Before 2018, the Code required that a potential current beneficiary of an ESBT
must have been eligible to hold S corporation shares directly.
While there are other eligible trust shareholders, such as grantor trust and testamentary trust, which each have their uses, this article will address the benefits and disadvantages of using an ESBT
versus a Qualified Subchapter S Trust (QSST).
(9) Forms 1041 are also filed for qualified disability trusts, electing small business trusts (ESBTs
), grantor type trusts, bankruptcy estates, and pooled income funds.
an Electing Small Business Trust (ESBT
)--[but if there are 200 beneficiaries of the trust, all 200 are counted as shareholders and may disqualify the corporation's "S" status],
The QSST is a rather inflexible planning tool, so Congress created the ESBT
Since the objective is for the grantor to survive the retained income interest the trust instrument will either require a termination distribution or a conversion to a QSST or ESBT
within 2 years of the cessation of the grantor's term interest.
The failure to qualify as an S Corp, ESBT
, QSST or QSub as of the Effective Date was solely because the Election under Subchapter S was not timely filed by the relevant election's clue claw: and
Electing Small Business Trust (ESBT
is a trust in which beneficiaries are considered shareholders of a subchapter S corporation.
In addition, Congress has eliminated a potential problem for electing small business trusts (ESBT
* shareholders are only individuals, estates, and certain trusts, including an electing small business trust (ESBT
) (Each beneficiary of the ESBT
counts as one owner.)
1031 tax-free exchange would likely be subject to the floor because individuals commonly engage in tax-free exchanges, while fees for determining whether to make a 65-day election (which permits trusts or estates to elect to treat a distribution made within the first 65 days of the entity's tax year as made the prior year) (19) or electing small business trust (ESBT
) election (20) would not be subject to the floor.
The IRS recently announced exclusive simplified methods for taxpayers to request late S corporation elections and to request relief for late Electing Small Business Trust (ESBT
) elections, late Qualified Subchapter S Trust (QSST) elect i ons, late Qualified Subchapter S Subsidiary (QSub) elections, certain late corporate classification elections, and pending letter ruling requests.