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June 24, 2024

Converting Trust Elections for S Corporation Stock

Pennsylvania Institute of CPAs

In an article for the Pennsylvania Institute of CPAs (PICPA), private client associate Brian Balduzzi explained how trustees for beneficiaries who die owning S corporation stock must manage conversion of the stock into subchapter S trusts (QSST) or an electing small business trust (ESBT).

For QSSTs, Balduzzi notes that there may be only one lifetime trust beneficiary, all ordinary income of a QSST must be distributed to them, regardless of trustee discretion. As such, the mandatory income distribution requirement can result in an increase in the beneficiary’s taxable estate, loss of some creditor or divorce protection, spendthrift issues and disqualification for state or federal benefits for those with special needs.

Balduzzi writes that ESBT elections can be appropriate for trusts where the beneficiaries are granted the sole power to withdraw the S corporation income distributed to the trust.

Balduzzi advises trustees to thoroughly review the trust instrument to determine possible tax effects on the income, to consider whether a trust modification might help better administer the ESBT for the beneficiary, and to collaborate with the S corporation and beneficiary to find the best course of action.

Full Article

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