Qualified Subchapter S Trust (QSST)

What Are the QSST Requirements?

Congress limits who may own S-corporation stock, and most trusts are not on the list. A qualified subchapter S trust earns its place by meeting five structural requirements, all of them at once and all of them continuously.

1. One current income beneficiary. Only one individual may be entitled to the trust income at a time, and that person must be a US citizen or resident. Successor beneficiaries are fine. Two people sharing income today are not.
2. All income actually distributed. The trust must pay out all of its income to that beneficiary. A trust instrument that merely permits full distribution does not satisfy the requirement, because the test is what happens, not what is authorized.
3. No principal to anyone else. While the current beneficiary is alive, the trustee may distribute principal to that beneficiary freely and to nobody else. A distribution to a remainderman breaks the trust and the trust instrument in the same stroke.
4. A clean succession at death. On the beneficiary’s death the trust must terminate or pass to a successor who also qualifies. Two beneficiaries holding concurrent interests will not work.
5. A US beneficiary. A non-resident alien cannot be the current income beneficiary, because the bar on foreign shareholders reaches through the trust to the person behind it.

Practice pointer. The requirement that trips real trusts is the second one, because it is about administration rather than drafting. Ask the trustee for the last three years of distributions before you rely on a QSST, since a beautifully drafted trust that accumulated income in one bad year is no longer eligible.

Who Files the QSST Election, and When?

The beneficiary files the QSST election, not the trustee. That single fact causes more missed elections than any other, because the trustee signs the deed, the accounts, the tax returns and the correspondence, and then does not sign the one document that keeps the company an S corporation.

The deadline is 2 months and 16 days after the trust becomes a shareholder. The clock starts on the transfer of the stock into the trust. A gift starts it, a funding after death starts it, and a distribution out of an estate starts it. The date the estate opened and the date letters issued are irrelevant to this deadline, which is exactly why families who are busy with probate miss it.

The election goes to the IRS service center where the corporation files its return, and once made it is irrevocable, with a narrow exception allowing conversion to an electing small business trust with IRS consent.

Avoid treating the two-year window after a grantor’s death as the real deadline. A trust that was a grantor trust immediately before death stays eligible for two years, which feels like breathing room and hides the shorter clock underneath it. The QSST election deadline runs from the transfer, and the two clocks are not the same clock.

How a QSST Is Taxed

The beneficiary is treated as the owner of the stock for income tax purposes, so the S-corporation income, deductions and credits land on a personal return and are taxed at that person’s marginal rate.

Compare that with the alternative. An electing small business trust pays a flat 37% on its S portion regardless of how small the income is or what bracket the beneficiaries occupy. On a company distributing $200,000 a year to a beneficiary whose marginal rate is 24%, the QSST keeps roughly $26,000 a year that the other structure sends to the Treasury. See the full comparison.

The Marital Trust Fit

A QTIP trust and a QSST are built to nearly the same specification. A QTIP gives the surviving spouse all of the income for life and permits no principal to anyone else during that life, which satisfies the QSST requirements almost line for line.

Practice pointer. File the QSST election as a matter of routine whenever a QTIP holds S-corporation stock, even when grantor trust status still appears intact. Grantor status ends without notice, on a trustee change, a released power, a divorce or a death, and the election already on file is what keeps the company’s S status alive through the change.

Where a QSST Fails

A power of appointment. A presently exercisable power that lets the beneficiary appoint principal to somebody else defeats the single-beneficiary requirement, because the trust could then benefit a person other than the current beneficiary. Powers of appointment are standard in good estate planning and routine in trusts drafted before anyone considered the S corporation, so read them before completing the election.

An accumulated year. A trustee who retains income, even once and even innocently, breaks the second requirement. The 65-day rule offers limited relief, because a distribution made within 65 days after year end can be treated as made in the prior year when the trustee makes that election. Past that window the failure is real.

Principal to the wrong person. A distribution to a remainderman or a contingent beneficiary during the current beneficiary’s life ends eligibility on the day it is paid.

Relief exists for a genuinely inadvertent termination, through a simplified IRS procedure or a private letter ruling, and a ruling commonly runs $40,000 to $50,000 plus professional fees. Drafting the trust correctly costs a fraction of that.

Frequently Asked Questions

Sources of Law

• IRC §1361, eligible S-corporation shareholders; §1361(c)(2)(A) (eligible trusts); §1361(d) (QSST definition, election and beneficiary treatment); §1361(e) (electing small business trust); §641(c) (ESBT taxation); §663(b) (65-day rule); §1362(f) (inadvertent-termination relief); Rev. Proc. 2013-30 (simplified late-election relief); Treas. Reg. §1.1361-1(j) (QSST mechanics). (retrieved 2026-08-31)

What I See in These Files

In 14 years of law practice, I have almost never had the S-corporation question arrive as an S-corporation question. It reaches me as ordinary estate planning, and I find the damage was done by people doing careful work on a different problem.

A common question I hear is, "Does it matter which trust my shares go into?" It decides whether the company keeps its S election, so I ask what the company is before I ask anything about the trust.

In one case I have reviewed, a Florida man owned 47% of a company his family had run since 1907. He did what careful people do and moved his shares into his revocable living trust so his family could skip probate. The company was an S corporation. The transfer converted it to a C corporation that same day, and it stayed one. Nobody in that room was careless. The lawyer was doing estate planning, the client was avoiding probate, and neither of them asked the one question that mattered.

A second file I have read is worse, because there the lawyer wrote down what happened. His own affidavit said nobody had told him the company was a subchapter S corporation and that he would not have advised the transfer had he known. The family went back to state court and got an order voiding the transfer for mistake. The order changed nothing. A completed transfer stays completed for tax purposes even after a judge says it should never have happened.

Practice pointer. Ask whether the company is an S corporation before any share moves into any trust, and ask it out loud in front of whoever is drafting. Asked first, the question is free. Asked afterward, the answer costs a private letter ruling at $40,000 to $50,000.

The honest limit is that this page cannot tell you whether your trust qualifies. The five requirements are objective, but a power of appointment three pages into a trust instrument, or one accumulated year in an accounting nobody reads, decides the answer in a way no general description reaches.

Updated on September 1, 2026. Reviewed by Kevin D. Klagge, Esq., Fla. Bar No. 99502. Attorney Kevin Klagge represents families, businesses, and international clients in estate and tax planning, business structuring, and international law, with a focus on Florida legal tools. He litigates estate and business issues in court. General information about federal law, not legal or tax advice, and no attorney-client relationship is created. S-corporation and trust rules are technical and fact-specific; coordinate with your CPA. Do not send confidential information until we have agreed to represent you.