FAIRFAX, VA ESTATE PLANNING ATTORNEYS DISCUSS QUALIFIED SUBCHAPTER S CORPORATION TRUSTS (QSST)
Every year, thousands of managers and owners of small and medium sized Virginia businesses select the S corporation operational structure because of its reduced liability and tax advantages. The S corporation essentially avoids the payment of corporate taxes by passing the income to the shareholders, who are responsible for paying the IRS for their portion. However, there are some drawbacks to the S corporation structure. One of these is the fact that only certain types of trusts can legally hold shares of an S corporation. If shares of a Virginia S corporation are placed into a non-qualifying trust, the S corporation could have its status revoked and all shareholders could potentially be liable for the payment of federal income taxes and penalties. This is why it’s crucial to consult a qualified Virginia tax or estate planning attorney before funding a trust with shares of an S corporation.
Qualified Subchapter S Trusts (QSST)
As the name indicates, Qualified Subchapter S Trusts do meet the legal stipulations to hold shares of an S corporation. However, there are certain requirements that a trust must meet to be a QSST:
– There can only be one beneficiary to the trust. An exception to this would be the beneficiary’s spouse, who can share the income from the trust if both the beneficiary and spouse are U.S. citizens or residents and file a joint tax return.
– During his or her lifetime, only the beneficiary can be given shares of stock in the S corporation from the QSST.
– All of the trust income from the S corporation must be distributed to the beneficiary.
– If the beneficiary dies, and he or she bequeaths the S Corporation shares to another trust, that trust will have to re-qualify as a QSST.
For many of our estate planning clients, a QSST satisfies their need to fund trusts with shares of an S corporation. However, occasionally our attorneys will have to look to other options, like the Electing Small Business Trust. This is the only type of trust that permits multiple beneficiaries and allows the trustee greater flexibility over distributions of profits. In most cases, the QSST will work for most of our legal clients.
If you own shares of a Virginia S corporation and are thinking about placing them in a trust, you first need to verify that this is possible. Retain the services of a qualified Virginia business attorney before you act.
