Small Business Trust (ESBT)
Here again, like the Sub S Trust, is an estate planning tool using your Living Trust. However, there are two big differences.
Rather than a single income beneficiary, here you can have multiple income beneficiaries. And this time you change tax categories – from personal to the trust level.
Corporate stock or Business Trust shares and other property fund the trust. There is no purchase transaction of stock or shares by the living trust. It is a gift, bequest, etc.
You can have up to 75 beneficiaries in one living trust. Or you can setup multiple living trusts. Beneficiaries can be individuals, estates, or charities.
Your beneficiaries only get income from the trust. After you pass away, ownership of the business often transfers to heirs. Note this could change the beneficiaries income.
Initially your Trustee files Form 2553 with the IRS to elect Small Business Trust status. You do this within 75 days of receipt of the Corporate stock or Business Trust shares.
Trustee files Annual Tax Return on Form 1041
Determine the character of any business income. Then list it on the trust tax return. Trust marginal rates are the highest. Yet income can accumulate within the business.
However, a 39.6% tax rate applies to undistributed ordinary income. So the trustee normally distributes all income to the beneficiaries. This is because they are often in lower personal tax brackets.
A Sub S Trust gets personal level taxation and must distribute all earnings. In contrast, the Small Business Trust gets trust level taxation, and may distribute or accumulate earnings.
This is one of very few living trusts with permission to hold Corporate stock or Business Trust shares (w/S election). However, it is flexible in the sense that you as the creator determine the beneficiaries and the timing of distributions.
Your Living Trust setup as a Small Business Trust is complex. They require careful documentation by skilled accountants and lawyers.
If you operate a business, have a large estate and many heirs, this tool may be a fit. Explore this opportunity with your tax professional.
Optional: convert from Small Business Trust to a Subchapter S Trust which only has a single income beneficiary.