Estate Planning With S Corp Trusts After Tax Reform: QSSTs, ESBTs, and the 20% QBI Deduction

Description

Only certain types of trust can hold S-corp stock, and assuring that any trust qualifies will be critical to maintaining the important S-corp pass-through tax treatment. It is important to understand the rules relating to trusts holding S-corp stock in the planning process because the status of a trust can change over time and require special elections and special trust structures to maintain qualification. The key elections and structures are the ESBT and the QSST, each of which has different tax treatment. The relatively new QBI deduction will have different treatment under each of these forms of trust.

The 20% QBI deduction for pass-through entities contained in the tax reform law creates significant opportunities, and no small amount of additional complexity, for estate planners and advisers to clients whose estate plans include trusts to hold and transfer S corp stock. Estate planning counsel should be looking now at potential changes to existing trusts to take advantage of new tax-saving opportunities for S corp trusts.

The law also permits ESBTs to have nonresident beneficiaries, even if the ESBT holds S corp stock, and clarifies that ESBTs making charitable contributions apply individual charitable deduction limits rather than those of Section 642(c). Both of these provisions may create planning opportunities for estate plans in which an S corp ownership interest is a significant component.

Estate planning counsel must be adept at applying the new provisions to current and future estate plans involving S corporations. For existing ESBTs, trustees and their advisers should determine whether the trust document allows for realignment of beneficiaries to enable the use of a QSST or, in the absence of this power, whether a modification of the original trust is appropriate.

Listen as Langdon T. Owen, Jr., Shareholder at Cohne Kinghorn, provides a practical guide to the challenges and opportunities in using trusts to hold S corporation stock arising from the new tax overhaul bill.