Definition
The term qualified subchapter S trust refers to one of the two trusts that can hold subchapter S corporation stock. Qualified subchapter S trusts are oftentimes used by donors to plan for the eventual transfer of subchapter S stock to a single heir after their death.
Explanation
Qualified subchapter S trusts (QSST) are frequently used as an estate planning tool. These trusts allow holders of subchapter S stock to transfer ownership to a single beneficiary. This is in contrast with an electing small business trust (ESBT), which allows for multiple beneficiaries. Both QSST and ESBT can help maintain the integrity of a subchapter S corporation when a shareholder passes away and the shares are transferred to an ineligible trust.
In order for a trust to be a QSST, it must meet the following conditions:
The trust must have only one income beneficiary.
One hundred percent of the subchapter S income must be distributed to the income beneficiary at least annually.
Corpus distribution (distribution of assets in the trust) can only be made to the income beneficiary as long as they are alive.
Income will be paid to the income beneficiary until the earlier of their death or termination of the trust.
If the trust terminates, and the income beneficiary is still alive, all of the trust's assets must be distributed to the income beneficiary.