Trusts in Controlled Group situations

[Purplemandinga]

I find myself confused with controlled group determinations that involve trusts. I read everywhere that trusts which have ownership interests in another business attribute the ownership to the beneficiaries. But does the ownership ever attribute back to the grantor? Say if the trust is revocable and thus ultimate control over the ownership still rests with the grantor would the ownership not attribute back to the grantor?

Any guidance would be appreciated. 

[Larry Starr]

6 hours ago, Purplemandinga said:

I find myself confused with controlled group determinations that involve trusts. I read everywhere that trusts which have ownership interests in another business attribute the ownership to the beneficiaries. But does the ownership ever attribute back to the grantor? Say if the trust is revocable and thus ultimate control over the ownership still rests with the grantor would the ownership not attribute back to the grantor?

Any guidance would be appreciated. 

I'm hoping the following might be helpful from Derrin's book Who's The Employer, which you should own (here's a link to info: http://www.employerbook.com/).

Grantor trusts are subject to a special rule. The grantor (or other owner) of a grantor trust is deemed the owner of all stock or business interests held in the trust. [Code §1563(e)(3)(B); BL 167]

A grantor trust is one in which someone (generally the grantor, the person who set up the trust) is treated as the owner of trust property for tax purposes. [Code §§671-678] This normally happens when the trust is revocable, the grantor has kept the power to determine what happens to the money, or the grantor has kept an income interest in the trust. A grantor trust rarely files an income tax return, and income is reported under the ID number of the grantor. [Treas. Reg. §1.671-4(b)] Sometimes, a beneficiary can be the deemed owner of a grantor trust. [Code §678]

The fact that the grantor is deemed to own everything in the trust does not prevent other beneficiaries from being allocated their proportional interest. Remember, the attribution rules are all about finding multiple persons who the law can treat as owning all or part of the stock.

Example 9.12.1 Greta is grantor of a trust which owns 100 shares of Acme Widgets. The trust leaves all trust property to her son when she dies. The trust is revocable, and so it is a grantor trust. Greta is 43 at her nearest birthday. Assuming that the current interest rate is 6%, the IRS tables say the value of her son’s remainder interest is 16.301%. Since this is a grantor trust, Greta is deemed to own all 100 shares of Acme Widgets. Her son is a beneficiary and so he is deemed to own his actuarial interest, or 16.3 shares of the stock. Note that if the son is under age 21, he is deemed to own all stock his mother owns, and hence all stock held in her grantor trust. [Q 9:18] This is an example of permissible double attribution. Stock is attributed from the trust to the mother, and from the mother to the minor son. [Q 9:3]

Example 9.12.2 Assume the same facts as Example 9.12.1, except that Greta has four children, who share equally in the trust. Each has less than a 5% actuarial interest (4.975% to be exact) and so none of them is deemed to own stock held by the Trust. Greta is still deemed to hold 100% of the stock.

Example 9.12.3 Continuing Example 9.12.2, five years elapse, making Greta 48. According to the IRS tables, the remainder is now worth 20.383%, meaning each child has an interest slightly above 5%, and is deemed to own his or her pro rata share of stock. The same result could be achieved by lowering the interest rate. The moral is that beneficial interests are constantly fluctuating and should be rechecked annually. The birthday of a beneficiary is a logical date to use. However, in the interests of prudence, recomputation should follow any large shift in the interest rate.

Example 9.12.4 Continuing Example 9.12.3, the trust contains a clause giving the trustee discretion to divide the trust as the trustee chooses between the four children, based on their needs and circumstances at the time. It is theoretically possible that any of the four children could receive all trust assets. Since the attribution rules assume that maximum discretion is exercised in a beneficiary’s favor, each child can be deemed to own 20.383 shares of Acme Widgets, the entire remainder interest.

Example 9.12.5 Assume the same facts as Example 9.12.2. One of Greta’s sons, Bob, works at Acme Widgets. The trust provides that upon Greta’s death, all Acme stock goes to Bob, and the rest of the trust is divided between all four children. Bob is deemed to own 16.3 shares of Acme (the entire remainder interest) and the other three children are not deemed to own any of it.

Example 9.12.6 (Warning: This is a math-intensive example, but unfortunately the fact pattern is amazingly commonplace. The good news is you just have to look things up in the right table(s), and then do simple addition and subtraction.) Harold, age 50, owns 100% of corporation C. He transfers it to a revocable grantor trust. The trust provides that upon Harold’s death, Harold’s wife, Wendy, age 48, receives a life interest in the stock. When Wendy dies (or Harold, if sooner), then the stock passes outright to their child, Chris, or to his estate. The applicable federal mid-term rate is 5%.

• Harold is deemed to own 100% of C because it is a grantor trust.

• Following the methodology from Example 1 in Publication 1457, Chris is deemed to own 17.740%, using the second-to-die table R2 available on the IRS web site. Chris receives nothing until both Harold and Wendy are gone, so that is why we use the second-to-die table.

• This means the value of the income interest up to the death of the later of Harold and Wendy is worth 82.260% (100% - 17.740%). [See Example 2 in Publication 1457] Wendy only owns a fraction of that remainder interest, because she must survive Harold. Harold’s life estate, according to table S, also available on the IRS web site, is 72.535% (using a 5% interest rate). That means the value of Wendy’s remainder interest is 9.725% (82.260% - 72.535%). [See Example 4 in Publication 1457]

A person ceases to be a beneficiary of an estate once he has received all that he is entitled to and he probably will not need to pay it back. [Treas. Reg. §1.1563-3(b)(3)(ii)] Thereafter, he is not deemed to own property held by the estate.

Example 9.12.7 Mary is named in her Aunt Margaret’s will. Mary will receive $50,000. Aunt Margaret’s total estate is $250,000 and includes 1,000 shares of XYZ stock. The Executor, under court order, distributes to Mary $50,000 cash from a savings account, and holds the rest of the estate for further administration. Before the distribution, Mary is deemed to own 200 shares of XYZ stock. After the distribution, she is no longer regarded as a beneficiary and is not deemed to own the XYZ stock.

 

[Luke Bailey]

I would add to what Larry has said that 414(b) and (c) (by way of 1563), 267 (used for 4975), and 318, all have different attribution rules.

[Purplemandinga]

Thank you both very much. This was extremely helpful. Thank you for the link to the material.