Can a Trust Own a Corporation: Everything You Need to Know
If you're wondering can a trust own a corporation, the answer is yes, but only specific types of trusts qualify.3 min read
2. Electing Small Business Trusts or ESBTs
3. Grantor Trusts
4. Living Trusts
5. How to Put Your Company into a Trust
Updated July 13, 2020:
If you're wondering can a trust own a corporation, the answer is yes, but only specific types of trusts qualify.
As a legally separate entity, a trust manages and holds specific assets for a beneficiary's benefit. A grantor donates the trust assets, decides the beneficiary, determines the conditions for the trust, and selects a trustee to oversee the assets on behalf of the beneficiary. Grantors choose to use trusts in cases where the beneficiaries cannot manage the assets by themselves.
An S corporation is a business entity that chooses to be granted a special tax status by the IRS. S corps are not subjected to the double taxation that other businesses are since their shareholders can elect to have the business' profits and losses included on their personal income taxes.
There are several types of trusts that can own an S corporation.
Qualified Subchapter S Trusts or QSSTs
There are two points in time when a trust can elect to become a QSST or Qualified Subchapter S Trust. The first is within two and a half months after the trust becomes a stake holder in the S corp. The second is two and a half months after the S corp's first taxable year begins. The trust's beneficiary must meet several strict guidelines in order to be a qualifying S corporation shareholder. If the below requirements are not met, the S corp might lose its tax status.
- The trust can have only one income beneficiary, and that beneficiary must be a U.S. resident or citizen.
- The one beneficiary must currently collect all income of the trust.
- The beneficiary must also collect all corpus distributions.
- Income interest of the beneficiary will have to end at the beneficiary's death or the trust's termination, whichever is earlier.
- The beneficiary must elect to be considered as an eligible S corp shareholder.
Electing Small Business Trusts or ESBTs
In an ESBT or Electing Small Business Trust, the S corporation's income taxes are not affected by the trust distributions. ESBTs are comprised of two different trusts that separate the S corp stock from any other assets the trust owns.
Like a QSST, an ESBT requires its beneficiaries to follow guidelines as well. The beneficiaries must be charitable organizations, estates, or individuals, and they cannot have bought their interest in the trust. Similar to a QSST, a trust must choose to be considered as an ESBT within two and a half months of either the trust becoming a stakeholder in the S corp or the S corp's creation.
Grantor trusts are usually the favored option for a trust-owning business. Grantor trusts must be treated as though they are owned by only one person. If the grantor should die and the trust continues, the trust can still be a stakeholder in the S corp for up to two years after the death of the grantor. If the grantor status of the trust is lost by any means other than the grantor's death, it cannot continue as a stakeholder in the S corp.
Essentially, all living trusts are grantor trusts when they are created due to the grantor's retained rights to revoke the trust and to benefit from the trusts' assets during their life. Living trusts are very popular in estate planning since their purpose is to hold assets for the living and then distribute them upon death, based on the wishes of the deceased. A living trust owns the assets given to it by the grantor, so all property must be re-titled while the grantor is still alive, including S corporation stock.
Issues can sometimes arise when the grantor dies and the S-corp election comes under scrutiny. If S-corp status is inadvertently terminated, there are some relief procedures offered by the Internal Revenue Service.
How to Put Your Company into a Trust
If you have not yet formed your company, remember to issue the certificates in the trust's name. Trusts have three parts to their names: the trusts's name, the date is was formed, and the trustee's name. All three parts need to be on the certificates. If the business is already running, shares of a corporation can easily be transferred to a living trust by ensuring that the trust owns your stake in the business.
If you need help with a trust-owned corporation, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.