HCE-Attribution

[PFranckowiak]

I have a company where Mr. A. has put his ownership 75% into a Trust for his 5 children. Nonrelated person owns other 25%.

I know Mr. A's Children are considered HCE by attribution as they are benficiaries of the Trust.

The Children's spouses are not considered HCE.

What about the Grandchildren? They don't have any direct ownership and their parents don't have any direct ownership.

I know that the 318 rules don't pass the direct ownership down to the Grandchildren.

I know that the Trust attributes ownership to the Beneficiaries prorata.

I am not sure that the Trust changes anything as far as the Grandchildren are concerned, unless thay are named in the trust as a direct beneficiary, not a contingent. Do I have to find out who the direct beneficiaries of the trust are and make sure that the Grandchildren are not beneficiaries?

Need for HCE determination. (Have owner, children, children's spouses and Grandchildren all working for the company)

Any thoughts? Am I missing something here?

Thanks for your help.

Pat

[Guest Sieve]

If this is a living trust (i.e., revocable until death), then it is considered a grantor trust, and the grantor is considered to own 100% of the trust assets--including the stock in the Company. (IRC Section 318(a)(2)(B)(ii).) So, you would just use the normal Section 318 attribution rules (from Dad to wife & to kids--IRC Section 318(a)(1)(A)), but you would not re-attribute from kids to grandchildren (IRC Section 318(a)(5)(B) & Treas. Reg. Section 1.318-2(b)). I suspect what you have here is, in fact, a revocable, living trust--so, Dad is the 100% owner, the kids are treated as also owning 100% each, but the grandkids are not treated as owning anything.

When the revocable trust becomes irrevocable (at death), or if it is currently irrevocable (unlikely), then the trust beneficiaries are treated as owning their actuarial interest (which does not necessarily mean that they own a pro rata percentage of stock). (IRC Section 318(a)(2)(B)(i) & Treas. Reg. Section 1.318-3(b).) In that case, you would attribute first to the kids (through the trust) and then to the grandchildren (through their parents--IRC Section 318(a)(5)(A) would apply because the kids' ownership is attributed from the trust rather than from another family member).

Clear as mud, ehh?

[PFranckowiak]

Thanks - clearer than it was. I need to find out more information and this gives me clearer questions to ask. I am dealing with several trusts in this situation, so unclear what estate planning was done and I just will have to ask more questions.

Again thanks for your response.

Pat