Can Living Trusts Own S Corporation Stock?

By Sarah Barton

An S corporation is simply an ordinary corporation chartered under state law whose shareholders have decided to make a special tax election under the Internal Revenue Code. One of the main advantages of forming an S corporation is the avoidance of double taxation. An S corporation's profits and losses are reported only on its shareholders' personal tax returns. The business itself is not required to pay taxes, unlike a typical corporation. Because of these advantages, the Internal Revenue Service has certain limitations regarding the corporations that qualify for S corporation status.

Shareholder Restrictions

In addition to limiting the size of an S corporation to no more than 100 shareholders, the IRS restricts the types of shareholders permitted to own stock in an S corporation. Individuals, estates, certain exempt organizations such as nonprofits, and specific types of trusts are the only shareholders eligible to qualify for S corporation status. A living trust that meets the eligibility requirements of the Internal Revenue Code can own stock in an S corporation.

Certain Living Trusts Permitted to Own Shares

The Internal Revenue Code limits the trusts eligible to hold S corporation stock to certain types of domestic trusts. A living trust, which is simply a trust that comes into existence during the lifetime of the person creating the trust, qualifies to own S corporation stock as long as it meets the requirements of a Subpart E "Grantor Trust" under the Internal Revenue Code.

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Grantor Trust

Under the Internal Revenue Code, a grantor trust eligible to be an S corporation shareholder must be one that is designed to be treated as entirely owned by one individual who is a United States citizen or resident. That is, for federal income tax purposes, all of the ordinary income and income allocated to the trust's assets is viewed under the law as being owned by the individual who created the trust. The individual deemed to be the trust owner is considered the shareholder of the S corporation, rather than the trust itself. A living trust that meets these requirements is eligible to be a shareholder of an S corporation.

Death of the Owner

A grantor trust continues to be eligible to own stock in an S corporation for two years after the death of the owner of the trust. At that point, the grantor trust ceases to be an eligible stockholder. The continuation of the corporation's S election depends on whether the trust meets the requirements of other types of trusts permitted to own S corporation stock. If the trust ceases to qualify as an eligible S corporation shareholder, its ineligibility results in the termination of the corporation's S election. The corporation then will be subject to double taxation under the Internal Revenue Code.

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Can a Trust Own an S Corp?
 

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S Corporation Structure

An S corporation is a tax designation that a business must apply for with the Internal Revenue Service. Used for small businesses, the benefit of the S corporate designation is that it allows the business to be taxed as a partnership. To apply for S corporate status, the business must submit a completed Form 2553 within 2 months and 15 days after the beginning of the first tax year that it wants to be treated as an S corporation.

How to Convert a C Corporation to an S Corporation With Shareholder Approval

A regular corporation, also known as a C corporation, can make an election with the Internal Revenue Service to receive special tax treatment as a small business corporation under Subchapter S of the tax code: The C corporation is then considered an S corporation. This designation changes only how the corporation is treated for tax purposes. The IRS has established a list of requirements that a C corporation must be able to satisfy to qualify for the election. An S corporation can have a maximum of 100 shareholders, none of those shareholders can be limited liability companies, corporations, or nonresident aliens, and it can have only one class of stock. The IRS requires all shareholders to consent to the election in writing.

S Corporation Regulations

An eligible existing corporation can elect to become an S corporation. This means that the corporation is taxed under the provisions of Subchapter S of the U.S. Tax Code. The purpose of this election is to avoid double taxation. Thus, rather than taxing the corporation and then taxing the shareholders, all the corporate income passes through to the individual shareholders, who only have to report the income on their individual tax returns.

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