2.3.4 S Corporation Stock
220.127.116.11 I.R.C. Sec. 1361(c)(2)(A)(ii) permits a revocable grantor trust which becomes includible in the deceased grantor’s estate to be a qualified shareholder for two years after the grantor’s death. An estate, on the other hand, may be a qualified shareholder for the entire period of its reasonable administration. I.R.C. Sec. 1361(b)(1)(B). [For a case of an “unreasonable” period of administration, see Old Virginia Brick Co. v. Comm’r., 367 F.2d 276 (4th Cir. 1966) (after 18 years of estate administration held to become a “trust” and therefore not a qualified S corporation shareholder).
18.104.22.168.1 “S corporation stock is generally a poor choice for lifetime funding of a revocable trust because of the additional restrictions imposed post-death when it is held in the decedent’s revocable trust rather than his estate … [I]f complications arise (e.g., a Will contest, etc.), two years could prove to be woefully inadequate.” Jones, “Putting Revocable Trusts in Their Place,” 129 Trusts & Estates 8, 12 (September 1990).
22.214.171.124.2 “There is a mistaken belief, held by even very competent professionals, that living trusts are not suitable entities to hold or to distribute subchapter S stock.” Esperti and Peterson, “Post-Mortem Planning Differences for Estates and Trusts,” Trusts & Estates 14, 22 (February 1992).
126.96.36.199 The Small Business Job Protection Act of 1996 created a new category under I.R.C. Sec. 1361 to provide that an electing “small business trust” will be a qualified S corporation shareholder. I.R.C. Sec. 1361(e).
188.8.131.52.1 “The provision allows stock in an S corporation to be held by certain trusts (“electing small business trusts”). In order to qualify for this treatment, all beneficiaries of the trust must be individuals or estates eligible to be S corporation shareholders, except that charitable organizations may hold contingent remainder interests. No interest in the trust may be acquired by purchase. For this purpose, “purchase” means any acquisition of property with a cost basis (determined under Sec. 1012). Thus, interests in the trust must be acquired by reason of gift, bequest, etc.” House Committee Report.
184.108.40.206.2 The trust is the taxpayer, not the beneficiaries. According to the Conference Report, these trusts are taxed at the highest individual rate.