Why S-Corporation Owners Need Specific Trusts
As an owner of an S-corporation, you need to have a certain type of trust to hold your corporation’s stocks legally. The reason is that only specific trusts are eligible to own an S-corporation. Here are the eligibility requirements:
- The trust must be irrevocable
- An election must be made within two months and 15 days after the decedent’s death
- All income must be distributed annually to only one beneficiary
- The trust is a grantor trust on behalf of the beneficiaries
Although Qualified Subchapter S Trusts (QSSTs) are an option, they have disadvantages. For example, only one beneficiary can benefit from the QSST throughout their lifetime.
As a result, the beneficiary’s children cannot be beneficiaries of the trust. Furthermore, all the ordinary income of a QSST must be distributed to the beneficiary, regardless of their needs.
This can result in the beneficiary’s taxable estate building up from the compounded value of the QSST’s share of the S-corporation’s distributed income. Additionally, the compounded value of the QSST’s share of the S-corporation’s distributed income is vulnerable to potential lawsuits against the beneficiary, their former spouse’s marital rights, and full access to underaged, spendthrift, or special-needs QSST beneficiaries. (Citation: Tax Advisor – 2023.04.05)
Since clients generally don’t want their entire income automatically distributed to the trust beneficiary, two separate trusts (or at least two separate shares of one trust) must be established for each beneficiary.
In summary, having a specific type of trust as an S-corporation owner is crucial for legally owning your corporation’s stocks. While QSSTs are an option, they come with significant disadvantages, so it’s important to know other trust options that better suit your needs.
Contact a Trust Attorney today to schedule a consultation and learn more about how we can help you with your estate planning needs.