Hidden Traps – Revocable Living Trusts with S Corporation Stock

A revocable living trust is a vehicle often used by many individuals to hold assets for estate planning purposes.  Such trusts can continue to hold S corporation shares for two years after the death of the settlor. After the two-year period, the trust must be a Qualified Subchapter S Trust (QSST) or an Electing Small Business Trust (ESBT) in order to continue to be an eligible S corporation shareholder. Both QSSTs and ESBTs have limitations and can be costly in terms of the ability to achieve the intended objectives of the trust (QSST) or paying tax at the highest marginal tax rates (ESBT). Among other requirements, a QSST must have only one income beneficiary and all income and corpus distribution must go to that one beneficiary during his/her lifetime. Often, most trusts do not have such provisions and, for those trusts, the only other solution is for the trust to become an ESBT. This option can be expensive in that all the income from the S corporation must be taxed to the trust at the highest marginal tax rates and distributions to the beneficiaries do not generate deductions at the trust level. The outcome could be a trust paying tax at 39.6% federal and 12.3/13.3% for California, while the beneficiaries could be in much lower tax brackets. There are planning options to deal with these issues.  If you own S corporation stock through your living trust, it is important that you review your planning to ensure that the pitfalls discussed above have been addressed.  Please contact us or your estate attorney, if you have any questions.

Please contact Martini, Iosue & Akpovi by phone at (818) 789-1179 if you have questions or want more information.


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