Associate Attorney - Tax (Honolulu HI)
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|Question 109: A deceased former owner of a company established family and marital trusts that owned a majority of the company. Both trusts list his spouse as the sole beneficiary. Hence she is considered as owning the company stock due to attribution. Does this attribution pass down to her son (whose father was the deceased owner) for purposes of determining whether he is a shareholder-employee?|
Answer: In a word, yes.
Under IRC 318, there always is attribution from parent to child, regardless of the age of the child. Moreover double attribution is permissible, so long as the "family attribution" rules are not used twice. So attributing stock from trust to mother to son is perfectly valid under IRC 318. Accordingly, if mother is deemed to own enough that she is a shareholder-employee, then her son is also.
Let's take this a step further. Let's suppose that we are asking about the wife's nephew, rather than her son. Family attribution will not apply in that case. But suppose the trust says "To wife for life, remainder at her death to her nephew." In that case, he is a contingent beneficiary and is deemed to own his "actuarial interest" in the trust, determined under the estate tax rules. That would be a function of wife's age and the current interest rate.
These issues are discussed (with examples) in Chapter 14 of my book, Who's the Employer?.
Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner or to readers. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of this and similar situations.
The law in this area changes frequently. Answers are believed to be correct as of the posting dates shown. The completeness or accuracy of a particular answer may be affected by changes in the law (statutes, regulations, rulings, court decisions, etc.) that occur after the date on which a particular Q&A is posted.