Defined benefits plan for a grantor trust

[Guest Jpsket]

First off, I'd like to say hello to everyone. I've found this site to be a great source of information, and I hope that I can contribute in the future.

At the moment, I have a defined benefits plan question: suppose there is an S corp with two shareholders. One of the SHs is Wife, who works for the company. The other SH is a grantor trust, with grantor being Husband. Both Husband and Wife perform services for S corp. Corporate earnings and wages are paid directly to Wife. Also, corporate earnings and wages are also paid directly to the Grantor trust, with these monies then being distributed to Husband.

My question: can Husband and Wife both participate in S corp's defined benefits plan, even though Husband's earnings and wages are paid directly to the trust? Since income tax will flow through the grantor trust to Husband, would this be a sufficient basis for Husband to be able to participate in the defined benefits plan?

[ETA Consulting LLC]

To answer this question, you must first establish whether the trust and the S corp are members of the same controlled group. We know that ownership of the trust is two-fold. First, the grantor (in your case) would be deemed to own 100% of the Trust. Further, the beneficiary of the trust would have their ownership calculated by the actuarial interest in the Trust. With this said, I would imagine that the husband and wife (collectively) would own 100% of the Trust. The same would apply to the S-Corp. So, when the dust settles, the husband and wife really owns 100% of the S-Corp and 100% of the Trust.

So, to answer your question: Yes, they may both participate in the same plan. I would imagine that the documents are properly drafted to include both employers; the trust and the S-Corp. Not really sure of the mechanics of who is the employer paying the W-2 for the work on the trust, but any W-2 paid would appear to be from within that same controlled group.

Good Luck!

[Bird]

I agree, but wonder how the income that the trust receives is passed through to the husband. If it is subject to payroll taxes, either as W-2 income or self-employment income, then the trust could be an adopting employer and I think it all makes sense. If not, then the trust could be an adopting employer, but the husband wouldn't have any plan income.

(I also wonder if the payments to the grantor trust are subject to payroll taxes at that level...if so, then I think that perhaps the grantor trust is effectively a proxy for the husband and doesn't need to be an adopting employer; that is, the S corp is effectively the employer for both. I barely know enough about this to be dangerous but wonder if a grantor trust can even receive "wages"...)

[K2retire]

I barely know enough about this to be dangerous but wonder if a grantor trust can even receive "wages"...

That was where I was getting hung up on this also! I wondered if the trust is receiving K-1 income and pass that through to the grantor.