S corporations must comply with several strict requirements or risk losing their tax-advantaged status. Among other things, they can have no more than 100 shareholders, can have no more than one class of stock, and are permitted to have only certain types of shareholders.
In an estate planning context, it’s critical that any trusts that will receive S corporation stock through operation of your estate plan be eligible shareholders.
Eligible trusts include:
Grantor Trusts. A grantor trust is eligible provided that it has one “deemed owner” who’s a U.S. citizen or resident and meets certain other requirements. Also, when the grantor dies, the trust remains an eligible shareholder for two years, after which it must distribute the stock to an eligible shareholder or qualify as a qualified subchapter S trust (QSST) or an electing small business trust (ESBT).