Why would you need this type of Trust?
If you own an S-corporation, this type of trust is helpful because only certain types of trusts are permitted to be owners of an S-corporation. The eligibility requirements are that all trust beneficiaries must be individuals or estates eligible to be S-corporation shareholders. No interest may be acquired by purchase, and the trust must elect to be treated as an Electing Small Business Trust.
In most cases, this provision can be added to your existing Revocable Living Trust to address the potential ownership of an S-corporation upon death.
The type of trust cannot be tax-exempt, such as a CRAT or CRUT. But it can be a CLAT or CLUT.
Is a separate tax identification required?
The ESBT does require a separate Tax Identification Number.
Is this subject to estate tax upon my death?
Yes, unless the transfer occurs from an irrevocable trust structured as a completed gift and outside your estate.
Challenges with an ESBT
A major challenge with the ESBT is that all S Corporation income is treated as a separate trust and is taxed to the trust at the highest rate applicable to trusts. That is unless the maximum capital gains tax rate applies. Any remaining portion of the trust income is subject to the regular trust rules.
The election must be made within two months and 15 days after the decedent’s death. (https://www.irs.gov/pub/irs-drop/rp-13-30.pdf)
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