Academic journal article Journal of Accountancy

(Use of Trusts in S Corporation Succession planning.)(Small Business Tax Solutions)

Academic journal article Journal of Accountancy

(Use of Trusts in S Corporation Succession planning.)(Small Business Tax Solutions)

Article excerpt

Q. Many of my clients operate their businesses as S corporations. I know qualified subchapter S trusts (QSSTs) cm be S corporation shareholders. Can other types of trusts be used in S corporation succession planning?

A. In addition to individuals and estates, under current law only four types of trusts are permissible S corporation shareholders: QSSTs, grantor trusts, Internal Revenue Code section 678 trusts and voting trusts.

Grantor Trusts

IRC section 1361 (c) (2) (A) (i) says a trust treated as owned by a US. citizen or resident may hold S corporation stock. Any trust in which the grantor retains powers or rights described in IRC sections 671 to 677 is deemed to be owned by the grantor. Thus, a qualifying grantor trust may own S corporation stock.

Succession planning. Revocable (or living) trusts have become popular as effective will substitutes because of their privacy and probate-avoidance features. They can own S corporation stock because they are deemed to be grantor trusts under section 676.

Since IRC section 2702 was enacted, grantor-retained annuity trusts (GRATs) and grantor-retained unitrusts (GRUTs) have become popular succession-planning tools. When a grantor retains a specified income interest for a certain period, the value of the gift of the remainder interest can be significantly discounted, effectively leveraging the grantor's unified credit. The flowthrough nature of S corporation income makes it an ideal way to fund a GRAT.

Section 678 Trusts

If someone other than the grantor has sole power over a trust's income or corpus, he or she is deemed the owner of the trust under section 678. Such trusts can own S corporation stock in a way similar to grantor trusts.

Succession planning. A general power of appointment trust is an alternative to a qualified terminable interest property (QTIP) trust for obtaining the estate tax marital deduction. The surviving spouse has a general power of appointment over the entire trust and is thus deemed to be its owner. This means such trusts can be structured as section 678 trusts and can own S corporation stock--even if there is more than one permissible beneficiary.

A section 678 trust also may be used for the unified credit shelter bequest to children or for QTIP property following the surviving spouse's death. …

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