A Trust Can Hold Shares in an S-Corp but Must Contain Certain Key Provisions

While the trust you created when first setting up your estate plan may have been sufficient to accomplish your goals and objectives, circumstances may change over time. Depending on the type of assets you acquire through the years, it may be time to update your trust to ensure that your estate plan is still effective. One example is if you acquire stock in an S-Corporation. S-Corporations are subject to special rules in order to preserve their tax benefits and status. Trusts must be drafted carefully if they are to hold title to this type of stock.

5 Potential Modifications to Your Trust When Holding S-Corporation Stock

How should your trust be amended if you hold shares of S-Corporation stock? The following are five examples:

  1. The trust should potentially be modified to include Qualified Subchapter S Trust (QSST) provisions. These provisions must state that all trust accounting income of the trust must be distributed currently to a single individual shareholder. Additional restrictions apply as well, including the need for making a QSST election by filing an election with the IRS within 2.5 months of becoming a shareholder.
  2. The trust should potentially be modified to contain Electing Small Business Trust provisions. If the current trust has multiple beneficiaries, provisions can be added to include a flexible option for the trust to be an S-Corporation shareholder.
  3. The trust should be modified to ensure that all of the potential beneficiaries are either individuals, estates, or qualified charitable organizations.
  4. The trust should potentially be modified to ensure that it is treated as a “grantor” trust under the Internal Revenue Code rules and regulations. These rules can often be complex; therefore, any drafting should be handled by an experienced attorney.
  5. The trust should potentially be amended to include certain provisions that may allow it to continue to hold S-Corporation stock even after you die.

Understanding how to handle assets such as S-Corporation stock is important when modifying an estate plan. Fortunately, we can help. We encourage you to check out the positive feedback from our many former clients on our client testimonials page today.