An irrevocable trust can own S corporation stock, but there are strict restrictions that must be carefully observed. The trust must qualify as a permitted shareholder under IRS rules, which significantly limits the options available to irrevocable trusts.
The primary requirement is that an irrevocable trust must be a "qualified subchapter S trust" (QSST) or an "electing small business trust" (ESBT) to hold S corp stock. A QSST is a trust where one beneficiary is entitled to receive all trust income during the trust's existence, the beneficiary has the power to direct trust distributions, the trust cannot make distributions to anyone other than the named beneficiary during that beneficiary's lifetime, and the beneficiary's interest terminates at death with the trust's assets going to the estate or being distributed.
Alternatively, an ESBT allows multiple beneficiaries and is more flexible than a QSST but has its own requirements, including restrictions on the types of beneficiaries permitted (generally only individuals, estates, and certain charities).
Both options require the trust to make a specific election with the IRS (Form 2553 for QSST; Form 2553 with appropriate notation for ESBT). Without the proper trust structure and election, an irrevocable trust cannot hold S corp shares, and doing so would cause the S corp to lose its special tax status.
The restrictions reflect S corp rules limiting share ownership to ensure the corporation maintains its closely-held status and achieves consistent tax treatment across shareholders.