Electing Small Business Trust (ESBT)
The term electing small business trust refers to one of the few trusts that can hold the stock of a subchapter S corporation. Electing small business trusts are oftentimes used to plan for the eventual transfer of subchapter S stock to the donor's heirs after their death.
Electing small business trusts (ESBT) are frequently used as an estate planning tool. These trusts allow holders of subchapter S stock to transfer ownership and income to multiple beneficiaries. The assets held in the trust are limited to subchapter S stock as well as non-subchapter S property. Once established via the receipt of stock, the trustee is responsible for treating the trust as an ESBT within a two month and 16-day timeframe. Some of the additional attributes of an ESBT include:
- Beneficiaries must be individuals, charitable organizations, or estates.
- Subchapter S stock in the trust cannot be purchased by the trust.
- The trust cannot be a qualified subchapter S trust (QSST) or any other tax exempt trust.
Income beneficiaries of the trust are considered shareholders in the subchapter S corporation. As such, these beneficiaries are included in the count when determining the corporation's total allowable shareholders. Unfortunately, these trusts are subject to federal tax at the highest individual rate (currently 39.6%). However, an ESBT is one of the few trusts permitted to hold subchapter S stock, and the flexibility of the trust allows the grantor to not only determine beneficiaries, but also the timing of distributions.