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Author Topic: Trusts / Estates  (Read 3281 times)
 
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AuditorLisa
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« on: March 04, 2009, 11:00:30 AM »

Quite often we come across corporations that have some of their stock owned by trusts and/or estates. 

According to the feedback I receive from the policyholders, different carriers handle these situations differently. Some allow exclusion of officers and others do not.

I was taught, (a million years ago) that we determine of the trust is invoked. If not invoked, the issuing person retains ownership.  Once invoked the trustee has the legal right to the property and if for a minor, may hold it for the use or benefit of that person. 

And, that an estate is not a legal entity until all items of the estate are settled ie ownership is with the estate not a person until the terms of the estate are met then ownership may be transferred to a person (or more likely a trust)

I find that most auditors, underwriters and audit processors all have different variations of how to handle this scenario.

Since most of my information comes from a REALLY old (1994) CIAMA booklet and a really OLD brain, I was wondering if there might be anything newer to be shared with my team regarding these situations.

Thanks bunches! AuditorLisa  Grin







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auditor1
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« Reply #1 on: March 04, 2009, 11:13:45 PM »

A person who creates a trust is called a Grantor, or a Settlor, or a Trustor.

Revocable – In a revocable trust, the Grantor retains the right to revoke or amend the trust.  The Grantor is considered the "equitable owner" of the trust assets, and the Trustee(s) is(are) considered the legal owner(s) of the assets.  A revocable trust is designed to eliminate probate, but provides no asset protection against lawsuits.  Trustees who are officers or directors of closely-held corporations, partners of partnerships, or members of LLC's may elect to be excluded from workers comp coverage. 

Irrevocable – In an irrevocable trust, the Grantor cannot revoke the trust.  The Grantor has parted with the incidents of ownership of the assets of the trust and, therefore, has no right to have the assets returned to his individual ownership, or power over the disposition of the trust assets.  Trustees who are officers, directors, partners, or members cannot be excluded.

California Workers' Compensation Experience Rating Plan Section II, Paragraph 8 – Ownership (see You must login to view links.
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For the purpose of experience rating, ownership shall be determined as follows:

(e) If a trust is set up to operate an entity, ownership shall be determined as though each trustee owns an equal share of the entity unless the grantor retains the right to modify or terminate the trust, or the right of the trustee to exercise complete discretion with respect to the operations, assets or management of the entity is subject to approval of the grantor, in which case the grantor shall be determined to be the owner.

(g) If all or a portion of a business is owned by an entity, the interest owned by the entity shall be treated as though it is owned by the person or persons who own the entity in proportion to each person's ownership interest in the entity.

(see also Section IV, Paragraph 2 - Combination of Entities)

Labor Code Exclusion of Trustees (see You must login to view links.
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3351.  "Employee" means every person in the service of an employer under any appointment or contract of hire or apprenticeship, express or implied, oral or written, whether lawfully or unlawfully employed, and includes:

(c) All officers and members of boards of directors of quasi-public or private corporations while rendering actual service for the corporations for pay; provided that, where the officers and directors of the private corporation are the sole shareholders thereof, the corporation and the officers and directors shall come under the compensation provisions of this division only by election as provided in subdivision (a) of Section 4151.

(f) All working members of a partnership or limited liability company receiving wages irrespective of profits from the partnership or limited liability company; provided that where the working members of the partnership or limited liability company are general partners or managers, the partnership or limited liability company and the
partners or managers shall come under the compensation provisions of this division only by election as provided in subdivision (a) of Section 4151.  If a private corporation is a general partner or manager, "working members of a partnership or limited liability company" shall include the corporation and the officers and directors of the corporation, provided that the officers and directors are the sole shareholders of the corporation.  If a limited liability company is a partner or member, "working members of the partnership or limited liability company" shall include the managers of the limited liability company.

(g) For the purposes of subdivisions (c) and (f), the persons holding the power to revoke a trust as to shares of a private corporation or as to general partnership or limited liability company interests held in the trust, shall be deemed to be the shareholders of the private corporation, or the general partners of the partnership, or the managers of the limited liability company.

Often, the auditor finds that the person who had the power to revoke a trust is now deceased.  Upon the death of the Grantor, the trust became irrevocable.  So successor trustees are no longer shareholders (or general partners, or managers) as the trust now owns the stock.  In such cases, none of the officers of the corporation can be excluded because the California labor code stipulates that only stockholding officers and directors of closely-held corporations (i.e. all shares of the corporation are owned exclusively by officers and directors) can be excluded.  Also, the successor trustees are no longer considered general partners, or managing members.

However, the Bureau will not base test audit differences on matters of ownership involving trusts (except, perhaps, when the ownership determines the combinability of multiple entities).  Therefore, many carriers in this era of open-rating will avoid upsetting their policyholders with such details and opt to retain the business by excluding officers and directors who are trustees, whether the trust is revocable or irrevocable.
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