Benficries of trust considered owners of corp and therefore HC

Trust owns s corp.

The pres and sec of the s corp are the beneficiaries of the trust.

Are they therefore considered owners of the s corp and therefore they ate HCEs irregardless of their salaries being only 100K? Thank you!

If they are not >5% owners they are not consdidered HCEs based on the salaries you mention. The officer test only applies to determining who is a key employee.   

Evaluate the trust’s governing documents and relevant law to discern each individual’s beneficial interests (and creator’s rights, if any) under the trust.

Assume the trustee and each other fiduciary would exercise its discretion in the beneficiary’s favor.

Consider whether the trust is a grantor trust.

Consider at least Internal Revenue Code sections 671-678, 1563, and 2031, and the Treasury’s rules and the IRS’s guidance interpreting those sections.

Consider rules for a trust that can be an eligible shareholder of subchapter S corporation.

Consider how the trust’s income tax returns have described and will describe each beneficiary’s proportionate share of the trust’s income.

This is not advice to anyone.

5 hours ago, ratherbereading said:

If they are not >5% owners they are not consdidered HCEs based on the salaries you mention. The officer test only applies to determining who is a key employee.   

The trust owns the s corp, however, the question is, does the fact that these 2 are the beneficiaries of the trust, deem them to be 5% owners and thus HCEs?

About your description of the facts:

You mention that the corporation’s president and secretary are trust beneficiaries.

But are they the only trust beneficiaries?

Are the two beneficiaries spouses?

Are the two beneficiaries otherwise related?

Is either of the two beneficiaries also a creator or grantor of the trust? Are both?

Is the trust irrevocable or revocable?

What rights (if any) does the trust’s creator or grantor have?

Is the trust a grantor trust for Federal income tax purposes?

Does a beneficiary have a withdrawal right?

Does a beneficiary have a right to a current distribution from any portion of the trust’s income?

Does a beneficiary have a right to a current distribution from any portion of the trust’s principal?

Does a trustee have a discretionary power to distribute any income, or any principal, to a beneficiary?

Do any of the trustee’s powers differ regarding the S corporation shares and the trust’s other investments?

Do any of a beneficiary’s rights or beneficial interests differ regarding the S corporation shares and the trust’s other investments?

Those and other facts might matter in how one translates trust powers and beneficial interests into deemed ownership of the corporation the trust holds.

Consider 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).

This is not advice to anyone.

If you have access to "Who's the Employer" by Derrin Watson, I have found it to be a very valuable and accessible resource for researching these kinds of questions.

The original question was about attribution of ownership for HCE determination purposes; keep in mind that HCE determination uses attribution under section 318.

IRC 318(a)(2)(B) contains rules about attribution of ownership from trusts.

C.B. Zeller, thank you so much! Yes, i have a copy of Watson's publication. Great idea. Thanks!

Peter Gulia, your analytical and sharp knowledge is much appreciated, as always. I will look into the information for this particular case.