Electing Small Business Trust (ESBT)

Definition

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.

Explanation

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.

Related Terms

widely held fixed investment trust, qualified terminable interest property trust, qualified subchapter S trust, intentionally defective grantor trust