The Two-Year S Corporation Trap in Your Late Parent's Revocable Trust: Docket the QSST or ESBT Election the Day of Death, Not the Day the Grace Period Ends

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.

The Benefits of Owning a 529 Plan in a Trust

A 529 education savings plan is one of the most tax-efficient ways to save for qualified education expenses. When the account is owned by an individual, however, control, continuity, and multi-generational planning can be limited. Placing a 529 plan in a trust can resolve many of those limitations. The trust must be properly drafted for the 529 specifically, though; a generic trust will not do.

Key Benefits of Trust Ownership

When a trust owns a 529 account, the trustee, rather than an individual donor, controls the account. This structure offers several practical advantages:

• Continuity of Management: If the original contributor dies or becomes incapacitated, the trustee continues to manage the account. You don't need to retitle it or rely on a power of attorney that a 529 custodian may reject. Most 529 plans do let an individual owner name a successor owner directly on the account, and for a family whose only goal is continuity, that simpler step may be enough. A trust does more than a successor-owner designation can, though. It survives the death of both the original owner and any named successor, and it binds the beneficiary-change decision to the terms the family actually agreed on, rather than to whatever the next person in line happens to decide.

• Beneficiary Flexibility: An individual owner can already change the beneficiary to another qualifying family member under the federal rules. A trust adds structure around that decision.  The trustee exercises it according to the trust's terms, not at the unconstrained discretion of whoever happens to hold the account.

• Integration with the Broader Estate Plan:  The 529 becomes part of a coordinated plan rather than a standalone account that may be overlooked or mismanaged.

• Multi-generational Use. Unused funds can benefit later generations under the trust terms, subject to Section 529's rules on qualified beneficiaries. Moving funds to a beneficiary in a younger generation than the original one is not automatically free, however. Section 529(c)(5) can treat that kind of change as a taxable gift, and it may carry generation-skipping tax consequences. A trust intended to shift education funds down the family tree should be drafted with that rule in mind.

• SECURE Act 2.0 Rollover Opportunity. Up to $35,000 of unused 529 funds may be rolled into a Roth IRA for the beneficiary, and a trustee can oversee that decision. The opportunity comes with real conditions: the account must have been open more than fifteen years, contributions made within the last five years are not eligible, and each year's rollover is capped at that year's ordinary Roth IRA contribution limit. This is not a one-time $35,000 transfer.

These benefits make trust ownership especially attractive for grandparents or parents who want professional or successor management while preserving the tax-free growth and qualified withdrawals that make 529 plans valuable.

Revocable or Irrevocable: Which Is Better?

There is no universal answer. The better choice depends on the client's goals.  The bigger point, though, is that both revocable and irrevocable trusts can administer 529 Plans.  Each offers benefits: 

Revocable Trust. A revocable living trust offers maximum flexibility. The grantor can amend the trust, change the trustee, or terminate the arrangement entirely. For most clients who primarily want continuity and management during incapacity or after death, a revocable trust is often sufficient and simpler. It generally offers no additional creditor protection beyond what the account would have in the grantor's own name. On the estate-tax side, IRC Section 529(c)(4) already excludes 529 account values from the contributor's gross estate as a general matter, apart from a narrow clawback if the contributor dies during a five-year gift-averaging election. That protection exists independently of trust ownership. Whether it carries through cleanly when a revocable trust, rather than an individual, is titled as the account owner is a more open question, and one worth confirming with the specific plan rather than assuming either way.

Irrevocable Trust. An irrevocable trust can remove the 529 assets from the grantor's estate with more certainty and may provide greater protection from creditors. It can also support more sophisticated multi-generational planning, including generation-skipping structures. The trade-off is reduced flexibility. Once the trust is irrevocable and the 529 is transferred, changes are limited. Irrevocable trusts also require careful attention to gift-tax consequences at the time of funding, to the ongoing identity of the "account owner" for Section 529 purposes, and to the 529(c)(5) issue noted above if the plan contemplates moving funds to a younger generation later on.

For many families focused on education funding and incapacity planning, a revocable trust is the more practical choice. Clients with larger estates or specific asset-protection goals may benefit from an irrevocable structure, but only with precise drafting.

Financial Aid Treatment

Any comparison of ownership structures should also account for financial aid. Under current FAFSA rules, a 529 account owned by a grandparent or other third party no longer counts against the student; that changed a few years ago and reversed the older, less favorable rule. A trust-owned account, admittedly, sits in less settled territory. No uniform answer exists for how a trust-owned 529 is reported, or whose asset it is treated as, on the FAFSA or the CSS Profile. Families expecting need-based aid should consult with counsel, the plan administrator, and perhaps a financial aid specialist before assuming a trust-owned account will be treated the same as an individually owned one.

A Critical Caution: Generic Trusts Can Jeopardize 529 Benefits

Not every trust is suitable to own a 529 plan. Many generic or "form" trusts contain no language addressing 529 accounts. That silence creates real risk.

Section 529 plans have strict rules regarding the account owner, the designated beneficiary, and the use of funds for qualified education expenses. The plan's tax advantages can be threatened if a trust's terms are ambiguous about who may direct distributions, who may change the beneficiary, how the trustee must treat the account for a particular qualified beneficiary, or whether the trustee is authorized to take the actions the 529 custodian requires. In the worst case, distributions could lose their tax-free character, or the plan custodian could administratively reject the account.

A well-drafted trust should contain specific provisions that:

• Authorize the trustee to open, own, and manage 529 accounts,
• Direct how the trustee is to use the funds for a named or described qualified beneficiary,
• Permit changes of beneficiary only among eligible family members, with attention to the 529(c)(5) gift-tax rule when a change moves funds to a younger generation,
• Coordinate with the trust's distribution standards so that education expenses are properly paid or reimbursed, and
• Anticipate financial aid treatment where the family expects to seek need-based aid.

Without these provisions, the very benefits that make trust ownership attractive can be undermined. It is also worth checking the state's own 529 program. Many states offer an income-tax deduction or credit for contributions, and that benefit is often conditioned on who the account owner is. A trust-owned account may not qualify in every state, even when the trust itself is properly drafted for federal purposes.

Bottom Line

Owning a 529 plan in a trust can provide continuity, control, beneficiary flexibility, and better integration with an overall estate plan. A revocable trust is often the simpler and more flexible vehicle for most clients. An irrevocable trust may be preferable when estate-tax removal or asset protection is a primary goal. In either case, the trust instrument must specifically address 529 ownership and administration. Generic trust language is not enough and can put the plan's tax benefits at risk.

Clients who hold or intend to fund significant 529 accounts should review those accounts with their estate planning attorney. The goal is an ownership structure and trust terms that actually support the educational legacy the family intends to create, rather than one that quietly works against it.

Navigating Guardianship and Trusts: Lessons from In re Gregg for Aging-in-Place Planning

When planning to age in place, seniors and their families must carefully navigate estate planning tools like trusts and guardianships, especially when cognitive decline, such as dementia, raises questions about capacity. The Texas Court of Appeals’ decision in In re Gregg, No. 07-25-00035-CV (Tex. Ct. App. May 29, 2025) offers critical lessons for protecting assets and autonomy while ensuring care needs are met. This case highlights the interplay between guardianship powers, trust creation, and jurisdictional limits, underscoring the need for proactive planning to avoid legal disputes that can disrupt aging-in-place goals.

We advocate for trust-based strategies and clear legal frameworks to support seniors, particularly those with dementia, in maintaining control over their assets and care, thereby preventing such disputes. This article explores the In re Gregg case, its implications, and actionable steps for Ohio and Missouri families to secure their future.

Case Background: A Family Dispute Over Assets

Kenneth Gregg, a Texas farmer with substantial farmland, faced health challenges, including dementia. In 2023. His condition prompted significant estate planning decisions and a subsequent legal battle that reached the Texas Court of Appeals.

Here’s a summary of the case:

• Initial Transfers and Guardianship: In June and October 2023, Kenneth transferred land and cattle to his son, Monte. In December 2023, his daughters sought temporary and permanent guardianship of Kenneth’s person and estate due to his dementia. On December 22, 2023, the trial court appointed daughter Lucretia as temporary guardian of Kenneth’s estate, with limited powers to possess estate assets, spend funds for Kenneth’s daily care, and preserve assets (Tex. Est. Code Ann. § 1151.001).
• Trust Creation: In July 2024, despite his dementia and temporary guardianship, Kenneth created a trust, naming Monte as trustee and transferring all remaining property to the trust. Later that month, Lucretia was appointed permanent guardian of Kenneth’s estate.
• Dispute and Trial Court Order: Lucretia filed a motion in the guardianship action to recover equipment and proceeds, targeting Monte individually, not as trustee. On December 30, 2024, the trial court ordered Monte to return the assets, asserting authority over him in all capacities, including as trustee.
• Appeal via Writ of Mandamus: Monte sought a writ of mandamus from the Texas Court of Appeals, arguing that the trial court’s order was invalid because: (1) it was an impermissible prejudgment attachment, (2) it improperly targeted him as trustee when he was sued only individually, (3) the motion was filed incorrectly within the guardianship action, and (4) the order was vague and overbroad.

Court of Appeals’ Ruling: A Focus on Jurisdiction

The Texas Court of Appeals addressed only Monte’s second argument, finding it dispositive, and conditionally granted his writ of mandamus, ordering the trial court to vacate its return order. The court’s reasoning centered on two key issues:

1. Kenneth’s Capacity to Create the Trust:
   • The court applied Texas Estates Code § 1151.001, which presumes a ward retains all legal rights not explicitly assigned to the guardian. The December 2023 temporary guardianship order limited Lucretia’s powers to possessing assets, spending for Kenneth’s care, and preserving the estate, without prohibiting Kenneth from creating a trust or transferring property.
   • Despite Kenneth’s dementia diagnosis, the court found no evidence that the guardianship order removed his right to create a trust. Thus, the July 2024 trust was validly created, and Monte, as trustee, held legal title to the assets.
2. Jurisdictional Error:
   • Lucretia’s motion was filed against Monte in his individual capacity, not as trustee. The trial court’s order, however, extended to Monte in all capacities, including as trustee, without him being a party to the suit in that role.
   • The court ruled that this overreach rendered the order void, as the trial court lacked jurisdiction over the trust. A writ of mandamus was appropriate because Monte had no adequate appellate remedy, and the trial court’s action was a clear abuse of discretion.

The court directed the trial court to vacate the return order, protecting the trust assets from immediate recovery and highlighting the importance of precise legal procedures in guardianship disputes.

Implications for Aging-in-Place Planning

The In re Gregg case offers critical insights for seniors and families, particularly those in Ohio and Missouri, where aging-in-place planning is a priority:

1. Guardianship Limits and Retained Rights:
   • Like Texas, Ohio law presumes a ward retains rights not specifically assigned to a guardian (Ohio Rev. Code § 2111.02). If a senior with dementia creates a trust before or during a limited guardianship, it may remain valid unless the court explicitly restricts such actions. This underscores the importance of early trust creation to protect assets for aging-in-place needs, such as home care or modifications.
   • Lesson: Work with an elder law attorney to establish a revocable living trust before cognitive decline raises capacity concerns. This ensures assets are managed according to your wishes, even if guardianship becomes necessary.
2. Jurisdictional Precision in Legal Actions:
   • The court’s ruling emphasizes that legal actions must target the correct party and capacity (e.g., trustee vs. individual). In Ohio and Missouri, similar jurisdictional rules apply (Ohio Rev. Code § 2101.24; Mo. Rev. Stat. § 472.020). Failing to sue a trustee in their fiduciary capacity can invalidate court orders, delaying or derailing asset recovery.
   • Lesson: Ensure guardianship or trust disputes are filed correctly, with clear documentation of roles and capacities, to avoid costly legal errors.
3. Dementia and Capacity:
   • Kenneth’s dementia diagnosis in 2023 did not automatically revoke his ability to create a trust in 2024, as capacity is assessed at the time of the act (Tex. Est. Code § 1151.001). In Ohio, for example, the capacity to create a trust requires understanding the nature of the act and its consequences (Ohio Rev. Code § 5804.02). This highlights the urgency of planning before dementia progresses.
   • Lesson: Seniors with early-stage dementia should consult an attorney to assess capacity and create trusts or powers of attorney, ensuring control over assets for home care or other needs. Most laypersons conflate medical diagnosis with legal consequence; capacity and competency are questions of law, and they are determined legally by a judge. There are cases where doctors have deemed a person medically competent or capable, while judges have considered the person lawfully incompetent or incapacitated, and vice versa.
4. Family Dynamics and Disputes:
   • The conflict between Monte and Lucretia reflects common family tensions in guardianship cases, especially when dementia complicates decision-making. Trusts can mitigate disputes by clearly defining asset management roles.
   • Lesson: Communicate estate plans with family to reduce conflicts, and appoint trusted fiduciaries (e.g., trustees) to balance oversight and control.
5. Aging-in-Place Connection:
   • Aging in place requires financial security for home care, modifications, or aides. Trusts, like Kenneth’s, can protect assets from guardianship disputes, ensuring funds for in-home care.
   • Lesson: Integrate trusts with Medicaid planning to preserve assets for aging in place, avoiding the need for nursing home care, as seen in In re Gregg.

Call to Action: Secure Your Future Now

The In re Gregg case underscores the urgency of proactive estate planning to protect your assets and autonomy, especially with dementia risks. Take these steps today to ensure you can age in place with confidence:

1. Create or Update a Trust: Work with an Ohio or Missouri elder law attorney to establish a revocable living trust, preserving assets for home care and avoiding guardianship disputes. Ensure the trust aligns with state laws (Ohio Rev. Code § 5804.01; Mo. Rev. Stat. § 456.4-401).
2. Define Guardianship Powers: If guardianship is needed, specify limited powers to retain your right to manage assets, as Texas law allowed Kenneth to create a trust (Tex. Est. Code § 1151.001).
3. Appoint Trusted Fiduciaries: Name a reliable trustee or co-trustee, like Monte, to manage assets, and communicate plans to family to prevent conflicts.
4. Plan for Dementia Care: Consult resources like the Alzheimer’s Association 24/7 Helpline (800-272-3900, per your Admiral Nurse query) for caregiving support, and explore Medicaid programs (Ohio PASSPORT, Missouri MO HealthNet) to fund home care.
5. Review Legal Documents: Update powers of attorney, wills, and health care directives to reflect current wishes, ensuring clarity in case of incapacity.

Act now to safeguard your legacy and aging-in-place goals. Contact an Ohio or Missouri elder law attorney today to review your estate plan and protect your assets from disputes like those in In re Gregg.