Only trusts whose interest is obtained by gift, bequest or means other than purchase can qualify. Thus, the trust will not qualify if you purchase an interest in it. Capital losses are allowed only to the extent of capital gains. When computing the taxable income of the trust, no deduction is allowed for amounts distributed to beneficiaries, and generally no deductions or credits are allowed. On the other hand, the income is not included in the distributable income of the trust nor in the income of any beneficiary.
All income is distributed to the beneficiaries.
The interest income is passed through to the beneficiaries and taxed to them. The beneficiaries pay no tax on the S corporation income. This new trust rule allows for considerably more estate and tax planning. However, the price paid is the high tax rate on the income. This is not an approach to be taken lightly.