A Delaware Irrevocable Trust, also known as a Qualifying Subchapter-S Trust, is a legal entity created for estate planning and tax purposes. It offers several advantages for individuals seeking to protect assets, minimize tax liability, and control the distribution of their wealth. This type of trust is specifically designed to qualify as a shareholder for Subchapter-S corporations, which are U.S. companies that pass corporate income, losses, deductions, and credits through to their shareholders. The Delaware Irrevocable Trust operates under the laws of the state of Delaware, known for its favorable trust statutes and tax benefits. By establishing this trust, settlers (the individuals creating the trust) can enjoy numerous advantages. One significant benefit is the ability to protect assets from creditors, as the assets held within the trust are generally shielded from legal claims or financial judgments. This protection can be particularly valuable for individuals involved in high-risk professions or those with a considerable net worth. Furthermore, this trust type allows settlers to minimize their tax liability by effectively managing income and distributions. By qualifying as a Subchapter-S shareholder, the trust's income is passed through to the beneficiaries, who report it on their individual tax returns. As a result, the trust itself is not subject to federal income taxes, avoiding the double taxation typically associated with traditional corporations. There are different types of Delaware Irrevocable Trusts that qualify as Subchapter-S Trusts. Some common variations include: 1. Delaware Dynasty Trust: This type of trust allows assets to be passed down for multiple generations, providing a lasting legacy by avoiding estate taxes in subsequent generations. 2. Delaware Charitable Remainder Trust: Designed for individuals philanthropically inclined, this trust allows the settler to make charitable donations while receiving income from the trust during their lifetime. Upon their passing, the remaining assets are donated to the designated charity. 3. Delaware Special Needs Trust: This trust type caters to individuals with disabilities or special needs. It ensures that assets held within the trust do not jeopardize beneficiaries' eligibility for government benefits and provides financial support for their unique requirements. 4. Delaware Life Insurance Trust: By transferring a life insurance policy to this trust, the death benefit proceeds can be excluded from the settler's estate, reducing estate taxes and ensuring the policy passes directly to the designated beneficiaries. In summary, a Delaware Irrevocable Trust as a Qualifying Subchapter-S Trust offers individuals a flexible and effective vehicle for wealth preservation, tax planning, asset protection, and legacy planning. Different trust types cater to various specific needs such as multi-generational wealth transfer, charitable giving, special needs support, and life insurance planning. By engaging the services of an experienced attorney or financial advisor, individuals can tailor the trust to their unique circumstances and goals.
Delaware Irrevocable Trust which is a Qualifying Subchapter-S Trust
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For example, if a trust is a grantor trust to one individual, it is eligible as an S corporation shareholder, even though it is irrevocable (rather than revocable).
Irrevocable trusts are often set up as grantor trusts, which simply means that they are not recognized for income tax purposes (all of the income tax attributes of the trust, such as income, loss, gains, etc. is passed on to the grantor of the trust).
Specifically, S corporation shareholders must be individuals, specific trusts and estates, or certain tax-exempt organizations (501(c)(3)). Partnerships, corporations, and nonresident aliens cannot qualify as eligible shareholders.
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.
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.
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)).
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.
TRUSTS COMMONLY USED TO HOLD S CORPORATION STOCK 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.
As an initial matter, as long as the business owner is living, his or her revocable trust is treated as a grantor trust for income tax purposes, and as such, is an eligible S corporation shareholder.