2025 Guide to Trusts That Qualify as S Corporation Shareholders

🏛️ 2025 Guide to Trusts Eligible as S Corporation Shareholders

Not every trust can hold shares in an S Corporation.
The Internal Revenue Code places strict limits on who—or what—can own S Corp stock.
This post breaks down the six specific types of trusts that qualify under IRS rules,
explaining how each works and when it makes sense to use them for estate or business planning.
If you’re planning succession, managing family ownership, or just trying to avoid disqualification, this guide is for you.

1️⃣ Grantor Trusts

A Grantor Trust is one where the creator (the “grantor”) is still treated as the owner for tax purposes.
In other words, even though the trust holds the shares, the grantor reports the income on their individual tax return.
Since the IRS views the income as belonging to the grantor, such a trust qualifies to hold S Corp stock.

2️⃣ Section 678 Trusts (Beneficiary-Owned Trusts)

A Section 678 trust gives the beneficiary control over the income, making that person responsible for the taxes.
The IRS treats the beneficiary—not the trust—as the real owner.
This structure is often used when parents want to shift ownership but keep the tax obligations with the recipient.

3️⃣ Testamentary Trusts

Testamentary trusts are created through a will and come into effect at death.
They can temporarily hold S Corp shares, but only for a limited period—generally two years after the shareholder’s death.
After that, the trust must either distribute the shares to eligible beneficiaries or convert into a qualifying trust type (such as a QSST or ESBT).

4️⃣ Voting Trusts

A Voting Trust consolidates the voting rights of several shareholders under one trustee.
Parents often use it to pass ownership interests to children while maintaining decision-making power.
Every beneficiary of the voting trust is treated as a shareholder for S Corp purposes.

5️⃣ Electing Small Business Trusts (ESBTs)

Congress introduced ESBTs to make estate and income tax planning for S Corporations more flexible.
Unlike a QSST, an ESBT may have multiple beneficiaries and can choose whether to distribute or retain income.
The trust itself—not the beneficiaries—pays the tax on the S Corporation income.

All beneficiaries of an ESBT must be individuals, estates, or qualifying charities.
If a contingent beneficiary later becomes ineligible, the trust must act promptly to avoid losing S status.

6️⃣ Qualified Subchapter S Trusts (QSSTs)

A QSST allows exactly one income beneficiary.
All trust income must be distributed to that person annually,
and the beneficiary must file an official “QSST Election” with the IRS.
This type is ideal for simpler situations where there’s a single heir or spouse.

7️⃣ Practical Summary & Takeaways

Below is a simplified comparison of the six trust types eligible to own S Corporation stock.

Choosing the right trust depends on who will benefit from the income,
who pays the tax, and how long the trust is intended to last.
Mistakes in structuring these trusts can invalidate the S election—so professional guidance is crucial.

© 2025 EA Tax Guide — Educational content only, not legal or tax advice.