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A family trust set-up with minors as beneficiaries, owning s-corp shares
Old 08-28-2015, 11:19 AM   #1
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A family trust set-up with minors as beneficiaries, owning s-corp shares

I had someone mention in the recent past tell me that it'd be advantageous to set-up a family trust with my minor children as beneficiaries. I don't fully understand what will happen tax-wise, and will be meeting with an accountant soon, but was wondering if anyone here has any input. I partially want to do this so I no longer qualify as self-employed when it comes to FHA underwriting guidelines (aka abig PITA)

Below is a summary of my questions off the top of my head.

  • If my minor kids are the beneficiaries of the trust, how do taxes work at the end of the year? Now, all profits from my s-corp (i own 100%) pass through to my personal tax return...what about when I'm not a shareholder?
  • On that note, would it appear that my 4 year old has an income of $xx,xxxx?? He pays taxes on it?
  • Can you explain the dynamic between my kids (the benficiaries paying taxes with the income) and me (their guardian, and the settlor?, and a trustee?) and their mother (also a legal guardian). Very importantly, I dont want her having any way to get to their shares/ do we assure that?
  • If I were to set this up, and my kids are the beneficiaries - I wouldnt be able to show/prove any of the company's income other than what I pay myself and show on my w-2's....right?

I'm just trying to wrap my head around this to determine if it makes sense. I think I might be able to pay this house off in the coming year and want to set myself up (on paper) to more easily qualify for a home loan. It was a major PITA recently when I applied for a home loan because they consider you self-employed if you own more than 25% of a company.

Obviously, further shielding assets in this high-risk biz is a plus as well.

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Old 08-28-2015, 11:44 AM   #2
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Cannot answer all your questions.... but will throw out a few answers as best I know...

If you get rid of your shares, you no longer will get a K-1 from the S corp and will not have it on your tax return...

However, you need to check if the trust you plan can even own the S corp... usually a trust cannot own shares, but there is an exception... I just do not think that exception includes multiple beneficiaries... so if you have more than one kid, you might have to do multiple trusts....

Edit to add from the link...

If a trust that holds S stock does not meet all the applicable S corporation trust rules, not only will the trust be ineligible to hold S stock but the corporation's S election will terminate. Unfortunately, missteps are easily made, and inadvertent terminations and invalid elections frequently occur. Although there is no substitute for knowledgeable and careful advisors who know how to navigate the Subchapter S rules, there is some comfort in existing tax policy that permits inadvertent terminations of the S election or invalid elections to be corrected if certain conditions are met.

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Old 08-28-2015, 12:33 PM   #3
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I know less than Texas....

I would assume to do this would require an irrevocable trust, so get it right the first time. Otherwise I think you still pay taxes.
If the kids are getting paid through the trust and having income above some nominal amount, their taxes will fall back into the parent's rate via the kiddie tax rules. I believe can extend beyond being minors.
If the monies are now the kids, not yours. It is not there for you to "spend as you wish". Similar to UGM, there are rules as to how the money can be used by the parent or guardian.

So when your kids are this trust going to keep paying them?
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Old 08-28-2015, 03:39 PM   #4
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I've done a little bit of research into asset protection and from what I understand the best thing I could do is a "Wyoming Close LLC".

I'm single and I'm not looking into inheritance taxes, irrevocable trusts and that type of thing. I was just looking for ways I can possibly protect myself.

I have an umbrella policy on insurance and that's it right now.
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Old 08-29-2015, 08:10 AM   #5
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Definitely talk to your CPA. I am a CPA, but since I don't know all of the facts as they relate to you, take this with a grain of salt.

Unless the Trust is a Qualified Subchapter S trust, you will lose your S status of your corporation. Also, because the kids are not active in the corporation, their income will be considered passive and may be subject to the kiddie tax. Also, any losses that the corporation may incur will be disallowed because of the passive activity limitations rules. On top of all that, you may gift tax implication on the transfer of the stock. Long story short, you may not accomplish what you think you want to accomplish.
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