The Trifecta (Trust, Operations, and Holding Entity)

How it works

The Trifecta, a name popularized by Mark J. Kohler, is a diagram rather than a Code section. It is organizational: a way of arranging entities that already qualify for their own separate benefits, so that the liability plan, the tax plan and the estate plan all hang off one picture. On its own it creates no deduction.

Three legs, each holding a different kind of thing.

• A revocable living trust at the top. It holds the ownership interests of the entities below it, the membership units or the stock, along with the owner's personal assets. Its purpose is probate avoidance and control over incapacity and succession, not tax.
• An operations entity on one side. The active trade or business, usually an LLC taxed as an S corporation or a straight S corporation, so the owner's pay divides between wages and distributions and the business income can carry the section 199A deduction. This leg holds the earned income and the highest lawsuit exposure.
• A holding entity on the other. A separate LLC holding passive, appreciating assets: rental real estate, equipment leased back to the operating company, investment accounts. It is left on default partnership or disregarded taxation, with no S election, so depreciation, basis and the step-up flow cleanly. This leg is where value accumulates.

Why the separation is the whole idea

The two lower entities sit side by side under the trust, and neither one owns the other. That fact is doing three jobs.

• Liability. A judgment against the active business cannot reach assets held in a sibling entity that business does not own. The operating company holds little beyond receivables and goodwill, and the appreciating assets sit deliberately walled off from it. The wall holds only as long as the entities are operated as genuinely separate.
• Tax. Active income gets S corporation and section 199A treatment, while passive real estate stays in a pass-through that preserves depreciation and a basis step-up at death under section 1014. Mixing both inside one S corporation is a known trap, for reasons the failure modes below take up.
• Estate and succession. Because the trust owns the entity interests, the whole apparatus passes outside probate under the trust instrument, and both interests are positioned for the section 1014 step-up. Both halves follow from one feature: the retained power to revoke makes the grantor the owner for income tax under section 676, and makes the transfer includible in the gross estate under section 2038. Inclusion is the trade-off for revocability, and it is what makes the step-up available.

What this is worth in Florida

Not much on the tax side. Florida does not tax pass-through income at the personal level, so the wage and distribution split inside the operating entity is a federal self-employment tax question only. There is no Florida layer underneath it to optimize.

Two Florida points do bear on the structure. Both entities are formed and maintained through Sunbiz, with an annual report due by May 1 each year to stay active. And Florida homestead creditor protection, under article X, section 4 of the state constitution, survives transfer of the residence into a revocable living trust, so the home can sit at the top of the structure without losing that protection. That turns on how the property is actually titled, and it is a state constitutional protection rather than anything federal.

Who this applies to

Anyone can draw the diagram. It is a structuring choice rather than an election with thresholds, so there is no eligibility test for the arrangement itself. The legs have their own gates.

• The operations entity, if it elects S status. Section 1361(b)(1) requires a domestic eligible entity, no more than 100 shareholders, only allowed shareholders, and one class of stock. The election itself, and the Florida filings around it, are their own subject, which I cover in my Florida S-corp guide.
• The trust as shareholder. This is the linchpin that lets the trust sit on top of an S corporation without busting the election. A single-member LLC owned by the grantor's revocable trust can still elect S status, because section 1361(c)(2)(A)(i) makes a trust all of which is treated as owned by an individual who is a citizen or resident of the United States an eligible S corporation shareholder.
• The section 199A deduction on the operating side. Pass-through business income qualifies, at 20 percent under section 199A(a). The sunset that used to sit on it was removed by the 2025 reconciliation act, for tax years beginning after December 31, 2025. Specified service trade or business limits and the W-2 wage and UBIA limits phase in above the threshold.
• The holding entity. No qualification gate. It is a partnership if it has two or more members and disregarded if it has a single owner, under the default classification rule of Treasury regulation 301.7701-3(b)(1), with no Form 8832 filed. That default is what keeps depreciation and the step-up flowing through. How the multi-member version is taxed is its own subject, and I cover it under partnership taxation for a multi-member LLC.
• The trust itself. It has to be validly created under state law, and funding it means re-titling assets and assigning the entity interests into it. Grantor status during life is automatic where the grantor retains the power to revoke, under section 676.

What it requires

These are conditions that have to hold at the same time, not an order of operations. One of them is an omission rather than an action, which is easy to miss.

• A timely S election, where the operating entity is to be an S corporation. Section 1362(b)(1) sets the window at two months and 15 days from the start of the tax year the election is to take effect. An LLC electing S status files only Form 2553; under Treasury regulation 301.7701-3(c)(1)(v)(C) a timely 2553 is deemed to make the corporate classification election as well, so a separate Form 8832 is not required. Late election relief is available under Rev. Proc. 2013-30 where reasonable cause exists.
• No election at all on the holding entity. Neither Form 8832 nor Form 2553. Default classification is what preserves pass-through depreciation and the step-up, and filing either form is what gives that away.
• Appreciating assets titled in the holding LLC rather than the operating one. Real estate deeded in, investment accounts retitled. Appreciated real property inside the S corporation carries the section 311(b) gain trap on the way back out.
• A trust that actually holds the entity interests. Assigning the membership interests and the stock of both entities into the trust is what builds the structure; an unfunded trust accomplishes nothing.
• Wholly grantor-owned status on the trust that holds S corporation stock, so the section 1361(c)(2)(A)(i) shareholder eligibility holds.
• The grantor's Social Security number on the trust during life. Treasury regulation 1.671-4(b) supplies the reporting method, and no separate trust return is filed while the trust is grantor-owned and revocable. The trust gets its own EIN only after the grantor's death.
• Entities operated as genuinely separate companies. Separate bank accounts, separate books, intercompany agreements at arm's length such as a written lease where the holding LLC rents property to the operating company, reasonable owner-employee W-2 wages in the S corporation, and documented distributions.
• Annual filings that do not lapse. Sunbiz annual reports by May 1, Form 1120-S and its K-1s from the operating entity, Form 1065 from the holding entity or Schedule E where it is disregarded, and the owner's Form 1040 underneath all of it.

What you need to document

A liability separation and a probate avoidance are both claims about who owns what, and a claim about ownership is only as good as the instrument behind it.

The assignment of the entity interests into the trust

The signed instrument transferring the membership interests and the stock. This is what distinguishes a funded structure from a drawing of one, and its absence is invisible on an organizational chart.

Grantor-trust status of the trust holding S corporation stock

Recorded, not assumed. The S election survives because the trust is wholly owned by the grantor under section 1361(c)(2)(A)(i), and that is a fact about the trust instrument rather than about the entity.

A reasonable-compensation study for the owner-employee wage

Support for the W-2 figure paid inside the S corporation, which is the most-litigated piece of the arrangement.

Arm's-length intercompany agreements

A written lease where the holding LLC rents property to the operating company, and written terms behind any other flow between the two.

Separate books, separate accounts, documented distributions

One set of records per entity. Commingled funds are what an alter-ego argument is built out of.

Where it goes wrong

The Trifecta is mainstream structuring rather than an aggressive position, and each leg rests on well-settled authority. I want to state that at the scope I actually checked. The arrangement appears on neither the IRS listed-transactions page nor the transactions-of-interest page, and that covers those two published lists only. The remaining reportable-transaction categories in Treasury regulation 1.6011-4(b), meaning confidential transactions, transactions with contractual protection, and loss transactions, are fact-based and threshold-based, turn on a particular engagement's terms rather than on a structure's name, and cannot be checked off any list. Nothing in the arrangement itself suggests a Form 8886 obligation, but that is a conclusion about a specific implementation and not about the diagram. The risk here is execution, not concept.

The owner-employee wage

The most-litigated piece of this arrangement is the wage paid inside the S corporation. Driving wages toward zero to move the whole profit into distributions invites recharacterization of those distributions as wages, with payroll tax, penalties and interest following. Watson v. United States, 668 F.3d 1008 (8th Cir. 2012) and Rev. Rul. 74-44 are the authority behind that recharacterization, and a defensible reasonable-compensation study is the answer to it.

Real estate placed inside the S corporation

Section 311(b) makes a corporation recognize gain when it distributes appreciated property, measured at fair market value, and an S corporation cannot make the tax-free property distributions a partnership can. Property that goes into the operating company is not easily taken back out of it, and that is why real estate belongs in the holding LLC rather than the operating one.

What the trust leg does not do

A revocable trust is a grantor trust. It reduces no income tax and gives no protection from the grantor's own creditors during life. It buys probate avoidance, succession control and a basis step-up at death, and nothing else. Anyone presenting a revocable trust as an income-tax or asset-protection device is describing an abusive arrangement, not the Trifecta.

Sections 671 and 676 are why. The retained power to revoke makes the grantor the owner, so every item of income, deduction and credit is reported on the grantor's own return as though the trust did not exist. Whatever asset protection exists here comes from keeping operations and appreciating assets in separate entities, not from the instrument at the top.

The rest of the recurring failures

• A trust that was never funded. A trust that never receives the entity interests, or the home, accomplishes nothing. Probate is not avoided and the top leg is cosmetic.
• Formalities treated as optional. Commingled funds, no separate books and no intercompany lease destroy the liability wall the structure was built to provide.
• An S election broken at the apex. Assigning S corporation stock to a trust that is not a wholly-owned grantor trust, or letting grantor status lapse without converting to a qualified subchapter S trust or an electing small business trust within the section 1361(c)(2) grace windows, ends the election.

A situation where this comes up

The situation this diagram is drawn against is one entity doing everything: the practice, the equipment and a rental property all inside a single LLC, often a disregarded one.

What is worth naming about that is mechanical rather than a recommendation. All of the business profit is self-employment income, because there is no separate entity to divide the owner's pay between wages and distributions. Every asset the owner has accumulated stands behind any claim the business generates, because nothing separates them. Whether reorganizing any of that is worth doing turns on facts about a particular person, and this page cannot answer that.

A second version is the half-built one. An operating S corporation exists, a holding LLC exists, a trust was drafted at some point, and the membership interests and the stock were never assigned into it. On paper that is three legs. In substance the trust owns nothing, so the probate avoidance and succession control it was there to provide never arrived, and the chart gives no sign of it.

The third is the trust sold as the tax benefit. The hard-dollar tax effect in this arrangement comes from the operating entity, from the wage and distribution split and from section 199A. The trust leg is bought for probate avoidance, succession control and the basis step-up, which are real and are not income tax savings. Described the other way around, the diagram is being used to sell something it does not do.