Can an Irrevocable Trust Be an S-Corporation Shareholder?

An S corporation provides small business owners with the benefit of an incorporated business without the negative taxation of a regular corporation. S corporations must follow specific rules and regulations regarding size and ownership. For instance, an S corporation cannot have more than 100 shareholders, and all individuals that own shares of an S corporation must have United States citizenship or status as a resident alien.

Only estates and certain types of trusts can own shares of an S corporation. An irrevocable trust is established to provide assets to individuals named as the beneficiary of the trust. The assets contained in an irrevocable trust are managed by a trustee that controls the disbursements to the beneficiaries. An irrevocable trust that is setup as a grantor trust, qualified subchapter S trust or as an electing small business trust may own shares of an S corporation.

All grantor trusts are allowed to own shares of an S corporation. A grantor trust allows the creator of the trust to keep an interest in the trust assets or the income generated from the trust’s activities, as explained by the Lawyers.com website. In a grantor trust, the grantor claims losses and profits from an S corporation on her personal income tax return. Also, all losses and income from the trust must be reported on the grantor’s income tax return. Grantors are required to have citizenship in the U.S. or resident alien status.

In the case of a qualified subchapter S trust (QSST), the beneficiary of the trust has an obligation to make the subchapter S corporation election. Only one individual can be named as the beneficiary in a qualified subchapter S trust. All of the income generated by a qualified subchapter S trust must be distributed to the beneficiary of the trust. An S corporation can lose its tax election status if the qualified subchapter S trust fails to qualify as a grantor trust, qualified subchapter S trust or electing small business trust upon the death of the beneficiary.

An electing small business trust can have more than one beneficiary and the trustee has control over distributions made to beneficiaries. All beneficiaries of an electing small business trust must have U.S. citizenship or resident alien status. Also, an electing small business trust gets taxed separately at the highest possible income tax rate, according to the Lawyers.com website. In an electing small business trust, the creator of the trust may distribute assets unequally to beneficiaries.