Qualifying Subchapter S Trust (QSST) Agreement with IRC § 1361(d)(2) Beneficiary Election

QUALIFYING SUBCHAPTER S TRUST (QSST) AGREEMENT — WITH IRC § 1361(d)(2) ELECTION

RECITALS

WHEREAS, [SETTLOR NAME] ("Settlor"), a resident of [STATE], desires to establish an irrevocable trust to hold shares of common stock in [S CORPORATION NAME], a [STATE OF INCORPORATION] corporation that has in effect a valid election under IRC § 1362(a) to be taxed as an S corporation (the "Corporation");

WHEREAS, the Settlor intends that this trust qualify as a "Qualifying Subchapter S Trust" ("QSST") within the meaning of IRC § 1361(d)(3) so that the trust may be a permissible shareholder of the Corporation without causing termination of the S corporation election;

WHEREAS, the Settlor designates [INCOME BENEFICIARY NAME] (the "Income Beneficiary") as the sole income beneficiary of the trust during the Income Beneficiary's lifetime, and the Income Beneficiary is a citizen or resident of the United States;

WHEREAS, the Income Beneficiary intends to make a timely election under IRC § 1361(d)(2) to be treated as the deemed owner of the portion of the trust holding S corporation stock for federal income tax purposes under IRC § 678(a), with the election attached as Exhibit A and filed with the Internal Revenue Service Center where the Corporation files its Form 1120-S;

NOW, THEREFORE, the Settlor establishes this Qualifying Subchapter S Trust, effective as of [DATE].

ARTICLE I: TRUST ESTABLISHMENT AND FUNDING

1.1 Establishment

This trust shall be known as the "[INCOME BENEFICIARY LAST NAME] Qualifying Subchapter S Trust" (the "Trust"). The Trust is irrevocable.

1.2 Initial Funding — S Corporation Stock

The Settlor hereby transfers, assigns, and contributes to the Trustee the following shares of S corporation stock:

The Trustee shall hold legal title to such shares and shall be entered on the stock books of the Corporation as the shareholder of record.

1.3 Additional Property

The Trustee may accept additional contributions of S corporation stock or other property from the Settlor or any other person, provided that no contribution shall be accepted if it would cause the Trust to fail any QSST requirement of IRC § 1361(d)(3) or to have more than one income beneficiary.

1.4 Statement of QSST Intent

It is the Settlor's overriding intent that the Trust qualify as a QSST under IRC § 1361(d) and that the Corporation's S election under IRC § 1362(a) be preserved. Any provision herein that would, if literally enforced, disqualify the Trust as a QSST shall be construed, reformed, or disregarded to the extent necessary to preserve QSST status.

ARTICLE II: TRUSTEE

2.1 Initial Trustee

The initial Trustee shall be [TRUSTEE NAME], who shall hold legal title to all Trust property and shall administer the Trust in accordance with this Agreement and the [STATE] Uniform Trust Code.

2.2 Successor Trustees

2.3 Trustee Powers

The Trustee shall have all powers conferred under [STATE] law, including the power to vote S corporation stock, exercise shareholder rights, consent to Corporation actions, and receive and distribute S corporation distributions, subject in all events to the QSST requirements of Article III.

ARTICLE III: QSST REQUIREMENTS — IRC § 1361(d)(3)

The following provisions implement the statutory requirements of IRC § 1361(d)(3) and 26 CFR § 1.1361-1(j). Each is essential to QSST status; none may be amended or waived during the term of the Trust.

3.1 Single Income Beneficiary

During the lifetime of the Income Beneficiary, the Trust shall have only one income beneficiary, who shall be [INCOME BENEFICIARY NAME]. No other person shall hold any current beneficial interest in the income of the Trust. Cf. IRC § 1361(d)(3)(A)(i).

3.2 Mandatory Current Distribution of All Income

The Trustee shall distribute all of the Trust's accounting income to the Income Beneficiary currently and in any event no less frequently than annually. The Trustee has no discretion to accumulate or withhold income. Cf. IRC § 1361(d)(3)(B); 26 CFR § 1.1361-1(j)(1)(ii).

For this purpose, "income" means accounting income determined under [STATE] Uniform Principal and Income Act. Distributions of S corporation profits in excess of accounting income (i.e., principal allocations of distributions out of accumulated adjustments account) are governed by § 3.4 below.

3.3 Corpus Distribution Restriction (Sole-Beneficiary Rule)

Any distribution of corpus during the lifetime of the Income Beneficiary may be made only to the Income Beneficiary. No corpus distribution shall be made to any other person. Cf. IRC § 1361(d)(3)(A)(ii).

3.4 Beneficiary Termination Rule

The Income Beneficiary's income interest in the Trust shall terminate on the earlier of:

(a) The death of the Income Beneficiary; or

(b) The termination of the Trust.

Cf. IRC § 1361(d)(3)(A)(iii).

3.5 Distribution on Termination Before Death

If the Trust terminates during the lifetime of the Income Beneficiary, all of the Trust assets shall be distributed to the Income Beneficiary. Cf. IRC § 1361(d)(3)(A)(iv). No different remainder beneficiary may take if the Trust terminates during the Income Beneficiary's lifetime.

3.6 Distribution on Death of Income Beneficiary

If the Income Beneficiary dies before the Trust terminates, the assets shall be distributed (after payment of any taxes or expenses chargeable to the Trust) as follows:

(a) ☐ To the estate of the Income Beneficiary; or

(b) ☐ To [SUCCESSOR BENEFICIARY], who shall thereafter be the sole income beneficiary and shall make a new QSST election within the time prescribed by 26 CFR § 1.1361-1(j)(6)(iii); or

(c) ☐ Pursuant to a limited power of appointment granted in § 4.3 below.

3.7 No Powers That Defeat QSST Status

No power conferred on the Trustee, Income Beneficiary, or any other person shall be exercisable in a manner that would:

(a) Cause the Trust to have more than one income beneficiary at any time;

(b) Permit accumulation of income;

(c) Permit distribution of corpus to any person other than the current Income Beneficiary during such Income Beneficiary's lifetime;

(d) Cause the Income Beneficiary's interest to fail to terminate at the earlier of death or termination of the Trust;

(e) Cause distribution of Trust assets on termination during the Income Beneficiary's life to any person other than the Income Beneficiary.

ARTICLE IV: INCOME BENEFICIARY'S RIGHTS

4.1 Income Distribution

The Income Beneficiary shall receive all Trust accounting income at least annually. Distributions shall be made within [____] days of the close of each calendar quarter / annually within [____] days after each December 31.

4.2 K-1 Reporting; Beneficiary Taxation

Because the Income Beneficiary will make the QSST election under § 1361(d)(2), the Income Beneficiary shall be treated as the deemed owner under IRC § 678(a) of the portion of the Trust consisting of S corporation stock. Consequently:

(a) The Corporation's items of income, loss, deduction, and credit allocable to the QSST portion shall flow through to the Income Beneficiary directly via Schedule K-1 (Form 1120-S) and not through Schedule K-1 of Form 1041;

(b) The Income Beneficiary is liable for federal and state income tax on the entirety of the Trust's allocable share of S corporation income, whether or not actually distributed (the principal tax burden of QSST status);

(c) Gain or loss on sale of S corporation stock by the Trust is taxable to the Income Beneficiary under § 678(a);

(d) Non-S corporation portions of the Trust (if any) shall be taxed under the normal subchapter J trust rules at the trust or beneficiary level as applicable.

4.3 Limited Power of Appointment (Optional)

The Income Beneficiary may, by will alone, appoint the corpus at the Income Beneficiary's death to any one or more of the following permitted appointees: [DESCENDANTS / CHARITY / SPECIFIED CLASS]. This limited power of appointment does not affect QSST qualification provided that during the Income Beneficiary's lifetime, the Income Beneficiary remains the sole income beneficiary and corpus is distributable only to the Income Beneficiary.

ARTICLE V: QSST ELECTION UNDER § 1361(d)(2)

5.1 Beneficiary Election Required

The Income Beneficiary shall execute the election under IRC § 1361(d)(2), in the form attached as Exhibit A, and shall file the election with the Internal Revenue Service Center at which the Corporation files Form 1120-S.

5.2 Filing Deadline

The election must be filed within the 16-day-and-2-month period beginning on the day on which the stock is transferred to the Trust, in accordance with IRC § 1361(d)(2)(D) and 26 CFR § 1.1361-1(j)(6)(iii) — i.e., on or before the 15th day of the third month after the date on which the Trust becomes a shareholder of the Corporation.

5.3 Election by Legal Representative

If the Income Beneficiary is a minor or otherwise incapable of making the election, the election shall be made by the Income Beneficiary's legal guardian or conservator, or by the natural or adoptive parent if no guardian or conservator has been appointed, in accordance with 26 CFR § 1.1361-1(j)(6)(iii).

5.4 Irrevocability and Revocation

A QSST election is irrevocable except with the consent of the Commissioner under 26 CFR § 1.1361-1(j)(11). The Trustee shall not consent to revocation without confirmation that the Corporation has implemented an alternative permitted shareholder structure (e.g., conversion to ESBT under § 1361(e), distribution of stock to the Income Beneficiary directly).

5.5 Effective Date of Election

The election shall be effective as of [DATE], which is on or before the date the Trust becomes a shareholder of the Corporation.

5.6 New Election on Successor Beneficiary

If a successor income beneficiary takes (per Article III, § 3.6(b)), the successor shall file a new QSST election within the time prescribed by 26 CFR § 1.1361-1(j)(6)(iii) (within 2 months and 16 days after becoming the income beneficiary). Failure to do so will terminate the Corporation's S election.

5.7 Shareholder Consent to S Election

If the S election under IRC § 1362(a) is not already in effect, or if a new election is required, the Trustee shall sign and submit Form 2553 as shareholder of record, with the consent reflecting the QSST election attached.

ARTICLE VI: PRESERVATION OF S CORPORATION STATUS

6.1 Trustee's Duty to Preserve S Election

The Trustee shall:

(a) Maintain QSST qualification at all times;

(b) Not take any action that would terminate the Corporation's S election under IRC § 1362(d) or cause the Trust to be an ineligible shareholder under IRC § 1361(b)(1);

(c) Refuse contributions of property that would cause the Trust to have more than one income beneficiary;

(d) Refuse to make any distribution prohibited by Article III;

(e) Cooperate with the Corporation's tax matters partner or shareholder representative in S corporation tax compliance.

6.2 Inadvertent Termination Relief

If the Corporation's S election terminates by reason of any defect in the QSST or its election, the Trustee, the Corporation, and the Income Beneficiary shall cooperate in seeking inadvertent termination relief under IRC § 1362(f) and applicable IRS procedures (currently Rev. Proc. 2013-30 or its successor).

6.3 Comparison to ESBT — Not Elected

The Trustee and Income Beneficiary acknowledge that an Electing Small Business Trust ("ESBT") election under IRC § 1361(e) is not being made. An ESBT election would:

(a) Permit multiple beneficiaries and discretionary income distributions;

(b) Be made by the Trustee (not the beneficiary);

(c) Cause S corporation items allocable to the ESBT portion to be taxed at the highest individual income tax rate under IRC § 641(c), unless a beneficiary is treated as owner under § 678(a);

(d) Foreclose the deemed-ownership / direct K-1 treatment of QSST status.

The Settlor has elected the QSST structure to obtain pass-through to the single Income Beneficiary at the Income Beneficiary's marginal rates.

ARTICLE VII: TRUST TERMINATION

7.1 Termination Events

The Trust shall terminate on the earlier of:

(a) The death of the Income Beneficiary;

(b) Exhaustion of Trust assets;

(c) [SPECIFIED DATE / EVENT, e.g., the Income Beneficiary attaining age [____]];

(d) Distribution of all stock under Article III, § 3.5.

7.2 Distribution on Termination

(a) On termination during the Income Beneficiary's lifetime: All Trust assets shall be distributed to the Income Beneficiary outright (Article III, § 3.5).

(b) On termination at the Income Beneficiary's death: Distribution per Article III, § 3.6.

7.3 Final Tax Filings

The Trustee shall file a final Form 1041 reporting the QSST portion as a grantor-type trust, and shall coordinate with the Corporation regarding final Schedule K-1 issuance to the Income Beneficiary (or the Income Beneficiary's estate) for the year of termination.

ARTICLE VIII: MISCELLANEOUS

8.1 Governing Law

This Trust is governed by [STATE] law, except that federal tax characterization is governed by the Internal Revenue Code and Treasury Regulations.

8.2 Savings Clause

If any provision is inconsistent with the QSST requirements of IRC § 1361(d) or 26 CFR § 1.1361-1(j), such provision shall be reformed to conform.

8.3 Severability

Invalidity of any provision shall not affect the remaining provisions.

8.4 Counterparts

May be executed in counterparts.

ARTICLE IX: SIGNATURES

IN WITNESS WHEREOF, the parties execute this Qualifying Subchapter S Trust Agreement as of the date first written above.

Notary Acknowledgment

State of [STATE]
County of [COUNTY]

On this [____] day of [MONTH], [YEAR], before me appeared the persons named above, who acknowledged execution of this instrument as their free act and deed.

[____________________]
Notary Public
My commission expires: [__/__/____]

EXHIBIT A — QSST ELECTION UNDER IRC § 1361(d)(2)

ELECTION TO TREAT TRUST AS A QUALIFYING SUBCHAPTER S TRUST
Under Internal Revenue Code § 1361(d)(2) and 26 CFR § 1.1361-1(j)(6)

To: Internal Revenue Service Center
[Service Center address where Corporation files Form 1120-S]

Re: QSST Election by Current Income Beneficiary

1. Identification of Electing Beneficiary

2. Identification of Trust

3. Identification of S Corporation

4. Stock Information

5. Election Statement

Pursuant to IRC § 1361(d)(2), I, [INCOME BENEFICIARY NAME], the current income beneficiary of the above-identified Trust, hereby elect to have the Trust treated as a Qualifying Subchapter S Trust ("QSST") under IRC § 1361(d)(3), effective as of [__/__/____] (which is the date the Trust acquired stock of the S Corporation, or any earlier date permitted by 26 CFR § 1.1361-1(j)).

6. Beneficiary Certifications

I, the undersigned, certify that, with respect to the Trust:

(a) ☐ I am the sole income beneficiary of the Trust;

(b) ☐ The Trust requires that all income be distributed (or is required to be distributed) currently to me;

(c) ☐ Any corpus distribution during my lifetime may be made only to me;

(d) ☐ My income interest in the Trust will terminate on the earlier of my death or termination of the Trust;

(e) ☐ If the Trust terminates during my lifetime, all Trust assets will be distributed to me;

(f) ☐ I am a citizen or resident of the United States;

(g) ☐ I consent to be treated as the owner of the portion of the Trust holding the S Corporation stock under IRC § 678(a), and I will report all items of income, loss, deduction, and credit of the S Corporation allocable to such portion on my individual federal income tax return.

7. Acknowledgment of Effect on S Election

I understand that this election is irrevocable except with the consent of the Commissioner, and that any failure of the Trust to satisfy the QSST requirements of IRC § 1361(d)(3) may cause termination of the S Corporation's election under IRC § 1362.

8. Signature

[____________________]
[INCOME BENEFICIARY NAME], Current Income Beneficiary
Date: [__/__/____]

SOURCES AND REFERENCES

• Internal Revenue Code:
• IRC § 1361(b)(1) — Small Business Corporation Eligibility
• IRC § 1361(c)(2) — Eligible Trust Shareholders
• IRC § 1361(d) — QSST Definition, Election, Requirements
• IRC § 1361(d)(2) — QSST Beneficiary Election Procedure
• IRC § 1361(d)(3) — Five QSST Requirements
• IRC § 1361(e) — Electing Small Business Trust (ESBT) — comparison
• IRC § 678(a) — Beneficiary Deemed Owner
• IRC § 641(c) — ESBT Taxation (comparison)
• IRC § 1362 — S Election; Termination
• IRC § 1362(f) — Inadvertent Termination Relief

• IRC § 1366 — Pass-Through to Shareholders

• Treasury Regulations:

• 26 CFR § 1.1361-1(h) — Eligible Trusts
• 26 CFR § 1.1361-1(j) — QSST Requirements; Election Procedures
• 26 CFR § 1.1361-1(j)(6) — Form and Time of QSST Election
• 26 CFR § 1.1361-1(j)(11) — Revocation of QSST Election

• 26 CFR § 1.1361-1(m) — ESBT Rules (comparison)

• IRS Forms and Guidance:

• Form 1120-S — U.S. Income Tax Return for an S Corporation
• Schedule K-1 (Form 1120-S) — Shareholder's Share of Income, Deductions
• Form 2553 — Election by a Small Business Corporation
• Rev. Proc. 2013-30 — Late S Election and QSST/ESBT Election Relief

• IRS Private Letter Rulings on inadvertent termination (e.g., PLR 202532006)

• State Law:

• Uniform Trust Code (state-adopted version)
• Uniform Principal and Income Act (state-adopted version)

IMPORTANT DISCLAIMER: QSST status is unforgiving. A single defect — extra beneficiary, accumulated income, corpus distribution to a non-beneficiary, late or missing § 1361(d)(2) election — can terminate the S corporation election, with retroactive entity-level tax. Always confirm timing of the beneficiary election, coordinate with the Corporation's tax preparer, and consider Rev. Proc. 2013-30 if a deadline is missed. Engage qualified estate planning and S corporation tax counsel before contributing S corporation stock to this Trust.