My First QSST

[Snaggletooth]

Just what I always wanted -- two QSSTs!!

Let me try to pose my question with a minimum of my usual bumbling and stumbling:

The question centers around estimated taxes. The Sub S individual shareholders receive dividends every Apr 15, Jun 15, Sep 15, and Jan 15 so they can afford to make estimated taxes on their K-1s. This Sub S has been around since 1986, so it is definitely robust, solvent, and a going concern.

A few days ago the major shareholder created two trusts for his children - two individuals in their 20s. In order for the corporation to remain an S corp, these trusts must be QSSTs.
One of the requirements is that each trust must distribute its accounting income to its beneficiaries annually.

The QSSTs are now shareholders of the Sub S, and will be receiving quarterly dividends. If all the income is distributed, the trusts will have no taxes as the DNI will exhaust all their taxable income. The beneficiaries, however, will receive a K-1 for all the income they receive thus the beneficiaries will have a tax liability.

The beneficiaries will have a tax liability but the QSSTs will have received the dividends. The Sub S is obligated to pay dividends to the QSST and not the beneficiaries. The question becomes "How does this mismatch of tax liability and dividends get corrected?"

One possibility is for the trust to receive the dividends, then immediately turn around and write a check to the individuals, then for the individuals to immediately turn around and write a check to the taxing authorities for their estimated taxes. Messy.

Can the Sub S make estimated tax payments directly to the taxing authorities on behalf of the beneficiaries, and STILL book this as a dividend payment to the trust??

Sorry to drag it out, but that's what we're facing. For those of you who have QSSTs, you must also have the same problem. How do YOU handle it?

Some of you have posted that you only service individuals, and do not do corporations. Maybe you are the smart ones....

Thanks to all who have read this far - Snag

[veritas]

Why can't each trust

distribute the income immediately to the beneficaries? I believe the requirement is the income must be distributed at least annualy.

[Snaggletooth]

Veritas

Good question and thanks for asking. The requirement is that the income be distributed annually, but the beneficiaries have estimated tax that is required quarterly and they won't have sufficient cash to pay against large sums of income forthcoming on their K-1 from the 1041. So the dividends will be paid four times a year to the shareholders, and on those same dates the beneficiaries will be required to pay in their estimated tax. This doesn't leave the luxury of waiting for an annual distribution.

[JON]

I do a 1040

of a minority stockholder in an S Corp. The Corp makes all the estimate payments on behalf of the stockholder-employee. Numbers are large and no reason why S can not do it. The estimates are treated as distributions to the stockholder.

[les grans]

Are you saying that the tax law requires a single, annual distribution of the trust's income to the beneficiary? I don't see where that comes from. The tax law requires that the income of the trust be distributed (or deemed distributed) "currently". You can pay it out whenever. Or even have the trusts make the estimated tax payments.
Or maybe it's the trust documents that require an annual distribution....

[Snaggletooth]

Code

LesGrande, the requirement is mandated in §1361(d)(3). It cross references a couple more sections, but the bottom line is the accounting income must be distributed.

As far as the timing, I would say if a QSST received a K-1 from a sub S, the trust would be required to be distributed to its beneficiaries by the due date of the tax return.

Putting numbers into an example is the best way to focus thinking.

QSST share of corporate income is $150,000 for 2008 and will receive a K-1 from the S corp for this amount. On 04/15/08, 06/15/08, 09/15/08, and 01/15/09 dividends were declared for $15,000 each. This means that the corporation has paid only $60,000 to the trust (even if it has been paid to the taxing authorities).

The trust will thus have to come up with another $90,000 to pay to the beneficiary in order to pay out the complete $150,000. There are no other assets in the trust except the shares of the S corp, certainly not enough to raise another $90,000.

Does this mean that the corporation has to pay the trust another $90,000 in dividends by 04/15/09 so the trust can distribute it?

Where have I gone wrong? Or have I?

[les grans]

My version of section 1361(d)(3) says

"...all of the income (within the meaning of section 643(b)) of which is distributed (or required to be distributed) currently to 1 individual who is a citizen or resident of the United States."

I may have described this loosely in my previous post (in which I said the income was "deemed distributed") but in my experience, most often whenever the tax rules talk about income of a trust that "is (or is required to be) distributed" what they're really saying is that if it's "required" to be distributed, that's enough - even if it's not, actually, really, in fact, paid out...

It took me a coupla times around the block to understand this. I think I know where you are; trying to get income distributed by some deadline, when that's not really what's required. As long as the accounting income of the trust is "required to be distributed," it doesn't really have to be..!!

Bottom line as I understand it is that if the income "...is distributed or required to be distributed" it's good enough - it satisfies whatever rule is being applied - if it's required to be, even if it's not... Yeah, it's contraintuitive, but these provisions were written by **lawyers**.

Next question, I guess, is to find out what the trust says about the income... i.e. if it's gonna satisfy the "required to be" criterion.

[Snaggletooth]

Thanks

Thanks to everyone who responded.

I guess the verbiage of "or required to be distributed" lets these trusts off the awful hook. If the trust instrument requires no distribution, then the QSST requirement is never violated.

Les Grandes, thanks for outlining the perspective with which I need to read this wacky section.