Trusts as S Corporation Shareholders: Elections, Eligibility, and Avoiding Loss of Subchapter S Status

Trusts are viable S corporation shareholders. Grantor trusts, testamentary trusts, QSSTs, and ESBTs, are all eligible to hold S corporation shares. Owning S corporation stock through a trust, or transferring the shares to a trust at death, can be an effective method of transferring ownership. IRC Section 645(b)(2) provides a two-year transition period for certain trusts upon the death of an S corporation shareholder.

A QSST can be an S corporation shareholder. A QSST must meet specific criteria, including having a single income beneficiary and distributing all income currently to the said beneficiary. An ESBT could be a better alternative for owners wanting to distribute or accumulate income to multiple beneficiaries, for example, children. Both QSSTs and ESBTs require timely, properly filed elections. Both are allowed to hold property other than the S corporation stock creating a bifurcated reporting obligation.

There are many circumstances involving trusts that can create the inadvertent termination of the S election. These include leaving S corporation stock to an ineligible shareholder (a foreign trust, IRA, NRA) or even including a defective provision in the trust document. Tax advisers working with S corporations and S corporation shareholders need to recognize the caveats of establishing trusts as shareholders of S corporations for living and testamentary trusts.

Listen as our panel of Subchapter S veterans explains the concerns and considerations of having a trust as an S corporation shareholder.

1. Trusts as S corporation shareholders: overview
2. Trust eligibility
3. QSSTs
4. ESBTs
5. Practical considerations
6. Avoiding inadvertent terminations of S status

The panel will review these and other critical issues:

• General reporting requirements and bifurcated reporting when a QSST or ESBT holds other assets
• Properly filing QSST and ESBT elections
• Eligibility requirements for a QSST and ESBT
• Trust language to avoid jeopardizing S corporation status

Learning Objectives

After completing this course, you will be able to:

• Recognize various types of trusts eligible to be S corp shareholders
• Verify that QSSTs and ESBTs are properly and timely filed
• Distinguish between QSSTs and ESBTs
• Avoid the inadvertent termination of S status
• Determine the best method of obtaining relief from inadvertent S corp terminations

• Field of Study: Taxes
• Level of Knowledge: Intermediate
• Advance Preparation: None
• Teaching Method: Seminar/Lecture
• Delivery Method: Group-Internet (via computer)
• Attendance Monitoring Method: Attendance is monitored electronically via a participant's PIN and through a series of attendance verification prompts displayed throughout the program
• Prerequisite: Three years+ business or public firm experience preparing complex tax forms and schedules, supervising other preparers or accountants. Specific knowledge and understanding of pass-through taxation, including taxation of partnerships, S corporations and their respective partners and shareholders.

Strafford Publications, Inc. is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of Accountancy have final authority on the acceptance of individual courses for CPE Credits. Complaints regarding registered sponsons may be submitted to NASBA through its website: www.nasbaregistry.org.

IRS Approved Provider

Strafford is an IRS-approved continuing education provider offering certified courses for Enrolled Agents (EA) and Tax Return Preparers (RTRP).