Wills and Trusts

Wyatt, Tarrant & Combs, LLP

Avoidance of Excess Business Holdings Rules

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. Treas. Reg. §53.4943-8(b) provides that voting shares owned by a trust are deemed constructively owned by its remainder beneficiaries. The Regulation gives this example:

Thus, if a trust owns 100 percent of the stock of a corporation A, and if, on an actuarial basis, W’s life interest in the trust is 15 percent, Y’s life interest is 25 percent, and Z’s remainder interest is 60 percent, under this paragraph (b), Z will be considered to be the owner of 100 percent of the stock of corporation A.

Treas. Reg. §53.4946-1 provides that the following are disqualified persons with respect to a private foundation:

(i) All substantial contributors to the foundation, as defined in § 507(d)(2) and the regulations thereunder.

(ii) All foundation managers of the foundation as defined in § 4946(b)(1) and paragraph (f)(1)(i) of that section,

(iii) An owner of more than 20 percent of:

(a) The total combined voting power of a corporation,

(b) The profits interest of a partnership,

(c) The beneficial interest of a trust or unincorporated enterprise,

which is (during such ownership) a substantial contributor to the foundation, as defined in § 507(d)(2) and the regulations thereunder,

(iv) A member of the family, as defined in § 4946(d) and paragraph (h) of this section, of any of the individuals described in subdivision (i), (ii), or (iii) of this subparagraph,

(v) A corporation of which more than 35 percent of the total combined voting power is owned by persons described in subdivision (i), (ii), (iii), or (iv) of this subparagraph,

(vi) A partnership of which more than 35 percent of the profits interest is owned by persons described in subdivision (i), (ii), (iii), or (iv) of this subparagraph, and

(vii) A trust, estate, or unincorporated enterprise of which more than 35 percent of the beneficial interest is owned by persons described in subdivision (i), (ii), (iii), or (iv) of this subparagraph.

Treas. Reg. §53.4946-1(a)(5) provides that the combined voting power of a corporation includes voting power represented by holdings of voting stock (actual or constructive) but does not include voting rights held only as a director or trustee. These rules were harnessed to allow closely-held businesses to be held by charity in two different private letter rulings. In PLR 201303021 the IRS allowed nonvoting stock to be held indefinitely by a private foundation where the voting shares were held several different trusts with no one of which owning more than 20 percent of the voting shares. The remainder of each trust would pass to public charities. Family members were allowed to serve as trustees of the trusts, thus allowing family control of the enterprise. In PLR 201311035, 80% of the voting stock of an enterprise was held in a voting trust for the benefit of a public charity, which allowed the nonvoting stock to be held indefinitely by a donor advised fund.

Author: robmalinesq

I am an estate planning and probate attorney in Memphis, Tennessee.

Leave a reply. Please note that although this blog may be helpful in informing clients and others who have an interest in information privacy and security, it is not intended to be legal advice. The information on this blog also should not be relied upon to form an attorney-client relationship.

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