5% owner for RMD when company is owned by a trust

[D Lewis]

We have a plan where the ownership is a trust.

I believe this means the trustees of the trust are deemed to be the owners - is that correct?

So if an employee is a trustee of the the trust they are deemed to be a 5% owner, correct?

Does it matter if there is more than one trustee?  For instance if there are 4 are the all deemed to be 25% owners of the trust?  Or are they all 100% - or does it vary?

I don't know what I don't know here.

[Paul I]

The answer is fairly involved and you should consider having legal counsel assist in assessing whether or not there is ownership.  They could provide guidance on:

• Does the trustee have "beneficial interest" in the trust and, if so, what is the individual's interest.
• Are there "constructive ownership/attribution" rules that would determine if the trust beneficiaries have ownership in the trust's interest.
• Is the trust a grantor-trust and is the trustee treated as an owner.

None of this is in my wheelhouse and I am only peripherally familiar with some of these considerations.  Some of our BL colleagues likely are more qualified to provide additional details. 

[Peter Gulia]

To count stock shares, other capital interests, profits interests, or other ownership rights a participant gets indirectly through a trust, one looks to the trust’s beneficiaries and each beneficiary’s beneficial interests.

The many points of tax law one might apply or consider could include (at least):

Internal Revenue Code § 1563 and Treasury’s interpretation; see 26 C.F.R. § 1.1563-3(b)(3)(i) https://www.ecfr.gov/current/title-26/part-1/section-1.1563-3#p-1.1563-3(b)(3)(i).

“[T]he actuarial interest of each beneficiary is determined by assuming the maximum exercise of discretion by the [the trust’s trustee or other] fiduciary in favor of such beneficiary[.]”

Measuring some beneficial interests, especially those involving contingencies about when an interest begins or ends or regarding a person’s life or death, might call for estimated actuarial measures.

Among ways, see 26 C.F.R. § 20.2031-7 https://www.ecfr.gov/current/title-26/section-20.2031-7.

(Looking to each beneficiary’s percentage of the trust’s distributable net income shown on a Form 1041 income tax return or its K-1 tax-information reports often is not an accurate measure of beneficial interests to determine whether a retirement plan participant is a more-than-5%-owner.)

A trustee might have a personal beneficial interest depending on what powers and how much discretion the trustee has.

Property (including capital or profits interests in a business) of a grantor trust might be treated as the grantor’s property.

A trust for an employee stock ownership plan is a different situation.

To sort out these and other tax law points, the retirement plan’s administrator must consider all the terms of a trust, which will require reading the documents governing the trust and might require reading a State’s law governing trusts.

This is not advice to anyone.