The Unexpected Half-Life of A Terminating Grantor Trust or QSSTDecember 13, 2023 – Article
Private Client Services Partner, Stefanie Lipson, authored, "The Unexpected Half-Life of A Terminating Grantor Trust or QSST" in Trusts & Estates.
Trust documents are often drafted to ensure that a trust, whether by its terms or through trustee reformation, qualifies as an eligible shareholder of an S corporation (S corp). A similar level of focus should be directed to the process of administering a trust or estate on the death of a grantor or beneficiary of a trust that’s an S corp shareholder to ensure that the shareholder who succeeds to ownership is and remains an eligible shareholder—thereby preventing an inadvertent termination of the corporation’s status as an S corp.
A grantor trust under subpart E of part 1 of subchapter J of chapter 1 of the Internal Revenue Code that’s treated as owned by an individual who’s a U.S. citizen or resident, whether a revocable or irrevocable trust, qualifies as an eligible shareholder of an S corp without any election. Following the death of the grantor, the (now) non-grantor trust remains an eligible shareholder for a 2-year period beginning on the date of the grantor’s (deemed owner’s) death. If the stock isn’t transferred to an eligible shareholder prior to the end of this 2-year period, an election must be made by the trust holding the stock to qualify either as a qualified subchapter S trust (QSST) or as an electing small business trust (ESBT).