Types of Trusts That Can Hold S Corporation Shares
- S Corp Expert
- Mar 23
- 4 min read
Are you looking to understand which types of trusts can hold shares in an S corporation? Whether you're involved in estate planning, managing an S corp, or exploring tax options, this guide is for you. We’ll walk you through the different types of trusts eligible to hold S corporation shares, and explain how each type works to manage benefits and compliance.
What Types of Trusts Can Hold S Corporation Shares?
S corporations are strict about who can hold their shares. To maintain their S status, only certain types of trusts are eligible. These include:
Grantor Trusts
Section 678 Trusts
Testamentary Trusts
Voting Trusts
Electing Small Business Trusts (ESBTs)
Qualified Subchapter S Trusts (QSSTs)
Let's dive into the specifics of each type and what it means for S corporation stock ownership.
Grantor Trust: The Most Common Option
A grantor trust allows the individual who creates the trust (the grantor) to retain certain powers, meaning the grantor pays taxes on the trust’s income. For S corporation shares, this trust can hold stock as long as the grantor is an individual and not a nonresident alien.
Example: If you set up a grantor trust for your family, the trust can hold S corporation shares, and you would remain responsible for any tax obligations.
Section 678 Trust: When the Beneficiary Controls the Trust
In a Section 678 Trust, the beneficiary, not the grantor, controls the trust and is responsible for paying taxes on the trust’s income. This trust is eligible to hold S corporation shares if the beneficiary is an individual (and not a nonresident alien).
Example: If a parent sets up this trust for a child, the child would manage the trust and pay taxes on any income, including dividends from S corp shares.
Testamentary Trust: A Trust Based on a Will
A testamentary trust is set up according to instructions in a will, often used to care for children who can't yet manage assets. This type of trust can hold S corporation shares for up to two years after the decedent's death. After this period, the trust must either sell the shares or have the S corporation buy them back to preserve the company’s tax status.
Example: If an individual leaves S corporation shares to their child in a testamentary trust, the trust can hold those shares for two years before it needs to liquidate them or transfer them.
Voting Trust: Managing Voting Power
A voting trust brings together the voting power of multiple shareholders, temporarily transferring their shares to a trustee who votes on their behalf. To hold S corporation shares, the trust must:
Be formally written.
Transfer voting shares to the trustee.
Ensure that the shares are returned to shareholders after the trust period ends.
This trust is typically used when multiple shareholders wish to consolidate voting rights, but the S corporation's requirements must still be followed.
Example: Shareholders of an S corp set up a voting trust to consolidate their voting power for a specific period, after which the shares revert to the original shareholders.
Electing Small Business Trust (ESBT): Designed for Multiple Beneficiaries
The Electing Small Business Trust (ESBT) is specifically designed for holding S corporation stock. It allows multiple beneficiaries to benefit from the trust’s earnings while keeping S corporation stock and other assets separate for tax purposes. Each beneficiary is treated individually for the 100-shareholder limit.
Example: A family trust with several beneficiaries can use an ESBT to hold S corporation shares, keeping the tax structure compliant while allowing income to be divided among family members.
Qualified Subchapter S Trust (QSST): Single Beneficiary Focused
A Qualified Subchapter S Trust (QSST) is a special type of trust designed for estate planning. It can only have one income beneficiary, and all income from the S corporation must be distributed to that beneficiary at least once a year.
Important Rules:
The trust can only distribute assets to the income beneficiary while they are alive.
Upon the beneficiary’s death, all assets must go to them, ensuring no tax complications.
Example: A parent might set up a QSST to transfer S corporation shares to their child, with the child receiving all income from the stock each year.
Why It Matters: Compliance and Estate Planning
Each trust type plays a unique role in managing how and when benefits are distributed, ensuring that the S corporation maintains its tax status while meeting shareholders’ estate planning needs. When selecting a trust to hold S corporation shares, it’s important to consider the specific rules and limitations each trust brings.
Conclusion
Understanding which trusts can hold S corporation shares is critical for effective estate planning and tax compliance. Whether you're setting up a trust to benefit your family or seeking to manage voting rights, knowing your options is key to making the right choice.
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