About
Foundational Principles In the Community Diversity, Equity & Inclusion Technical Excellence Alumni TIAG Membership
Careers
Why Cohen & Co Our Culture Total Rewards & Benefits Early Career Opportunities Experienced Opportunities Join Our Talent Community
Contact
Akron, OH Baltimore, MD Buffalo, NY Chicago, IL Cleveland, OH Denver, CO Detroit, MI Milwaukee, WI New York, NY Philadelphia, PA Pittsburgh, PA St. Clair Shores, MI Youngstown, OH
Client Portal
Services Industries Knowledge Center People

About Our Services

We offer tailored solutions — whether private company or owner; public or private fund, adviser or fund service provider; or Fortune 1000 enterprise. Learn how we can help you.

Find Services

Assurance Services

Employee Benefit Plan Audits Internal Controls Investment Company Audits Private Company Audits

Tax Services

Federal Tax Planning & Compliance High Net Worth & Wealth Transfer International Filings & Structuring Investment Company Tax State & Local Tax Tax Credits & Incentives Transaction Tax Planning

Advisory Services

Business Valuations Data & Insights Digital Finance Solutions IT Strategy & Implementation Litigation Support Services M&A Advisory Outsourced Accounting Solutions Transaction Services Turnaround & Restructuring

Our Industry Expertise

Our industry experience means you can find professionals who speak your language and bring earned insights to the table. Learn how we can help you.

Explore Industries

Key Industries

Digital Assets Investment Companies Manufacturing Private Companies Private Equity Real Estate & Construction Technology & Life Science
VIEW THE COMPLETE LIST

Knowledge Center

Our team wants to help your team stay up to date. Browse our thought leadership, events and news for insights and a point of view on business-critical topics.

Find Insights & Events

Insights

Browse valuable articles and publications our experts have written to help you and your organization answer key questions — and consider new ones.

Read Our Insights

Events

Join us in person and online for events that address timely topics and key business considerations.

Explore Our Events

News

Find out what is happening at Cohen & Co, from industry recognitions and growth updates, to where we are contributing to important media stories.

Read Our News
People
Foundational Principles In the Community Diversity, Equity & Inclusion Technical Excellence Alumni TIAG Membership
Why Cohen & Co Our Culture Total Rewards & Benefits Early Career Opportunities Experienced Opportunities Join Our Talent Community
Akron, OH Baltimore, MD Buffalo, NY Chicago, IL Cleveland, OH Denver, CO Detroit, MI Milwaukee, WI New York, NY Philadelphia, PA Pittsburgh, PA St. Clair Shores, MI Youngstown, OH
Client Portal
Back to Insights

Trusts & Taxes 101: Electing Small Business Trusts

by Stephenie Truong

March 18, 2025 High Net Worth & Wealth Transfer, Private Companies, Real Estate & Construction

Posted by Stephenie Truong and John Reich

An Electing Small Business Trust (ESBT) can be useful to business owners who want to begin passing their S Corporation onto children or other beneficiaries. This irrevocable trust, which has the somewhat unique ability to hold S Corporation stock, offers not only estate planning opportunities, but also tax flexibility, continuity of ownership and another layer of asset protection for small businesses structured in this manner.

What is an Electing Small Business Trust?

Shareholders of an S Corporation are usually limited to individuals, certain charitable entities or estates, but specific types of trusts are also allowed to own shares. As mentioned, an ESBT is one of them. An ESBT allows a business owner to transfer their ownership interest, or stock, to the trust, while still maintaining continuity of and control over the business. As such, and ESBT can help facilitate a smooth transition of ownership while it minimizes gift and estate taxes for owners. Note an ESBT is not allowed to purchase the shares of stock itself; the grantor must gift shares to the trust.

What are the Tax Advantages and Disadvantages of an Electing Small Business Trust?

When deciding on a type of trust to hold S Corporation stock, it’s important to carefully consider the benefits and drawbacks of an ESBT.

The primary benefit when compared to other types of trusts is that an ESBT is allowed to distribute income to multiple beneficiaries. While other types of trusts automatically treat the sole beneficiary of the trust as the owner of the S Corporation, the terms of the ESBT’s trust agreement will determine how those beneficiaries are treated as stock owners. The ESBT also is not required to distribute all its income in the current tax year.

However, the ordinary income and capital gains attributable to the S Corporation income are taxed at the highest federal ordinary and capital gains rates. Depending on the income brackets of the beneficiaries, this could be inefficient from a tax perspective. Since income is recognized at the trust level, the ESBT does not receive a deduction for the distribution. That means the distribution of income is not subject to tax when it is distributed to the beneficiaries.

Additionally, be aware that income tax returns for an ESBT will be complex, as its income is broken into two portions (the S Corporation portion, and the non-S portion). The income attributed to the S-portion of the trust is taxed to the trust and subject to tax on its ordinary income at the highest federal tax rate. Net capital gains are also taxed at the highest federal capital gains rate. As mentioned, the S-portion of income does not allow a deduction for the distribution of income.

How Do ESBTs and QSSTs Compare?

Another type of trust frequently compared to an ESBT is a Qualified Subchapter S Trust (QSST), so it’s important to mention within the ESBT discussion. There are considerable differences between the two trusts to evaluate during the estate planning process. The most significant relate to the distribution of income and the number of beneficiaries each trust allows. In terms of income distribution, the QSST is required to distribute all its ordinary income each year to the beneficiary, leading to the income being reported on the beneficiary’s return. The ESBT does not have to distribute all its income annually, helping minimize tax for its beneficiaries. Additionally, a QSST is limited to only one lifetime beneficiary, while an ESBT can have multiple. It’s also important to note it is possible to make an election to convert a QSST to an ESBT, if desired.


Deciding if an ESBT is right for your overall tax situation is a complex matter. It can, however, prove useful to business owners looking to plan for the next generation of leadership, protect assets and remain flexible from a tax perspective. It’s worth a discussion with your tax advisers and attorneys to determine if this is right for you.

Contact Stephenie Truong, John Reich or a member of your service team to discuss this topic further.

Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.

Related Insights

Article

Trusts & Taxes 101: Intentionally Defective Grantor Trusts

Read More
Article

Trusts & Taxes 101: Probate & Estate/Gift Taxes

Read More
Article

Trusts & Taxes 101: Bankruptcy Protection

Read More
Sign Up for Our Emails & Events

Receive insights from our specialists in a variety of areas and timely information on upcoming events directly to your inbox as they go live in our online Knowledge Center.

Subscribe Today
Top
Subscribe to our newsletter
About Contact Submit RFP Privacy Policy

"Cohen & Co" is the brand name under which Cohen & Company, Ltd. and Cohen & Co Advisory, LLC, and its subsidiary entities, provide professional services.

Cohen & Company, Ltd. and Cohen & Co Advisory, LLC practice in an alternative practice structure in accordance with the AICPA Code of Professional Conduct and applicable law, regulations and professional standards.

Cohen & Company, Ltd. is a licensed independent CPA firm that provides attest services to its clients. Cohen & Co Advisory, LLC and its subsidiary entities provide tax, advisory and business consulting services to their clients and are not licensed CPA firms.

The entities operating under the Cohen & Co brand are independently owned and are not responsible for the services provided by any other entity operating under the Cohen & Co brand. Our use of terms such as “our firm,” “we,” “us” and other terms of similar import denote the alternative practice structure of Cohen & Company, Ltd. and Cohen & Co Advisory, LLC.

© 2025 Cohen & Co