A farmer, a contractor, or a small manufacturer puts his S corporation stock into his revocable living trust, as he should. He dies. The trustee, a grieving daughter with a good accountant and a busy life, administers the trust over the following year or two. Nobody files anything with the IRS about the stock, because nothing seems to have changed. Then, two years after the date of death, the corporation quietly stops being an S corporation. No notice arrives. No one decides anything. The tax status the family business has relied on for decades simply ends on a date fixed the day Dad died.
This is not a hypothetical. On October 23, 2026, the IRS released Private Letter Ruling 202643006, dated July 30, 2026, which addresses exactly this failure. It is a good reminder of a calendar item that trust administrators routinely miss, and it is the reason for the advice in the title: put the election on the calendar when the grantor dies, not when the grace period is about to end.
Two terms carry most of this article, so here they are in plain language. A QSST, a Qualified Subchapter S Trust, is a trust with a single income beneficiary who receives all of the trust’s income, and who is treated for income tax purposes as the owner of the S corporation stock the trust holds. An ESBT, an Electing Small Business Trust, is a trust that can have several beneficiaries and can hold income back, and that pays tax on its S corporation income at the highest rate. Each qualifies only if an election is filed, which is why the calendar matters. Both are explained more fully below.
Why the Grace Period Exists
An S corporation is a corporation that has elected under Subchapter S of the Internal Revenue Code to pass its income, losses and credits through to its shareholders instead of paying corporate income tax. To keep that election, it can have only certain kinds of shareholders. Under Internal Revenue Code § 1361(c)(2)(A), a trust is an eligible shareholder if all of it is treated as owned by one individual who is a U.S. citizen or resident. That describes the ordinary revocable living trust during the grantor’s life. The trust is a grantor trust, the grantor is the deemed owner, and the S corporation has no problem.
At death, the trust usually becomes irrevocable and is no longer treated as owned by the grantor. Left alone, it would immediately become an ineligible shareholder and the S election would terminate. Congress softened that result. Section 1361(c)(2)(A)(ii) allows a trust that was a grantor trust immediately before the deemed owner’s death to continue as an eligible shareholder for the two-year period beginning on the day of death. That is the grace period.
The grace period is a bridge, not a destination. Before it runs out, the trust must become something the S corporation rules recognize permanently, or the stock must leave the trust.
What Has to Happen Before the Two Years Run Out
- A Qualified Subchapter S Trust (QSST): Under § 1361(d), a trust with one income beneficiary, who must receive all of the trust’s income currently, can qualify. The beneficiary, not the trustee, makes the election. The beneficiary is treated as the owner of the S corporation stock for income tax purposes, which is the trade for the simplicity. If the trust creates separate shares for different children, each separate share is treated as a separate trust and each needs its own election, and a separate election is made for each S corporation the trust holds.
- An Electing Small Business Trust (ESBT): Under § 1361(e), a trust with more than one beneficiary, or one that accumulates income, can qualify. The trustee makes the election. The S corporation income is taxed to the trust at the highest rate, which is the price of the flexibility.
- Moving the Stock Out: The trust can distribute the shares to individuals who are eligible shareholders. The trust then no longer holds S stock and the problem goes away, although this may not be what the trust says should happen or what the family wants.
The decision between a QSST and an ESBT belongs in the first year of administration, not in the last month. It depends on how the trust is written, who the beneficiaries are, whether the trust needs to hold income back, and how the trust’s tax rates compare with the beneficiaries’ rates. Some trusts do not qualify as either without a court-approved or nonjudicial reformation, and that takes time.
What PLR 202643006 Shows
The facts in the ruling are simple and, for that reason, instructive. A trust owned S corporation stock and was treated as owned by an individual, A, so it was an eligible shareholder. A died. The trust agreement divided the trust into separate shares for two income beneficiaries, B and C. The trust remained an eligible shareholder for the two years after death. After the two years ended, the trust continued to hold the stock.
The corporation represented that the separate shares met the QSST requirements when the two years ended. But B and C never filed QSST elections. The IRS concluded that the corporation’s S election terminated on the day the two-year period ended, because the trust became an ineligible shareholder when the elections were not timely filed.
The ending is the good news. The IRS found the termination was inadvertent and, under § 1362(f), treated the corporation as continuing to be an S corporation. But the relief came with conditions. B and C each had to file a QSST election effective as of the end of the two-year period, within 120 days of the ruling date, with a copy of the ruling attached. The corporation and its shareholders had to agree to make any adjustments the IRS required. The corporation also had to represent that all of its returns had been filed consistently with S status, and that B and C had reported the trust’s income as if the elections were in effect. The IRS also said it expressed no opinion on whether the corporation was otherwise eligible, whether the separate shares existed, or whether any share was a valid QSST.
The ruling follows the pattern of other recent letters, including PLR 202449001, where a trust that could have been a QSST also failed to elect after the two years ended, and the IRS granted the same kind of relief.
A Caution About Reading the Ruling
A private letter ruling is addressed only to the taxpayer who asked for it and, under § 6110(k)(3), may not be used or cited as precedent. It tells us how the IRS has approached this problem, not what it must do for your client. The ruling dealt with a QSST. It did not discuss an ESBT election, nor did it turn on the faster, cheaper late-election procedure the IRS offers in Rev. Proc. 2013-30, which generally requires a corrective filing within three years and 75 days of the intended effective date. If that window has closed, a ruling request is the remaining road, and it costs time, user fees, and professional fees that a calendar entry would have avoided.
Why Docket From the Date of Death
The instinct is to calendar the end of the grace period and work backward. That instinct causes the problem, for several reasons.
- The End Date Is Fixed by the Death, and Nobody Remembers It: The two-year period begins on the day of death. The day the family receives the date-of-death valuations, the day the court case closes, and the day the trust is funded all fall on different dates. Only the date of death is on the certificate. If you make the calendar entry on the date of death, it is correct from day one.
- The Work Takes Longer Than the Election: The election is a one-page filing. The work behind it is not. Someone has to read the trust to see whether it divides into separate shares, requires distribution of all income, and can qualify as a QSST or ESBT at all. If it does not, the trust may need to be reformed or the stock distributed, and either takes months. A calendar that starts at the end of the period leaves no time for that.
- The Right Person May Not Be the Trustee: A QSST election is made by the income beneficiary, not the trustee. That person may be a surviving spouse, a child living in another state, or a minor with a legal representative. Finding that person, explaining what is being asked, and getting a signature is its own project.
- People Change: Over two years, a successor trustee resigns, an accountant retires, an attorney closes the file, and the family business hires a new bookkeeper. A date written on the calendar at the beginning survives those changes better than a good intention.
- The Consequence Is Severe and Hard to Reverse: When the election terminates, the corporation becomes a C corporation. It pays entity-level tax, its shareholders may face a second layer of tax on distributions, and, under § 1362(g), it generally cannot re-elect S status for five years without IRS consent. The relief in the ruling is discretionary. It is available only if the failure was inadvertent and the corporation and shareholders accept the IRS’s terms.
A Docket That Works
Here is the schedule I recommend to trustees and to the lawyers and accountants who advise them. Enter every item on the day of death, and assign each one to a named person.
- Day of Death: Identify every trust that holds S corporation stock. Record the date of death and calculate the last day of the two-year period. Enter the end date and the interim reminders. Confirm that the trust was wholly a grantor trust immediately before death, because the grace period applies only to that kind of trust. Notify the corporation’s accountant.
- Within 90 Days: Obtain the trust agreement, any amendments, and the corporation’s governing documents. Determine whether the trust divides into separate shares and who the income beneficiaries are. Make a preliminary decision between a QSST and an ESBT, or a distribution of the stock.
- Within One Year: Make a final decision. If the trust must be reformed to qualify, begin the court or nonjudicial process now. Confirm the amount and timing of the income distributions required for a QSST. Confirm who will sign the election.
- At 18 Months: Prepare the election and any separate-share elections, one for each share and each corporation. Make sure the person who must sign has the document.
- At 21 Months: File the election, if it has not already been filed, and obtain proof of filing. Do not wait for the last weeks. After Filing Keep the filing and proof of delivery with the trust records. Provide a copy to the corporation, which should keep it with the corporate minute book. Have the preparer of the trust’s and the beneficiary’s returns confirm that the returns match the election.
The exact filing deadline for the election, measured from the end of the period, is set by Treasury Regulation § 1.1361-1, and the procedure differs for a QSST and an ESBT. A cautious practitioner treats the election as due at or before the end of the two-year period, not some weeks afterward, and reads the regulation for the particular trust before relying on any later date. If your trust is already past that point, call a professional promptly, because the corrective options narrow with time.
What This Means for Ohio and Missouri Families
Many of the families I work with own farms, family businesses, and professional practices that are organized as S corporations. They are told, correctly, that a revocable living trust avoids probate. They are less often told that a revocable living trust holding S corporation stock creates a deadline after the person who signed it dies. The deadline is the same in Ohio, Missouri and every other state because it comes from federal tax law. The state-law steps that go with it, including reading the trust, deciding who the trustee will be, and reforming the trust if needed, differ from state to state.
If you are the trustee or the beneficiary of a trust that owns S corporation stock, or you are the owner of an S corporation and have a revocable trust, there are two practical steps. First, ask your attorney and your accountant whether the trust is drafted to qualify as a QSST or an ESBT, and whether it divides into separate shares at death. Second, ask who will put the date on the calendar. A well-drafted trust can make the later decision easier, and a clear instruction in the trust to the successor trustee costs nothing.
This article is general information, not legal or tax advice for any particular trust or corporation. The rules are technical and the deadlines are unforgiving. If you are the trustee of a trust that holds S corporation stock, or know someone who is, contact my office as soon as possible.
