Trusts as S corporation shareholders

Trusts as S corporation shareholders

Understanding S Corporation Shareholder Eligibility

The S corporation structure offers advantages for many businesses, but adherence to Internal Revenue Code (IRC) and Treasury regulations is crucial to maintaining S corporation status. Compliance is essential to avoid jeopardizing the S corporation standing, which is subject to specific mandates outlined in the IRC.

100-Shareholder Limit and Eligibility Criteria

S corporations are subject to a 100-shareholder limit, and each shareholder must meet the criteria of an eligible S corporation shareholder. Qualifying shareholders encompass U.S. residents, citizens, estates of decedents, and individuals in a Title 11 (bankruptcy) case (Sec. 1361(b)). Nonresident aliens are generally prohibited from holding S corporation stock, with exceptions for electing small business trusts (ESBTs).

Permissible S Corporation Shareholders

While trusts, in general, are restricted from holding S corporation stock, certain trusts are permissible S corporation shareholders. These include grantor trusts, testamentary trusts, voting trusts, ESBTs, and qualified Subchapter S trusts (QSSTs) (Sec. 1361(c)(2)).

Grantor Trusts

In grantor trusts, the grantor retains control over income and assets, with tax implications reported on the grantor’s individual income tax return (Sec. 671). A grantor trust can qualify as an eligible shareholder without the need for a specific election.

Testamentary Trusts

A testamentary trust, formed through a will, qualifies as a permissible shareholder for two years following the transfer of S corporation stock. After this period, eligibility depends on meeting other IRC provisions.

Voting Trusts

To qualify as an eligible shareholder, a voting trust must adhere to specific written agreements, including the delegation of voting rights and termination conditions (Regs. Sec. 1.1361-1(h)(1)(v)). Beneficiaries, determined under grantor trust rules, are treated as owners.


ESBTs require an election filed within a specific timeframe. Permissible beneficiaries are limited to individuals, estates, charitable entities, and certain government entities with a contingent interest. The Tax Cuts and Jobs Act expanded eligibility to include nonresident aliens.


QSSTs involve a single income beneficiary making an irrevocable election as the deemed owner. The trust follows grantor trust rules, and gains or losses upon stock disposition belong to the trust.

Ensuring Compliance for S Election Preservation

Wholly owned grantor trusts, nongrantor administrative trusts, testamentary trusts, voting trusts, ESBTs, and QSSTs must adhere to Code provisions to maintain eligibility as S corporation shareholders. Failure to comply may result in S election termination, emphasizing the need for continuous monitoring and potential relief under Sec. 1362(f) for inadvertent terminations. Individuals overseeing these trusts play a crucial role in preserving the S election for the underlying corporation.

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