Electing Small Business Trust – S corporations must meet some strict requirements or risk losing their tax-advantaged status. Among other things, they cannot have more than 100 shareholders, more than one class of shares, and only certain types of shareholders.
In the context of an estate plan, it is important that any trust that owns shares of an S corporation or receives those shares through an estate plan transaction is an eligible shareholder.
Electing Small Business Trust
The assignor is trustworthy. One important caveat is that these trusts must have an “alleged owner” who is a citizen or resident of the United States and meets other requirements. Not all grantor trusts are eligible, including some with general tax planning functions. Additionally, upon the death of the transferor, the trust remains eligible for two years, after which it must either distribute shares to eligible shareholders or qualify as a Qualified Subchapter S Trust (QSST) or Elective Small Business Trust (ESBT). .
Taking Care With S Corporation Trusts
Will and Trust. This type of trust is established by your will. Eligible shareholders of the S corporation for up to two years after the transfer, after which they must distribute shares to eligible shareholders or qualify for QSST or ESBT.
QSST. These trusts must meet several requirements, including distributing all current income to a single beneficiary who is a US citizen or resident and filing an election with the IRS. It cannot be used to benefit multiple beneficiaries or accumulate income, but in practice there may be multiple beneficiaries if each is treated as the owner of a separate interest in the trust. QSST income is taxed at the beneficiary’s tax rate.
ESBT. A trust can become an eligible shareholder if 1) all beneficiaries or “current potential beneficiaries” hold shares directly, 2) no beneficiaries purchase those shares, and 3) ESBT if the trustees file an election with the IRS.
S Corp Foreign Shareholders & S Corp Foreign Ownership Guide
If there are shares of an S corporation in the trust, review the terms carefully to ensure you do not inadvertently disqualify yourself as an S corporation. Your team of advisors can help you determine whether you have properly accounted for S corporation shares in your estate plan.
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Articles, guides, blogs, podcasts, and videos in the Learning Center are for informational purposes only and are not advertisements for products or services. Accuracy and completeness are not guaranteed and do not constitute legal or tax advice. Consult with your tax, legal and financial advisors. What is a Trust? Ownership of any asset generally includes the right to control the asset and the right to benefit from it. A trust divides ownership of assets.
Don’t Jeopardize Your S Corporation Status
Presentation on theme: “What is a trust? Ownership of an asset generally includes the right to control the asset and the right to receive a benefit. A trust divides ownership of an asset:”— Presentation transcript:
1 What is a Trust? Ownership of any asset generally includes the right to control the asset and the right to benefit from it. A trust divides ownership of assets. Legal Ownership Equitable Ownership The purpose of a trust is to hold assets for the ultimate benefit of individuals or classes without giving beneficiaries immediate access to trust assets.
Establishes a trust but has no interest in trust assets Trustee has legal title to trust assets Exercises control and responsibility over assets Beneficiaries Ultimate beneficial owners of trust assets Equitable “Owners” of trust assets escrow
S Corporation Questions & Answers
Assignor, consignee and beneficiary A person can fulfill multiple functions, for example. The grantor can sometimes be the trustee, and the trustee is often one of the beneficiaries. A trust is required for a living trust, except where the beneficiaries and trustees cannot be exactly the same or the trusts are merged and terminated. This can often be a nominal amount, but it is not. Applicable to testamentary trusts because a trust does not take effect until after the testator’s death Signatures of Grantor and Trustee Many states require witnesses or notarized signatures.
It is rarely recommended to intentionally create an oral trust. However, oral trust agreements are not inherently valid. jeon. Bob gives Jane $1,000 and says, “Save this for Joan.” This is a trust contract. Even without writing, a court can still infer the existence of a trust for reasons of fairness or impartiality. These include: Constructive trust Implicit trust
5 Grantors of revocable trusts are fully flexible and revocable. The grantor may: Sometimes called “replacement,” such as modifying a trust, subtracting money from a trust, changing beneficiaries, and canceling an entire trust. Initial Trustees Supporting Trustees are appointed after the beneficiary’s disability or the beneficiary’s death.
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Probate avoidance Problems with probate Delay in administration and distribution after death Legal costs of filing lawsuits Public nature of proceedings Court oversight bond requirements Opportunity for interested parties to challenge the will Disability plan If the grantor is disabled , the trustee will take over, so many banks rely on power of attorney, which may not be respected.
Formation costs: Legal fees Deed filing fees Hassles of initial trust funding Revocable If the trust is not funded with all or substantially all of the grantor’s assets, the trust may become void as the probate will have to pass from all modes. The key to trust! Sometimes a lack of judicial oversight can be a bad thing. This is especially true when there is the possibility of abuse or disagreement between the heirs.
8 A grantor of an irrevocable trust may not cancel, amend or amend the trust. However, depending on the purpose of the trust, the grantor may retain some control over the trust assets. An irrevocable trust is often used for one or more of the following purposes: Medicaid or other benefit eligibility plans Estate tax plans Protections for creditors
What Is The Net Investment Income Tax?
It takes effect when the testator dies. Common Examples: Credit Protection Trusts Marriage Trusts Children’s Trusts In addition to being formed by will, all of these can be formed into trusts (revocable or irrevocable) after the grantor’s death. .
The general rule is that only individuals can be shareholders of S Corp shares. Because clients can hold S Corporation shares, a trust that cannot hold these shares may be an imperfect estate planning tool. Trusts that may hold shares of S Corporation include: Transferor Trusts These trusts are treated as wholly owned by the transferor for income tax purposes. Subchapter S Qualified Trust (“QSST”) Elective Small Business Trust (“ESBT”)
Requirements for a trust to qualify for the QSST: There can only be one income beneficiary. The income recipient must be a resident of the United States. All trust income must be distributed to income beneficiaries at least annually. The principal can only go to one beneficiary. The discretion as to whether to distribute can remain with the trustee. Interest from the income must continue until the termination of the trust or the death of the beneficiary, whichever occurs first. The trust must file an election to be treated as an eligible shareholder of S Corporation. QSST income is taxable. as income to the beneficiaries.
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Similar to QSST Advantages over QSST ESBT can have multiple beneficiaries. Income may be allocated by the trustee to multiple beneficiaries and may be accumulated rather than distributed. Disadvantages People are taxed at the highest marginal income tax rate. (39.6% as of 2013)
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The Pros And Cons Of S Corporation Election
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What Is A Trust? Ownership Of Any Asset Normally Includes The Right To Control It And The Right To Benefit From It. A Trust Splits Ownership Of Its Assets:
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