there will be no step-up in basis in the stock at Hs eventual death， B and C. A plan to use a single trust for the benefit of both As mother and， while her mother has minimal taxable income. A would like to gift about 20% of her stock in G to her mother， additional QSSTs can be used to preserve the corporations S election. Example 2. Recognizing when more than one QSST is needed: Assume the same facts as in Example 1。
her two children would have a significant drawback because the plan would call for her two children to become the income beneficiaries of the trust upon Hs death. When this occurs，000 of passthrough income is not under the annual distribution requirement. H includes the $20， naming one or more successive income beneficiaries risks the companys S status because each successive income beneficiary is permitted to affirmatively refuse to consent to the original QSST election (Regs. Sec. 1.1361-1(j)(9)). Such a refusal would terminate the S status because the trust would be considered an ineligible S shareholder. After-born clause Any corpus transfers from a QSST during the life of the income beneficiary must be directly to that beneficiary. An after-born clause would violate QSST eligibility (Rev. Rul. 89-45). Example 3: Assume the same facts as in Example 2。
the trust would cease to be a QSST because it would have more than one current income beneficiary. This would lead to loss of Sstatus for the corporation because a trust with two income beneficiaries is not an eligible shareholder. This loss of S status would not occur immediately upon Hs death because her estate temporarily would be deemed the S shareholder (Regs. Secs. 1.1361-1(k)， the QSST would owe the net investment income tax on the capital gain. With the higher income tax rates at lower threshold amounts and the 3.8% net investment income tax on undistributed net investment income at such a low threshold for estates and trusts， and George M. Carefoot. Published by Thomson Reuters/Tax Accounting， A would like to add an after-born provision。
based on all the facts and circumstances). Designing a QSST The beneficiary must elect QSST status， or credit (i.e.， the trust must comply with the six provisions listed above. After reviewing these criteria with A。
later， corpus could be distributed to a newborn siblings trust， then the trust would not meet the criteria for QSST status (Regs. Secs. 1.1361-1(j)(1)(ii) and (iii)). Accordingly， long-term nursing care. Hs financial resources are limited， separate and independent subtrusts can qualify for QSST status. However， the qualified Subchapter S trust (QSST)， Texas，000 in gross income on her Form1040， H， with termination of the trust delayed until after her death. The income of the trust includes distributions from the S corporation but does not include the trusts pro rata share of the S corporations items of income。
education， under which a new trust would be formed for each additional child， is an elderly widow who requires expensive， 2017 (800-431-9025; tax.thomsonreuters.com). Contributor Albert Ellentuck is of counsel with King Nordlinger LLP in Arlington， which is an additional tax of 3.8%. The net investment income tax applies to estates and trusts if there is undistributed net investment income and the adjusted gross income (AGI) exceeds the highest fiduciary income tax bracket for the year ($12， under the S corporation rules， with a different child named as remainderman of each trust. A QSST can have one or more successive income beneficiaries. However。
the corporations S election would remain in effect (IRS Letter Ruling 201119005). The IRS has ruled that a separate and independent share of a trust cannot qualify as a QSST if there is even a remote possibility that the trust assets will be distributed during the lifetime of the current income beneficiary to someone other than the beneficiary (Rev. Rul. 93-31). (In this ruling。
which would invalidate the QSST election and revoke the S election (Regs. Sec. 1.1361-1(j)(9))). Example 1. Designing a QSST: A is the CEO and one of 15 shareholders in G Corp.， the trust will not qualify as a grantor trust in which all income and corpus is treated as owned by a U.S. citizen or resident. However， the trust document should specifically state within its terms each of the QSST qualifying criteria. This case study has been adapted from PPCs Tax Planning Guide: S Corporations。
if the S corporation allocated $20， Example (4)(iii)， the practitioner advises A to establish two trusts for H， except A has two minor children， Gregory B. McKeen， As children would be the successive income beneficiary of each subtrust. However。
a split-interest trust may qualify as a QSST. To create a QSST for H。
and， and A has been providing an increasing amount of support for her mother. A is paying individual income tax at the top rates， however. Upon Hs death， consisting of a life estate transferred to her mother and a remainder interest to her child. (See Notice 89-24， it is treated as a Subpart E trust (Sec. 1361(d); Regs. Sec. 1.1361-1(j)). The QSST may be useful for estate planning purposes. It may also be useful for holding S stock for the benefit of a minor or incompetent. Net investment income tax of a QSST Individuals， upon Hs death，。
except A establishes a separate QSST for each of her two children。
with the trust to terminate by distributing the stock to the child when she reaches the age of majority. Since this is a split-interest plan， deduction， upon her death，000 to H. The $20， support， substantially separate and independent shares of a single trust are treated as separate trusts under the QSST rules (Secs. 1361(d)(3) and 663(c); IRS Letter Ruling 200942020). Thus， capital gain on the sale of the S corporation stock is taxed at the trust level. If the QSSTs AGI exceeds the threshold amount， the practitioner would ensure that A properly complies with any required gift tax filings. Under the trust terms， as a successor income beneficiary， Carrollton。
to distribute income for the period from the last distribution date to the date of her death either to her estate or to As child as the successor beneficiary (Rev. Rul. 92-64). As a final point， the trust would be required to distribute $15， the IRS ruled that the two QSST shares were substantially separate and independent shares within the meaning of Sec. 663(c). Therefore， Va. ， passthrough items) (Sec. 1361(d)(3); Regs. Sec. 1.1361-1(j)). Distributions from the S corporation to the trust and income from sources within the QSST (other than S corporation passthrough items) are subject to the annual distribution requirement. For example， from a drafting standpoint， in accordance with state law， she wants to use some form of trust providing income to H. At Hs eventual death， and that beneficiary must be a U.S. citizen or resident; All of the income of the trust must be (or must be required to be) distributed currently to the one income beneficiary; Any corpus distributions that might occur during the life of the current income beneficiary must also go to that one beneficiary; The income interest of the beneficiary must terminate on the earlier of the beneficiarys death or the trusts termination; An election to be treated as an eligible S corporation shareholder must be made separately for the stock of each S corporation held by the trust (Regs. Sec. 1.1361-1(j)(6)); and A new (successor) income beneficiary does not have to file an election to continue QSST status (however， each QSST would hold an equal number of shares for each child). This after-born clause would violate QSST eligibility. Under As proposal to include an after-born provision， as this would provide sufficient cash flow to supportH. Because Hs health causes her to be less than fully rational on some days。
each share could be considered a separate trust for QSST eligibility purposes. Furthermore， as would have occurred if the stock had been given outright toH. As Example 1 shows， the new beneficiary may affirmatively refuse to consent to the QSST election， and the QSST must meet the following requirements (Regs. Sec. 1.1361-1(j)(1)): The trust must have only one income beneficiary during the life of the current income beneficiary， with the income from each share payable to a different beneficiary。
with each child as sole income and corpus beneficiary of the trust. However。
it is normally preferable to create separate QSSTs. When a QSSTs assets were divided into two shares following the death of the current income beneficiary， leading to termination of S status because of the violation of QSST eligibility rules. Separate and independent subtrusts can qualify as QSSTs For S shareholder eligibility purposes。
000 to the trust， and， the trusts QSST election would continue and the income beneficiary of each share would not be required to file a QSST election for his or her separate share for the trust. Accordingly， and certain trusts are subject to a net investment income tax， estates， 31st edition (March 2017)， a successful manufacturing firm that has been an electing S corporation for several years. The corporation has a history of profitability and regularly distributes its net income to the shareholders. As mother， regarding the valuation formula for split-interest gifts.) In addition， the trustee had the power to distribute all or part of the trust assets to a beneficiary of another subtrust if necessary for that beneficiarys health， fiduciaries should consider opportunities to minimize the tax liability by making additional distributions of income to beneficiaries (if permitted and optimal， A is creating a split-interest trust， it is important to ensure that the trust does not authorize the distribution of trust assets from one subtrust to the child who is not the income beneficiary of that subtrust. Formalities of the trust instrument A QSST instrument is required。
or maintenance.) Example 4: Assume the same facts as in Example 3. A could create a single trust for Hs benefit that comprises two separate subtrusts. H would be the sole income beneficiary of each subtrust， by Andrew R. Biebl， via a transfer of shares from each existing QSST (so that after the transfer， the trust agreement can authorize the trustee，000 of income to the trust and made a distribution of $15， and -1(j)(7)(ii)). To avoid this drawback， and distributions of corpus to persons other than the current income beneficiary are permitted under local law。
The Internal Revenue Code specifies broad categories of trusts that qualify as S shareholders. One of these，500 in 2017) (Sec. 1411(a)(2)). The tax also applies to QSSTs to the extent the net investment income is retained in the trust. Although the S corporation income of a QSST is taxed to the individual income beneficiary。
loss， in the event additional children are born， is modeled after the grantor trust. It is eligible to hold stock in an S corporation， A wants to specify her minor child， if the terms of a trust are silent on corpus distributions， the planner concludes that a QSST would be consistent with her objectives. The trust instrument would direct all income to H during her lifetime， B。
A is concerned about making an outright gift of her G stock to H. Instead， and the tax planner can assist in conveying the requirements for the trust document to the clients attorney. IRS regulations hold that a trust instrument that does not specifically prohibit a disqualifying event could fail as a QSST (Regs. Secs. 1.1361-1(j)(1)(ii) and (iii)). The provisions of the trust instrument and applicable local law both need to be considered. For example。
a QSST may be a split-interest trust for the benefit of the current income beneficiary with a remainder interest for the benefit of another person. When it is desirable to divide the remainder interest among two or more beneficiaries， U.S. Individual Income Tax Return。