Can an Estate or Trust be a Shareholder of an S-Corporation?

If an estate or trust owns an interest in an S-Corporation, consider S-Corporation shareholder eligibility rules.  Otherwise, the company could risk losing its S-election if the stock is held by an impermissible S-Corporation shareholder. 

1. An estate is an eligible shareholder of S-Corporation stock under IRC §1361(b)(1)(B) only for as long as reasonably necessary to administer the estate.

2. A trust that used to be a grantor trust during a decedent’s lifetime is only an eligible shareholder of S-Corporation stock upon the death of the grantor for up to 2-years.

3.  S-Corporation stock should be distributed to a new eligible S-Corporation shareholder before the expiration of these time limits if preservation of the S-election is desired.

4.  If non-grantor trusts are the beneficiaries of S-Corporation stock, a timely QSST election or ESBT election will be required to preserve the company’s S-election.