Content area
Full Text
If a qualified subchapter S trust (QSST) owns both S corporation stock and other assets, determining whether the income from the other assets must be distributed to the beneficiary depends on the terms of the trust document. It is possible to draft a QSST for which the income from other assets can be accumulated inside the trust.
Background
A QSST is one of several types of trusts that are eligible to hold stock in an S corporation. Its two primary requirements are (1) there can be only one beneficiary of the trust and (2) all income must be distributed at least annually (Sec. 1361(d)(3)(B)).
In this context, "income" means fiduciary accounting income (also called trust accounting income, or TAI) of the trust, rather than taxable income. For example, if an S corporation's Schedule K-l, Shareholder's Share of Income, Deductions, Credits, etc., shows $100,000 of taxable income, but the S corporation makes a distribution of only $45,000, the TAI required to be paid from the trust to the beneficiary is only $45,000. From an income tax perspective, the full $100,000 will be taxable to the beneficiary because the QSST election causes the portion of the trust consisting of the S corporation stock to be treated as a grantor trust to the beneficiary (Sec. 1361(d)(1)(B)). The income from any assets (other than from the S corporation) is taxed based on normal trust income tax rules.
However, one of the requirements to qualify for QSST status is that the trust must distribute (or be required by its terms to distribute) all the income of the trust currently to the sole income beneficiary. Therefore, a common assumption is that the non-S corporation portion of the trust must be a simple trust (which is required to distribute all income to the beneficiary)...