Can a Trust Be a Share Holder of an S Corporation?

By Mike Keenan

An S corporation is a corporation that meets several restrictions and elects to be taxed as a partnership. One of the restrictions deals with who can be a shareholder in an S corporation. Most trusts are not permitted to be shareholders of an S corporation, but there are a few exceptions. If a nonqualified trust acquires S corp stock, the S corporation immediately loses is special tax status.

Grantor Trusts

Grantor trusts owned by a U.S. citizen or U.S. resident are permissible owners of S corp stock as long as the assets of the grantor trust, including any S corp stock, are treated as owned by the grantor. After the grantor's death, the trust is still an eligible S corp shareholder for up to two years. A grantor trust is a trust that the person who puts money or other assets in the trust maintains control over. As a result, the grantor is responsible for paying any resulting income taxes, rather than the trust's having to pay taxes.

Qualified Subchapter S Trusts

A qualified subchapter S trust may also own stock without jeopardizing the S corp status. To qualify, the trust must be a domestic trust and have only one beneficiary; the distributions of principal can only be made to that beneficiary; the beneficiary's interest in the trust must cease when the beneficiary dies or the trust is terminated; and if the trust is terminated during the beneficiary's lifetime, all of the trust assets must be given to the beneficiary. A qualified domestic trust is one which has at least one trustee who is a U.S. citizen or a U.S. corporation and which empowers that trustee to withhold income tax from any distributions. (26 USC 2056A) In addition, the trust must treat all income as being distributed to the beneficiary each year. For example, if the S corporation generates $50,000 of taxable income, the beneficiary must be treated as having received that $50,000 for tax purposes.

Ready to incorporate your business? Get Started Now

Electing Small Business Trusts

An electing small business trust (ESBT) is also permitted to own stock in an S corporation. An ESBT is less restrictive than a qualified subchapter S trust because even though it must still be a domestic trust, it can have multiple beneficiaries. However, all of the beneficiaries must be eligible to hold S corp stock in their own capacity, which includes U.S. citizens, U.S. residents and qualifying nonprofit organizations. The downside to using an ESBT is that the income is taxed at the highest marginal rate rather than the beneficiary's tax rate, which could be lower.

Voting Trusts

Sometimes, owners will pool their S corp stock and designate a trustee to vote on their behalf. However, the individual owners still are responsible for any taxes on the income generated by the stock. The voting trust is qualified to own S corp stock if the trust is created with a written agreement that delegates the right to vote to one or more trustees, requires the distributions from the S corp to be paid to the beneficial shareholders, requires that the stock ownership be returned to the original shareholders when the trust terminates, and sets a termination date or event for the trust.

Ready to incorporate your business? Get Started Now
Can a Trust Own an S Corp?

References

Related articles

Taxes & the Advantages of Living Trusts

A living trust is a document that a person creates while he is still alive, which enables him to financially provide for the beneficiaries he names. The creator of the trust, or grantor, takes some of his property and gives it to a third party, known as a trustee. The trustee, a person chosen by the grantor, manages the property and distributes it to the beneficiaries, subject to terms outlined in the document that established the trust known as a trust agreement. A trust, if structured appropriately, can protect assets from creditors and can allow for assets to be transferred quickly without having to go through probate. What effect the trust will have on taxes depends on how the trust is structured.

How Do You Remove the Executor of a Living Trust?

The executor of a living trust, normally known as the trustee, is vested with the power to administer trust assets on behalf of the trust beneficiaries in conformity with the terms of the trust deed. The ease with which he can be removed from his position depends on a number of factors, including whether the trust is revocable or irrevocable.

Tax Treatment of Living Trust Distributions

When a grantor transfers assets to a trust during his lifetime, rather than having the trust take effect at death by operation of a will, the IRS treats it as a living trust. The tax treatment of distributions from any trust to its beneficiaries is the same, regardless of whether the trust is effective before or after the grantor’s death. The factors that determine who is responsible for paying the taxes on trust income depends on the stipulations of the trust document and whether the grantor retains the right to revoke it.

LLCs, Corporations, Patents, Attorney Help

Related articles

Can Living Trusts Own S Corporation Stock?

An S corporation is simply an ordinary corporation chartered under state law whose shareholders have decided to make a ...

How to Set Up a Tax ID Number for a Trust Account

A trust is a legal arrangement that allows property to be held for the benefit of a named beneficiary. There are a ...

What Are the Disadvantages of an Irrevocable Trust?

A trust is a legal device that permits a grantor to place assets under the control of a trustee, then who administers ...

Amending a Florida Trust

A trust is an instrument that allows one party, known as the settlor, to contribute assets to the trust and to name ...

Browse by category
Ready to Begin? GET STARTED