Illinois Irrevocable Trust — A Guide to Qualifying Subchapter-S Trusts Introduction: Illinois Irrevocable Trusts come in various forms, offering residents several options for managing their assets. One such type is the Qualifying Subchapter-S Trust. In this article, we will delve into the details of the Illinois Irrevocable Trust, specifically focusing on the Qualifying Subchapter-S Trust, its definition, features, and possible variations. What is an Illinois Irrevocable Trust? An Illinois Irrevocable Trust is a legally binding arrangement where the granter transfers ownership and control of assets to a trustee. Once established, the trust becomes separate from the granter's estate, meaning that the assets held within the trust are no longer considered part of the granter's personal property. This offers several advantages, such as tax benefits, creditor protection, and efficient estate planning. Qualifying Subchapter-S Trust: A Qualifying Subchapter-S Trust is a specific type of Illinois Irrevocable Trust that qualifies as a shareholder for a Subchapter-S Corporation (S Corporation), which is a special tax designation provided by the Internal Revenue Service (IRS). By designating a trust as a shareholder for an S Corporation, the beneficiaries can receive distributions from the trust without incurring self-employment taxes on the income generated by the corporation. Features of an Illinois Qualifying Subchapter-S Trust: 1. Limited number of eligible shareholders: To qualify as an S Corporation, the requirements mandate that the trust has a limited number of permissible shareholders. These typically include individuals, estates, specific types of trusts, and certain tax-exempt organizations. 2. Pass-through taxation: One significant benefit of a Qualifying Subchapter-S Trust is the pass-through taxation treatment. This means that the trust itself is not subject to income tax; instead, the beneficiaries are responsible for reporting and paying taxes on the income they receive. 3. Estate planning benefits: Establishing an Illinois Irrevocable Trust as a Qualifying Subchapter-S Trust can be advantageous for estate planning purposes. The trust allows for the seamless transfer of business interests or other assets to beneficiaries, minimizing potential estate taxes and ensuring the smooth transition of assets. Types of Qualifying Subchapter-S Trusts in Illinois: 1. Granter Retained Income Trust (GRIT): A GRIT allows the granter to retain income generated by the assets within the trust for a specified period, with the remaining assets passing to beneficiaries at the end of the term. 2. Charitable Lead Trust (CLT): A CLT provides income to one or more charitable organizations for a set period, after which the remaining assets are distributed to non-charitable beneficiaries. 3. Special Needs Trust (SET): An SET is designed to provide for the ongoing care of a loved one with special needs while protecting their eligibility for government assistance programs. 4. Spendthrift Trust: A Spendthrift Trust safeguards assets by limiting a beneficiary's ability to transfer or mortgage them, protecting against creditors and imprudent spending. 5. Life Insurance Trust (IIT): An IIT is specifically created to hold a life insurance policy outside the granter's taxable estate, providing tax benefits and ensuring efficient distribution of the death benefit to beneficiaries. Conclusion: The Illinois Irrevocable Trust offers residents flexible estate planning options, and within this framework, the Qualifying Subchapter-S Trust presents further advantages for those seeking tax efficiencies and a seamless transfer of business assets. Whether through a GRIT, CLT, SET, Spendthrift Trust, or IIT, individuals can tailor their Illinois Irrevocable Trust to meet their specific needs while enjoying the benefits of an advantageous tax structure and asset protection.
Illinois Irrevocable Trust which is a Qualifying Subchapter-S Trust
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An irrevocable grantor trust can own S corporation stock if it meets IRS regulations. The trust must contain language stating that all the ordinary income the trust earns along with the original trust assets are owned by the trust grantor.
Three commonly used types of ongoing trusts qualify as S corporation shareholders: grantor trusts, qualified subchapter S trusts (QSSTs) and electing small business trusts (ESBTs).
Net investment income tax of a QSST 1411(a)(2)). The tax also applies to QSSTs to the extent the net investment income is retained in the trust. Although the S corporation income of a QSST is taxed to the individual income beneficiary, capital gain on the sale of the S corporation stock is taxed at the trust level.
A Qualified Subchapter S Trust, commonly referred to as a QSST Election, or a Q-Sub election, is a Qualified Subchapter S Subsidiary Election made on behalf of a trust that retains ownership as the shareholder of an S corporation, a corporation in the United States which votes to be taxed.
The main difference between an ESBT and a QSST is that an ESBT may have multiple income beneficiaries, and the trust does not have to distribute all income. Unlike with the QSST, the trustee, rather than the beneficiary, must make the election.
The two-year limitation for S corporations to have as a shareholder either a testamentary trust or living trust that becomes irrevocable can be avoided by electing to convert the trust to a Qualified Subchapter S Trust, commonly referred to as a QSST.
Background. A QSST is one of several types of trusts that are eligible to hold stock in an S corporation. Its two primary requirements are (1) there can be only one beneficiary of the trust and (2) all income must be distributed at least annually (Sec. 1361(d)(3)(B)).
Three commonly used types of ongoing trusts qualify as S corporation shareholders: grantor trusts, qualified subchapter S trusts (QSSTs) and electing small business trusts (ESBTs).
A QSST is one of several types of trusts that are eligible to hold stock in an S corporation. Its two primary requirements are (1) there can be only one beneficiary of the trust and (2) all income must be distributed at least annually (Sec. 1361(d)(3)(B)).
The main benefit of a QSST is that it is treated as a grantor trust and therefore considered an eligible S corporation shareholder.