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because there will be significant annual withdrawal powers in the beneficiary, or These are some issues to consider
retained income of the S corporation that an existing ESBT lacking Sec. 678 when seeking to modify an existing
that cannot be distributed to the ESBT withdrawal rights should be modified QSST or ESBT. For further discussion
and recontributed to the corporation, to include the same, it may be appropri- of these types of trusts, see Hartman and
then a QSST may be the preferred es- ate to utilize a state decanting statute Walter, “Trusts as S Corporation Share-
tate planning choice over an ESBT, pro- or other form of nonjudicial or judicial holders,” on p. 21 of this issue. ■
vided the client’s family is able to control modification of the trust, or perhaps
distributions of the corporation’s income even a power granted to the trustee in
to the trust.10 The reason for this is that the trust document itself.
only the income that the corporation ac- Note, however, that under a
tually distributes to the trust needs to be questionable reading of the Code
distributed to the trust beneficiary under and regulations, some state decanting AICPA RESOURCES
the QSST rules and Sec. 1361(d)(3)(B). statutes (including those based on the CPE self-study
The balance can remain in the corpora- Uniform Trust Decanting Act) may at
Estate Planning Certificate
tion (and therefore in the protected first blush appear to prohibit an existing
Program
trust), yet still be taxed to the beneficiary QSST from being decanted to an
Small Business and Advanced
as the Sec. 678 deemed owner of that ESBT. These decanting statutes should
Tax Planning
portion of the trust which consists of the be reviewed carefully, however, because
trust’s interest in the corporation. although the apparent intent of these Tax Section resources (for
members)
The potential problem with using a statutes may have been to prohibit a
QSST in this situation is that in many QSST from decanting to an ESBT, in 2021 Estate and Trust
families there will be family members many cases the decanting will actually be Engagement Letter — Form 1041
who are actively involved in the busi- permitted.11 2021 Estate and Trust Income
ness (and who can therefore benefit In drafting decanting or other trust Tax Return Checklist — Form
from salaries and bonuses) and family modification documents, an adviser 1041 (Long)
members who are not so involved. All or should bear in mind the potential federal 2021 Estate and Trust Income
some of the latter family members may estate and gift tax issues involved. If the Tax Return Checklist — Form
want the corporation to distribute as modification documents are carefully 1041 (Mini)
much income as possible to their trust(s) drafted, however, so that the only 2021 Estate and Trust Tax Return
in the way of dividends. Since these change relates to substitution of the Organizer — Form 1041
dividend distributions must be made right to withdraw income distributed
For more information or to make
proportionately to all of the corporation’s from the S corporation to the trust (i.e., a purchase, visit aicpa.org/cpe-
shareholders, the QSST may then have trust accounting income, within the learning or call the Institute at
the effect of “overfunding” the shares of meaning of Secs. 643(b) and 1361(d) 888-777-7077.
the family member beneficiaries who are (3)(B)), it would seem that the income
actively involved in the business, as well beneficiary has given up nothing on a
as the shares of other family member current basis because the beneficiary has
beneficiaries who do not need more cur- retained the right to withdraw the same
rent income, with income that must then trust accounting income distributed by Contributor
be distributed to them outright. the S corporation to the trust. Note,
however, that there are also potential James G. Blase, CPA, J.D., LL.M., is
Modification of existing generation-skipping transfer tax issues principal of Blase & Associates LLC in
QSSTs and ESBTs involved if the trust was irrevocable Chesterfield, Mo. For more information

If a trustee thinks that an existing ir- before 1986, because the new trust may about this article, contact
revocable QSST would be better struc- have the effect of pushing more assets thetaxadviser@aicpa.org.
tured as an ESBT with Sec. 678 income down to succeeding generations.

10. Note that the tax issues here would be compounded if provisions found in the proposed Build Back Better Act, which would impose 5% and 8% surtaxes at levels
of trust income of as low as $200,000, are passed.
11. For more on the topic of decanting from a QSST to an ESBT, see Blase, “Decanting a QSST to a ESBT,” Estate Planning (May 2022) (forthcoming).

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