “step-up in basis” can reduce or even eliminate capital gains tax when the beneficiary later sells the asset.

For S-Corporations, this adjustment applies to the shareholder’s outside basis—the value of their stock—at death. If an heir inherits shares worth $2 million, that amount becomes their new tax basis in the stock, regardless of the original purchase price. However, the inside basis—the S-Corporation’s basis in its underlying assets—does not change. This difference creates planning challenges that asset planning attorneys in Las Vegas must address.

The S-Corporation “Death Trap”

Without careful timing, heirs can find themselves paying taxes despite the step-up. This occurs when appreciated S-Corporation assets are sold in a different tax year than when the shareholder’s interest is liquidated.

For example, suppose the S-Corporation sells most of its assets at a gain after a shareholder’s death. That gain passes through to the heirs’ personal tax returns, increasing their outside basis in the stock. If the S-Corporation is not liquidated in that same tax year, the heirs may end up with a capital loss in the following year—a loss that may not be usable to offset the prior year’s gain. The result is a mismatch in timing that wastes the benefit of the step-up.

Coordinating Sales and Liquidations

One effective planning strategy is to ensure that the sale of appreciated assets and the liquidation of the S-Corporation occur in the same tax year. Doing so allows the step-up in outside basis and the gain on the sale to align, potentially producing no net taxable income to the heirs.

In some cases, an executor can transfer inherited S-Corporation stock into a single-member LLC and then cause the S-Corporation to liquidate. This structure can match gains and losses in the same year, preserve creditor protection, and even allow for easier division of assets among multiple beneficiaries.

Additional Post-Death Planning Considerations

1. Interim Closing of Books
The S-Corporation can elect an interim closing of the books at the date of death, splitting the tax year into pre-death and post-death periods. This can allow more precise allocation of income and expenses between the decedent and their heirs.

2. Maintaining S-Corporation Status
Shares passing to estates, trusts, or beneficiaries must remain in the hands of eligible shareholders to preserve S-Corporation status. Failure to make necessary elections—such as qualifying a trust as a Qualified Subchapter S Trust (QSST)—can result in the unintentional termination of S status, creating serious tax consequences.

3. Handling Multiple Shareholders
When the estate is not the sole shareholder, the impact of liquidation on other owners must be considered. Not all shareholders may have high outside bases, and fiduciary duties require that all interests be handled fairly.

4. Character of Income
In liquidation, some distributed assets may produce ordinary income—such as inventory or depreciable property subject to recapture—rather than capital gain. Ordinary income cannot be offset by capital losses from liquidation, which can limit the tax benefits of the strategy.

5. State and Local Tax Implications
If the S-Corporation operates in multiple jurisdictions, the gain from asset sales could be taxed in more than one state, while the loss from stock disposition might be recognized only in the shareholder’s home state.

Why Estate Planning for Your Business Matters in Las Vegas

Nevada’s favorable tax environment often attracts entrepreneurs who hold substantial interests in closely held S-Corporations, from real estate investment companies to operating businesses. The absence of a state income tax does not remove federal tax considerations, and for high-value estates, the difference between a properly executed step-up strategy and a poorly timed transaction can mean hundreds of thousands of dollars in tax savings.

Our experienced asset planning attorneys in Las Vegas can coordinate with accountants and executors to:

• Align sales and liquidations for optimal tax outcomes.
• Maintain the corporation’s S election during ownership transitions.
• Structure trusts and LLCs to manage inherited shares effectively.
• Navigate the interplay of federal, state, and local tax rules.

Conclusion

The death of an S-Corporation shareholder is both a personal and financial turning point. While the step-up in basis offers heirs a powerful tax advantage, it does not automatically apply to the corporation’s underlying assets. Without careful planning, mismatched timing of sales and liquidations can squander the benefit.

Request a consultation to learn how our asset planning attorneys in Las Vegas can design strategies that capture the full value of the step-up, preserve S-Corporation status, and protect family wealth. For business owners and heirs alike, taking action now—before a triggering event—ensures that legacy assets are passed on with minimal tax erosion.

Reference: ACTEC Foundation (January 2020) S Corporation Death Traps