The main benefit of a QSST is that it is treated as a grantor trust and therefore considered an eligible S corporation shareholder. ... The interest terminates when the trust terminates or the beneficiary dies, and at that point principal and income must be distributed to the beneficiary (or the beneficiary's estate).

What type of trust is a QSST?

A Qualified Subchapter S Trust, commonly referred to as a QSST Election, or a Q-Sub election, is a Qualified Subchapter S Subsidiary Election made on behalf of a trust that retains ownership as the shareholder of an S corporation, a corporation in the United States which votes to be taxed.

Does a grantor trust need to make a QSST election?

Likewise, former grantor trusts whose grantor-trust status terminated by reason of the grantor's death may own S corporation stock for two (2) years. ... In addition to the requirements in the trust itself, the income beneficiary must make an election for the trust to be treated as a QSST.

How do you determine if an irrevocable trust is a grantor trust?

An irrevocable trust may become a grantor trust under Internal Revenue Code (IRC) Section 673(a) if the grantor holds a “reversionary interest" in a trust that is greater than 5 percent of trust principal or income. A reversionary interest is the right of a grantor to later get back some of the trust assets.

What type of trust is an ESBT?

The ESBT is treated as a single trust for administrative purposes, such as having one taxpayer identification number and filing one tax return.

Tenth of an Hour, Episode 85: Trusts as S Corporation Shareholders: Basics of the QSST

16 related questions found

What is the difference between a QSST and ESBT?

While there can only be one income beneficiary, a QSST may designate successor beneficiaries. With an ESBT, you can set up one trust that includes all of the income beneficiaries. However, note that any ESBT designated beneficiaries must be an individual, estate or charity eligible to own S corporation stock.

Is an ESBT a grantor trust?

A grantor trust is eligible to make an ESBT election. If an ESBT is determined to be a grantor trust (in whole or in part), the income of the S Corporation is taxed at the individual grantor level instead of at the trust level. This could be problematic if an ESBT is a grantor trust with respect to a nonresident alien.

Is an irrevocable trust a non grantor trust?

A non-grantor trust can be an irrevocable trust that allows the grantor to transfer assets by gift or sale for the benefit of beneficiaries. ... To achieve exclusion from such taxes and create an effective non-grantor trust, the grantor must not have retained rights, interests or powers over the trust assets.

Who owns an irrevocable trust?

Under an irrevocable trust, legal ownership of the trust is held by a trustee. At the same time, the grantor gives up certain rights to the trust.

Can a grantor be a beneficiary of an irrevocable trust?

The grantor is not the trustee but can be a beneficiary. This type of irrevocable trust is called a self-settled asset protection trust and will be discussed in more detail below.

Is a QSST a simple or complex trust?

Under this scenario, the subtrust would elect QSST status, while the original trust could continue to be a complex trust. ... Each separate trust (or subtrust) would need to have a separate employer identification number and file a separate income tax return (Regs.

Who makes a QSST election?

The trust's current income beneficiary must make the QSST election. The beneficiary must file a statement that complies with Sec. 1361(d)(2) and in the manner prescribed by Regs.

Is a QSST irrevocable?

The two-year limitation for S corporations to have as a shareholder either a testamentary trust or living trust that becomes irrevocable can be avoided by electing to convert the trust to a Qualified Subchapter S Trust, commonly referred to as a QSST.

How are QSST taxed?

Although the S corporation income of a QSST is taxed to the individual income beneficiary, capital gain on the sale of the S corporation stock is taxed at the trust level. If the QSST's AGI exceeds the threshold amount, the QSST would owe the net investment income tax on the capital gain.

What tax form does a QSST file?

Qualified Subchapter S Trusts (QSSTs)

The corporate income tax return (Form 1120S, U.S. Income Tax Return for an S Corporation) shows all the income for the year, and then splits it among all the shareholders on Schedule K-1. Each shareholder than declares his or her portion of the income on Form 1040.

What makes a trust a GST trust?

A generation-skipping trust (GST) is a type of legally binding trust agreement in which the contributed assets are passed down to the grantor's grandchildren, thus "skipping" the next generation, the grantor's children.

How do you tell if a trust is revocable or irrevocable?

A revocable trust and living trust are separate terms that describe the same thing: a trust in which the terms can be changed at any time. An irrevocable trust describes a trust that cannot be modified after it is created without the consent of the beneficiaries.

Who owns the property in a grantor trust?

A grantor trust is a trust in which the individual who creates the trust is the owner of the assets and property for income and estate tax purposes. Grantor trust rules are the rules that apply to different types of trusts. Grantor trusts can be either revocable or irrevocable trusts.

What happens to revocable trust when grantor dies?

When the grantor of a revocable trust dies, the trust becomes irrevocable. At that point, the successor trustee needs a federal tax identification number or employer identification number. In some states, successor trustees also need state tax identification numbers.

What makes a trust a non-grantor trust?

A non-grantor trust is any trust that is not a grantor trust. As a separate tax entity, a non-grantor trust is required to have its own TIN . Non-grantor trusts must pay taxes on income received, which is typically at much higher rates than for individuals.

Does an irrevocable grantor trust need an EIN?

Irrevocable Trusts.

When an irrevocable trust is established or a grantor revocable trust becomes irrevocable (typically at the grantor's death), the trust is a separate entity from the trust's creator. Therefore, the IRS requires the irrevocable trust to have its own EIN.

What is the difference between grantor and non-grantor trust?

Unlike a grantor trust, which is taxed to the grantor, a nongrantor trust is taxed as its own separate taxpaying entity. The trustee of the trust has the trust file its own tax return, Form 1041. On that return goes all the trust's items of income and expense.

Can a foreign trust be an ESBT?

An ESBT must be a domestic trust (a foreign trust is ineligible) that, among other requirements, cannot have as a beneficiary any person other than an indi- vidual, or estate or certain qualifying tax-exempt or- ganization.

Can an ESBT have an NOL?

In a recent Chief Counsel Advice, the IRS has indicated that the NOL cannot be carried over to the ESBT (although it can be used by the non-ESBT portion of the trust).

How does a trust elect to be an ESBT?

To qualify as an ESBT, a trust must meet only three requirements: All of the trust's beneficiaries must be individuals or estates eligible to be S shareholders. ... No interest in the trust may be acquired by purchase; these interests must be acquired by gift, bequest, etc. The Trust must elect to be an ESBT.