“Shares held by trusts or minors could have adverse results for association purposes..”
There are a number of deeming rules within the Association rules that accounting practitioners should be very careful of. Sometimes, these rules apply in situations where there was no intention for there to be a change in association.
One of the key deeming rules has to do with trusts. If there is a discretionary trust that owns shares in a company, each of the discretionary beneficiaries is deemed to own all of the shares in the company. For example, if there are four beneficiaries in a trust, each one of those beneficiaries is deemed to own all of the shares held by the trust, for association purposes. This means that if a spouse is a beneficiary of a trust and she owns her own separate company, then those companies would be associated because she would be deemed to own 100% of the shares of the first company, as well as the shares she already owns of the second company.
Another deeming rule to be aware of deals with minor children. There is a rule that states that any shares held by a minor child are deemed to be owned by each of the parents of that child. This means that if a minor child owns shares of a company, the mother and the father are each deemed to own all of the shares owned by the child. If you combine this rule with the rule discussed above, there could be issues in a situation where a parent is not a beneficiary of a trust, but the children are. Take the situation where Mom owns 100% of one company and a trust owns 100% of the second company. Both companies would be associated because Mom would be deemed to own all of the shares owned by the child and the child would be deemed to own all of the shares held by the trust. This is especially dangerous in estate freeze situations.
Whenever a trust is used or a minor is used to own shares, careful consideration should be given as to whether or not this affects the association of family companies.
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