This mostly applies to individuals such as physicians, dentists, and other licensed professionals. You operate your business as a professional corporation or business trust – either one taxed as an S corporation.
For estate planning purposes, you’d like to have your Living Trust participate in the overall setup. That’s fine. However, there is no specific tax benefit. You continue to earn and pay taxes on income based upon S corporation rules and regulations.
But adding your living trust to the business ownership structure adds another “legal owner” into the flow of funds.
You can do this, but it requires paperwork that complies with IRS rules. That is why it’s called, ‘qualified.’ It’s not difficult but you need to get it right.
Your living trust needs special language. It must clearly state that you will get all the S corporation income each year and subsequently pay income taxes at the personal level. Bottom line effect – your money and taxes are unchanged.
Without this special language in your living trust, it prevents your professional corporation or business trust from using the S election. With the language, your business qualifies for the QSST election.
You are the ‘income beneficiary’. Yet your living trust might include other family members as beneficiaries. But only you report the S corporation activities. It goes on your personal 1040 form.
If your living trust has this special language built in ok. If not, you need to amend the trust declaration. Your tax advisor might help provided they are familiar with grantor trust rules 671-677.
You as the ‘income beneficiary’ must notify the IRS within 60 days following the corporation’s year end. The timing of events is important. It can change how you do the IRS notifications.
The Qualified Subchapter S Trust is NOT another trust. It is essentially another way of describing your underlying living trust that has specific language.
This language allows for pass-through of the S corporation income to your living trust. If you sold the practice, any upside is capital gains tax rate.
Since this setup is highly tax sensitive, exercise caution. Get the living trust paperwork done right. Afterwards, your living trust is eligible to be the owner of your business.
Optional: convert from Sub S Trust to Small Business Trust which has multiple income beneficiaries.