History and Operation of Trusts
A statutory trust is a legislatively created and regulated entity familiar to attorneys, bankers, and some professional financial planners. Statutory trusts are legislatively restricted in their design and implementation and must adhere to certain requirements granted by state statute. Since most Citizens don’t study all the various statutes of a State, these so-called “professionals” receive a sense of power over the “Common man”. The Internal Revenue Service? dictates how these trusts will be taxed and specifies how each will be treated under IRS Code in general.The Statutory entity assumes that only the government has the authority to create life and act as God. Therefore if you use a statutory trust you are subject to the law that created it. In other words the government becomes a partner in the regulation of your entity. They can charge you fees (excise taxes), dictate the terms under how you must operate your entity, and change the rules as it appeals to them. Statutory trusts will always be subject to the law that creates them.
The Statutory Organization is based on hundreds of thousands of pages of laws, in various states, and court opinions on the meanings of those laws. It can be formed only within the provisions of the statute. The statute might well impose capitalization restrictions. It might allow government inspections, public disclosure of officers and Directors, and require financial reports. It could require certain racial or sexual characteristics of the founders. It could allow the State agencies power to seize, audit, and close down your business without any notice. It probably will allow for future, unilateral changes by the State in the procedures for the operation of the organization. By being unilateral, its nature becomes socialistic.
You Have Another Choice
An alternative to the Statutory trust or business organization is that of the Common Law trust or business organization. Unlike the Statutory trust the Common Law trust does not rely upon the governments and their laws for its existence. It is a right recognized under Article 1 Section 10 of the Constitution? of the United States of America. ”no state shall impair the obligation of contract.” The United States Supreme Court has ruled on this numerous times. The creation of a Pure Trust is not subject to legislative control. The United States Supreme Court holds that trust relationship comes under the realm of equity, based upon the Common Law, and is not subject to legislative restrictions as are corporations and other organizations created by legislative authority . (Eliot v. Freeman, 220 US 178)
Under the Constitutional Common Law, you have an equal right as a Citizen to create your own life or entity. You do not need to ask for permission. In addition the courts will support the trustees in carrying out the terms of their Trust contract? and agreement. (Clews v. Jamison, 182 US 461, 21 S.Ct. 845)
With a Common Law entity, the State cannot intrude into the affairs of a “Contractual Company” because the State is not a party to the contract. The only parties to the contract are the private parties who operate under the protection of the U. S. Constitution?. The right to contract? is inherent in the people, and guaranteed by that Constitution?.
To summarize: We still have a choice to create an organization based on the Constitution? or an organization based upon the dictates of the State government through their statutes.
The Constitutional Organization is based on nothing more than the common law and a phrase in the U.S. Constitution?. If we believe in, and operate through that Constitution?, we limit the powers of government. That was the intent of the Constitution?. This organization abides by and subscribes to the Constitution? of The United States of America as the Supreme Law of the land. When we don’t understand and exercise Constitution? rights, we give greater control over to government and their regulated special interests groups. In addition we forget the cause for which so many of our brothers and sisters have fought and died for. We are the stewards of the freedoms for our posterity and, therefore have a great responsibility. By using our freedoms we give them life. Through our ignorance, the government has successfully offered alternatives to the Constitution? that place us under greater restrictions. By exercising OUR Constitutional rights, we limit their power.
The UBOT, a Constitutional Organization, can be formed by any Citizen and no state may pass any law “impairing the Obligation of Contracts.”
Some History
Trusts have had a long history of usage. Plato used a non-profit trust to finance his university in Greece about 400 B.C. Trusts were known in Roman law? as well. In England, trusts were in use as early as the 11th century, and by the 14th century, were being enforced by the Courts of Chancery?.
Two of the most famous early business trusts in England were Lloyds of London (1811) and the London Stock Exchange (1802). An explanation of their function, under the common law of England, can be found in Smith v Anderson, 15 Chancery Division 247 (1880).
The Business Trust made its U.S. debut in Massachusetts in 1827.1 As a result, a U.S. Business Trust today is often called a “Massachusetts Trust” in legal circles. The U.S. Supreme Court defined the Massachusetts trust as a form of business organization, common in Massachusetts, consisting essentially of an arrangement whereby property is conveyed to trustees, in accordance with terms of the trust. The business is to be held and managed for the benefit of persons who hold transferable certificates issued by the trustees showing the shares into which the beneficial interest in the property is divided.2
While tax law and regulation strongly benefited the corporate form during the mid years of this century, changes detrimental to corporations in the last decade have resulted in a resurgence in the use of BTOs (Business Trust Organizations). Remember corporations are created by law and are totally regulated by the law that created them, i.e. the government. In 1945, both Scudder Capital Growth Fund, Inc. and Kemper Money Market Fund, Inc. changed their forms of organization from corporate to Massachusetts Trust.
Many of the conditions that our forefathers faced in England as owners of land parallel those of today.
For example, the lord of the land was entitled to relief or money payments when the land was passed on to an heir of full age. The lord was given the right to claim wardship? fees when the son of the former owner? was a minor. The lord was also entitled to aid or tax money to pay for the marriage of the lord’s daughter or the knighting of the lord’s eldest son. In addition, the owner? of the land was usually prohibited from selling the land or dividing it among his children or grandchildren. If the owner? of the land was convicted of a crime, he forfeited all he owned to the lord or the king, thereby leaving his family impoverished. There were 100 other taxes and limitations on the ownership? of land. It was to avoid these restrictions that trusts were first created in England. They were designed to avoid the application of these rigid laws by allowing the Settlor to vest legal title in a trustee on behalf of a wife, son, daughter, or other person as beneficiary. It had many advantages, including that it could be a secret.
Trusts were also used early in English history to allow religious organizations to use property charitably bestowed which would otherwise not be able to be enjoyed due to certain restrictions against land ownership? by churches and religious organizations. The English also used (and still use) trusts to avoid probate? of an estate.
History In The United States
Pure trust organizations, now referred to as UBOTs, arrived with the colonists. The first pure trust of record here was drafted by the famous attorney and patriot, Patrick Henry. In 1765, 24 years before the adoption of the Constitution?. This was done for Governor Robert Morris of the Virginia Colony, who was a prominent financier of the American Revolution. Known as the North American Land Company this pure trust is still in operation...over 220 years later.
In 1804 William Bingham, a man reputed to be the richest American when the thirteen colonies won independence, started a pure trust for his vast estate. At one time, the trust owned two million acres in Maine that sold about the time of the Civil War. In addition to being a very large land-owner, Bingham was a Senator from Pennsylvania of the Second United States congress. The trust was terminated by the trustees in 1964, after some 160 years of operation. It was terminated because of the multiplication of beneficiaries (total 315) and the sale of the last properties involved. Throughout the years, the income from property or proceeds from the sale of the land was distributed to the beneficiaries. It was not affected during its period of existence by the death of its Creator (Settlor), or by succeeding Trustees, probate? procedures, or death transfer taxes.
Edward H. Hines, a multimillionaire building supplier, established a 12 million dollar trust in 1914, and he managed this trust business until his death in 1931. His two sons, Ralph J. and Charles, succeeded the elder Hines as managers and retained the management of the trust after a court fight instituted by two nieces, a sister, and a nephew, all seeking to break the trust by claiming that the administration of the family estate had been erroneous. The court ruled that the trust was not an erroneous method of managing the assets, and in fact was a valid and legal arrangement for the estate. Ralph J. Hines, the eldest son, died in 1950, and again the family assets in the trust were not disturbed by estate and inheritance taxes. The Edward H. Hines Lumber Company (a trust) is still operating today, preserved for future generations intact.
Another example of a trust used for family estate planning is that of the Joseph Kennedy family. Joseph Kennedy, father of John F. Kennedy, originally established a UBOT trust to own the famous Chicago Merchandise Mart. The Kennedy family is known to maintain several other UBOT trusts for tax sheltering purposes. One such trust was reported with the caption: “Kennedy Divides Merchandise Mart”, Chicago Tribune, March 22, 1947. “A trust agreement? in which Kennedy's wife, Rose F. Kennedy, and a long time friend and associate, John L. Ford, joined as managers of this trust, formed several years before, helped materially in distributing ownership? to this thirty million ($30,000,000) dollar Merchandise Mart, among members of this family. It has been said that many of these trusts are domiciled in the Fiji Islands of the South Pacific.”
William Waldorf Astor created a fifty million ($50,000,000) dollar trust estate, by a conveyance to trustees, recorded in New York, August 15, 1919 and saved his heirs several million dollars which would have gone for probate? costs and death taxes, had the estate been distributed by the court instead of trustees.
The Rockefeller family has used various kinds of trusts as a means of maximizing privacy. Before his death in 1937, John D. Rockefeller tucked much of his fortune into about 70 trusts for his descendants. The vast web of individual and group funds represent assets of considerably more than one billion dollars.
Nelson A. Rockefeller and his generation are believed to be reducing their personal holdings by the creation of still more trusts for their own grandchildren and great-grandchildren. It has been reported to one source that there are “well over 100 and perhaps 250 individual Rockefeller trusts” by now. Many of these trusts are known to be UBOT trusts to place the funds beyond the reach of estate taxes and the high cost of probate?.
H. L. Hunt, the Texas oil billionaire, is reported to have paid $75,000 for the setting up of the first Hunt family trust. Some persons, who claim to have been close to the Hunt family, estimate that there may be as many as 200 Hunt family trusts now in existence.
The recent death of H. L. Hunt will not have an effect on any of these trust estates, as this family has arranged their affairs so as to increase the estate generation after generation, rather than see the estate cut to shreds by the expensive process of probate?.
Even Ronald Reagan has established a trust. Set up in 1966, the “Ronald Reagan Trust” has enabled him to receive sizable tax advantages. In some years since it was established, Mr. Reagan paid no taxes at all, while maintaining a magnificent living standard.
These are but a few of the many family estates that are preserved generation after generation through the use of the Trust organization - the most effective of these trusts are the UBOT trusts.
What Is A UBOT?
An Unincorporated Business Organization? is a name often associated with the Common Law Business Organization known as the Massachusetts Trust. It is a business organization wherein property is conveyed to trustees and managed for benefit of holders of certificates. (Similar to corporate stock certificates but with differences). A “Massachusetts business trust” is an unincorporated organization organized under Massachusetts law for purposes of investing in real estate.
The Unincorporated Business Organization is simply a contractual company agreement between two or more parties for the purpose of conducting a business. It is established under common law and relies upon no legislative statutes for its existence.
The UBOT is a contract in which a Settlor (or Creator, or Trustor, or Grantor) transfers property (Real, Personal, or both) to one or more Trustees to be held and managed for one or more Beneficiaries.
The Creator: Establishes the entity by bringing it into existence and exercising certain powers of appointment.
Trustees: They have the power of control over the trust. They may share legal and equitable title but should maintain “arms distance.”
Beneficiaries: Citizens and/or organizations who will ultimately receive the property or beneficial interest when disbursements are made. They hold Certificates as evidence of interest in the trust estate.
The trust is created when one or more persons transfer the legal title in property to trustees, with power vested in the latter to manage and control the property and business, and to pay the profits of the enterprise to the beneficiaries of the trust of their successors.
In its typical and characteristic form, the UBOT is brought into being by two basic documents:
(1) A Declaration of Trust or Contract which outlines terms by which persons desiring to invest agree to the creation of a governing group of trustees. The Declaration also:
- Vests the trustees with title to the property of the enterprise and with control and management of its business.
- Contains provisions for transferring certificates of interest for each beneficiary or member.
- Outlines operating provisions of the trust in perpetuity or for a stated duration despite death, insanity, or bankruptcy of a member.
- Frees certificate holders from liability to third persons.3
(2) A Trust Indenture wherein the trustees accept the property and undertake to manage this corpus according to the specific terms of the Trust Indenture.
What Are The Elements Of A “trust”?
A trust involves three elements: (1) a trustee who holds the trust property and is subject to equitable duties to deal with it for the benefit of another; (2) a beneficiary to whom the trustee owes equitable duties to deal with the trust property for his benefit; (3) trust property which is held by the trustee for the beneficiary.
9 Basic Aspects Of The Business Trust Organization
1. It is formed by executing a contract between the parties, setting forth the purposes, terms and conditions of its existence. A written agreement can be enforced by law.
Contracts generally have 5 characteristics
1. There is an offer and an acceptance4 between
2. Two or more parties5, who are of legal age and competent understanding, and there is
3. Consideration paid between the parties,6
4. A legal purpose, and finally,
5. Language that allows a date to be identified by which the contract is to be completed.7
2. It is a legal entity and an artificial individual with rights almost equal to a natural individual, able to own property and conduct business like any person. It is irrevocable and no one has any reversionary rights to its assets.
3. Its assets are owned and its business activities managed by Trustees, who accept such responsibility as fiduciary on behalf of the beneficiaries.
4. The beneficial interests are divided into Capital Units, evidenced by certificates, conveying to the holder the limited rights to receive their pro-rata share of any distributions of income or assets that may be made by the Trustees.
5. The Certificate Units are personal property which convey neither legal title to the property in or any voice in the management of the business or the selection of Trustees, and which become void upon the death of the holder.
6. Under U.S. jurisdiction it is subject to taxation on its net undistributed income. The beneficiaries, if taxpayers, are taxed only on what they actually receive.
7. The assets of the Business Trust Organization are never subject to probate? or estate tax because, as an artificial person, it never dies. It is set up in contemplation of life, not of death, as is a will?.
8. The Certificate Units become void upon the death of the holder and, thus, have no value to be subject to estate tax or probate?.
9. The life of the Unincorporated Business Organization Trust can be extended as deemed advisable or terminated at any time by the Trustees in accordance with the trust indenture. The beneficial interests would then be distributed to the beneficiaries.
Role Of The Creator
Once the creator has caused a business organization to be established, he may or may not have any further interest in the organization. The creators powers may be simply for the establishing of the entity, appointments of Trustees, trust protectors, beneficiaries of whatever the indenture allows. He may or may not serve in a capacity henceforth.
Trustee(s)
One of the major features that distinguishes a Contractual Common Law Trust is the amount of ownership? and control that is vested in the Trustee(s).
Most Grantor type trusts are revocable, or even if irrevocable they usually allow the original Grantor the right of appointment over the Trustees. Also, the Grantor usually retains an equity ownership in the assets of the Trust. The Grantor is frequently a Trustee and /or a Beneficiary of the trust. This is fine if the objective of the Trust is to avoid probate? and to allocate exemptions and deductions to minimize estate and inheritance taxes. But for privacy and reduced liability, it needs to be Irrevocable.
A Contractual Trust, to be recognized as such, must have a business purpose. It must also have the proper form and economic substance. However, for tax purposes, the “Substance” of the entity prevails over the “Form” of the entity. In other words, even if the the Indenture of the Trust is a correct and legal form for a Common Law Contractual entity, if the entity is managed so as to exhibit the characteristics of a Grantor Trust, Corporation, Partnership?, Proprietorship?, etc., it will be taxed as if it were indeed the other entity even though it will be recognized as a Contractual Organization in every other respect.
Certain criteria are applied to determine whether or not the Contractual Trust has any substance. Possession, enjoyment, and control are characteristics of ownership?. If the Trustee (not the Settlor or Grantor) obviously has possession, enjoyment, and control, it is likely that the Trust will be disallowed for tax purposes and the Settlor (Grantor) will be required to pay the taxes on all of the income.
If, however, it can be clearly demonstrated that the Board of Trustees? of the Trust Organization is in control, has the right of possession and enjoys benefits according to the terms of the indenture, it is very unlikely that the tax authorities will challenge the Trust tax return.
It is very important for those who contemplate exchanging their assets into a Common Law Contractual Trust Organization to understand that they no longer own the assets. The Settlor can bargain for employment with the Trustee and an employment contract can be agreed upon before the assets? are exchanged. As Manager of the assets the Settlor can still have possession of the assets and he/she can enjoy benefits derived from the management of the assets, but it should be clear to all that the Trustee owns and controls the assets.
In order to be able to clearly demonstrate that ownership? and dominion? over the assets is vested in the Board of Trustees?, it is vitally important for all business transactions to be documented. At least one Trustee should be a signatory on every bank account and should sign any check which is not a routine part of day-to-day operations. Trustee letters of direction should be prepared and filed pertaining to any and all policy matters which may be implemented by the management staff. Trustee minutes, showing appropriate resolutions, should be prepared and kept with the Trust documents to reflect the business decisions which are made.
Why Must A Trust Be Irrevocable?
From using Irrevocable Trusts on the basis that they lose complete control. Let’s examine that by first considering what the Revocable trust is.
REVOCABLE TRUST: A Revocable trust is one in which the Settlor can change his mind and cancel the whole deal, thereby taking back all assets placed into the trust. Unfortunately, a revocable trust does not protect the estate from future claims against the Settlor. The Settlor is deemed to still have control and therefore liability. For example:
If you find yourself involved in a lawsuit because of some unusual or unexpected event and a judgment is granted against you personally, with a revocable trust, the judgment creditor can force you to revoke the trust to obtain the trust assets to satisfy the judgment.
In addition Revocable Living Trusts are subject to the application of federal estate taxes and state inheritance taxes.
Since the Revocable trust is still identified with your social security number, it is easily identifiable. In other words, there’s no privacy.
IRREVOCABLE TRUST: The assets can be managed by the Settlor but legal and equitable title are vested in the Trustee(s). Therefore a judgment granted against you personally, does not affect the assets of the trust. This is because the Irrevocable Trust like a Corporatio?n is set up as a separate legal entity. The UBOT can avoid estate or inheritance taxes and probate? costs. But privacy, limited liability, and protection of assets are what they are best known for.
Note: Most living trusts are set as revocable and provide no privacy or protection against frivolous lawsuits. They also do not avoid Estate taxes.
Who Is The Trustee?
The trustee is usually a competent person who is capable and trustworthy. That’s a premise of a trust. The trustee should be arms distance. Arms distance means they should not be a family member, relative, subordinate, partner, etc. It should be someone who can be confided in to look after the best interest of the trust and the beneficiaries. The trustee should not be the beneficiary for the following reasons: As of July 1, 1987, creditors can reach trust property to the extent that a Trustor has retained the power to revoke the Trust. The trust property subject to the power of revocation is liable for the claims of creditors. (Cal. Prob. Code. §§ 18200, 18201) Under proper circumstances exceptions may be made.
Any one capable of holding property may be a trustee: an infant, married women, corporation, or alien, or even a person of unsound mind. In the case of an infant or lunatic trustee, a court of equity? can vest title in some suitable person to carry out the trust. The trustee may be one of the beneficiaries as long as the risks are understood.
A significant American contribution to the development of the idea of the trust has been the creation of corporations specifically chartered to act as trustees. Corporate trustees are now also permitted under British law and in most Anglo nations and asset havens.
Can The Trustee Take My Assets?
Remember when the trustee has no beneficial interest to the trust assets, he cannot take them. Although he does have control over the assets, he also has a fiduciary responsibility to the trust and the beneficiaries. Taking the beneficial interest or corpus of the trust for himself would be a breach of contract? and therefore as illegal as if he came and stole your property outright. More than one trustee may be appointed if trust is of concern. In addition a trust protector can be appointed to look after the interests of the trust. If a trustee does not manage the trust favorably, the trust protector has the power to remove the trustee and appoint another. The Trust protector should also be at arms distance?.
Who Is Entitled To Receive Distributions From The Trust?
A Trust is very much like you are in its right to own property. It may own any property, real or personal, legal or equitable, which is in existence and which has value. This means that there is no limit as to what trusts may own. It is only limited by what you have to convey to it originally, and any other property received by the trust which is not taxable income to the trust. The corpus of the UBOT is represented by 100 beneficial units. Each unit represents 1% of the distributable income of the trust and also represents 1% of the actual trust corpus (capital) when the trust terminates. In the UBOT the beneficiaries hold trust certificates which represent the beneficial (capital) units. Because of this, these units are sometimes called Trust Certificate Units, (TCUs).
Any one can be beneficiary: infants, married women, corporations, unincorporated bodies, residents or non-residents, any one capable of taking and holding any kind of property and no acceptance by the beneficiary is necessary.
What Is A Simple Trust vs. A Complex Trust?
If the trust is a “simple” trust, the trustees are required to distribute all of the taxable income of the trust to beneficiaries each year. If it is a “complex” trust, the trustees are given the power to determine if, when, and how distribution will be to beneficiaries.
If distribution is not made, and the trust is set up under the jurisdiction of the United States, taxes will be paid by the trust and the retained earnings will become part of the corpus of the trust. If this “taxed” income is distributed to beneficiaries at a later date, it is considered a distribution of corpus and there is no additional tax to be paid by the trust. (Unique from a Corporation in that it avoids Double Taxation.)
What Can I Put Into A Trust?
A trust is very much like you are in its right to own property. It may own any property, real or personal, legal or equitable, which is in existence and which has value. This means that there is no limit as to what a trust may own. If the UBOT is set up under Common Law and for legal purposes it has no legislative restriction in its design!
Life insurance is one type of property which can be put into trust. Most people are unaware that regardless of who is named as beneficiary of an insurance policy, its face value is placed in the estate of the person who owns it. Ownership? is determined, among other things, by whoever pays the premiums. To prevent this large amount of money being subject to probate?, the ownership? of life insurance policies should be transferred to a trust. In order for the trust to own an insurance policy, it should pay the premiums and also be the beneficiary.
Any kind of property may be held in trust: real, personal, legal, equitable, in possessio? or in action, (if assignable), in remainder, reversion, or expectancy, domestic or foreign, can all be the subject of a declaration of trust.
What About An Attorney To Help Set Up The Trust?
First of all, attorneys are taught in case law? as it relates to the statutes of the state they are contracted or licensed to practice in. Their first obligation is not to you but to the courts and their jurisdiction. An attorney’s background and experience relates therefore to statutory law and not Common Law. In addition, an attorney learns very little, if anything at all, concerning trusts. The trust business is a very small segment of the overall practice of law in this country. Only the most basic courses in trust law? are offered in most law schools. On the other hand, probate? is one of the major sources of income throughout the law profession. Many lawyers have turned down judgeships to remain probate? attorneys. The average probate? costs in California is 10% of the gross estate. Theoretically, a $600,000 estate with only $30,000 dollars of equity could cost $60,000 in probate? costs alone!! Not bad for an attorney!
UBOT eliminate probate? and make the future services of attorneys minimal. There is, therefore, very little incentive for the legal profession to teach law students how to structure the UBOT.
However, an attorney who is genuinely interested in your welfare and who is willing to do the proper research will almost always recommend the UBOT in place of a will? or a Grantor-type trust for anyone who owns property, securities or who works for himself.
How long does a Trust exist?
Trusts unlike Corporations do not live perpetually. Trusts generally live anywhere from 5 years to 30 years and can be renewed prior to their expiration for up to the same amount of a term or less. Our trusts are generally set up for 25 years and are renewable.
As long as the trust is active, i.e., it has not been terminated, the trust property belongs to the Board of Trustees?, and cannot be included in anyone’s estate for probate? purposes. The death of the Settlor, a Trustee, or a holder of TCUs has no effect on the ownership? of the trust property. The Trust does not die, therefore the assets of the Trust are not subject to probate?, or to estate taxes or inheritance taxes.
Under present tax law, some gifts made within three years of the donor’s death are included in the donor’s estate for federal tax purposes. However this does not apply to transfers made for full consideration or which do not require the filing of a gift tax return. Therefore, even if the Settlor were to die within three years of setting up a UBOT, the trust propert?y should not be included in his/her estate, since the original transfer (exchange) was made for full consideration on pro rata basis in the form of TCUs.
Since the death of a holder of TCUs terminates the interest in the TCUs held, the value of the TCUs are not included in the holder’s estate either. Life estate interests are included in a decedent’s estate only if he or she transferred the property and retained a life estate interest. This is not the case with holders of TCUs. Therefore, the TCUs are not included in the estate of a holder who dies.
Who Can Create A Trust?
Every person who can hold and dispose of any legal or equitable estate or interest in property, may create a trust in respect of such estate or interest. ...the state, a private corporation, married women, an infant at least till he avoids it, and aliens and non-resident. Still further it is the constitutional right under the Federal constitution? of a Citizen of one state to constitute a Citizen of another state a trustee of his property real or personal, wherever the property is located.
What About Taxes On The Trust Income?
As a Settlor of the UBOT, you have divested yourself of ownership? and control of the assets which were exchanged to the trust. You will have exchanged the TCUs that were exchanged to you to an arm’s length party to avoid having the trust ruled a grantor type trust.
A properly drafted Trust Indenture and Trust Bylaws (Minutes) will include provisions to insure that a Settlor is not subject to taxes due on the trust income.
However, if you set up a grantor type trust or if you, in substance?, control a non-grantor type trust, you will be subject to §§ 671-679 of the IRS Code which makes the income of the trust taxable to the Settlor of the trust. Note here that it is essential to the integrity of the trust that the Trust Indenture and the Trust Organization Bylaws be followed to the letter.
What About The IRS??? Don’t They Go After Trusts???
The Internal Revenue Service? is nothing more than a collection agency for the Federal Reserve Bank?. As a collection agency, it attempts to collect as much money as possible from “taxpayers”. To that end, the IRS is constantly trying to discourage people from doing anything that might have the effect of saving tax dollars, as the more you pay, the better it is for the IRS and its owners.
So what are you going to do about it? There is nothing sinister, evil, immoral, unpatriotic, or illegal about paying as little as lawfully possible in taxes. A judge highly respected for his legal opinions and often quoted, Judge Learned Hand, had this to say on that subject, in the case of Helvering V. Gregory, 60 F. 2d 809.
“Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the Treasury; there is not even a patriotic duty to increase one’s taxes. Over and over again courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible, everyone does it, rich and poor alike and all do right; for nobody owes any public duty to pay more than the law demands. Taxes are an enforceable extraction, and not a voluntary contribution.”
It is up to us to protect our life, liberty, and pursuit of happiness. In 1795, Justice Patterson of the U.S. Supreme Court had this to say about property rights:
“....It is evident that the right of acquiring and possessing property and having it protected, is one of the natural, inherent, and inalienable rights of man. The legislature therefore had no authority to make an act divesting one citizen of his freehold?, and vesting it in another, without just compensation. It is inconsistent with the principles of reason, justice, and moral rectitude.”
Today we see infringements upon these rights consistently.
“To compel a man to furnish funds for the propagation of ideas he disbelieves and abhors is sinful and tyrannical.” Thomas Jefferson
Again Judge Learned Hand....
”Liberty lies in the hearts of men and women; when it dies there, no constitution?, no law, no court can save it; no constitution?, no law, no court even can do much to help it”
A UBOT can place you in a position of strength.
YOU CAN HAVE A COMMON LAW TRUST TODAY
Can My Creditors Gain Access To Trust Assets To Satisfy My Debts?
All jurisdictions have laws concerning transfers to defraud creditors. If you transfer assets into a trust and such transfer leaves you insolvent, or with no means of satisfying your present debts, or if such transfer leaves you without means to meet your debts which reasonably can be expected to be owed in the future, a court can rule that the transfer to the trust was made to defraud? your creditors, and claim the trust as an alter ego or nominee thereby setting aside the transaction. This would place the trust assets back in your hands and subject to the claims of creditors.
For example: If you were in the middle of a court case which you have a better than 50% chance of losing, and you set up a trust which leaves you without the means to pay the judgment of the court when you do lose, that may be considered a defrauding of your creditors. If that is the case then the trust would simply be made null and void.
However, let’s say a doctor set up a trust prior to any action that may compromise the trust. Then some time later found it financially impossible to continue malpractice insurance, it would be unlikely that a court would rule that the transfer of assets to the trust was intended to defraud anyone. The action taken was after the trust had been established. A trust set up in this manner provides privacy and protection and places you in a position of strength to deal with legitimate judgment creditors from a position of strength not weakness.
If you are sued? Since you do not own the assets placed into the trust (they are owned by the Board of Trustees? and the Trust), any lawsuits against you cannot affect the trust. However, you must establish the trust before you get into legal difficulties. If not, the transfer to the trust can be held to be a fraudulent conveyance, and set aside. This same rule applies if you should happen to go through personal bankruptcy.
What Happens If The Trustee Is Sued?
An irrevocable Trust is never liable for the personal debts of a Trustee unless the Trustee is also the Settlor or beneficiary. Nor is the trust responsible for the debts of the TCU holders. Specific “spendthrift” provisions in the indenture can add more protection for holders of TCUs.
Substance? vs Structure
As long as the holders of TCUs do not have the right to participate in the management of the trust, they are not liable for trust debts. If a Settlor continues to have “control” and/or “enjoyment” of “his” assets without involving the Trustee(s), he will face the possibility that this trust will a be ruled to be an alter ego by the IRS.
A perfectly organized UBOT with the proper legal “form” can still be ruled a Grantor type trust if the “substance?” of its overall operations indicate that there is no Trustee control.
Even though the Settlor may hold a management position with day to day possession and enjoyment of the assets, if it is obvious that the Trustee is in charge and that the “substance?” of the business operations is to enhance the interests of the beneficiaries, it is extremely unlikely that the IRS would even attempt to rule this a Grantor type trust. Extensive research has failed to produce even one case in law to the contrary.
Operating A Business With The Trust
The simplest way for a trust to generate income is for the trust to own business property and lease that property to individuals who use it in their business. This avoids the headaches of employee-employee confrontations, business-related taxes, business related liabilities, etc. However, the trust can operate the business itself, even several businesses.
The trust might, for example, want to operate a farm or a business that has a large inventory with constant turnover. In these instances, if the trust owns the assets, it is better for the trust to operate that business than it is to have someone else operate the business.
If the trust elects to operate the business, it is wise to set up a second trust - one to own assets:
Trust #1 | Trust #2 | ||
| Assets | Business Management | ||
| Leased to Business | Employees/Normal | ||
| Chiropractic, etc. | business operations | ||
| Ex. Dental equipment | |||
Setting up a second trust limits the liability of operations to itself and protects the major assets which are owned by the first trust and leased to the second trust. The first trust could hold all of the TCUs of the second trust and receive distributions of income without being subject to the debts or liabilities of the operating (second) trust. The Management trust can additionally be setup with you as trustee (controller) and the first trust as the beneficiary.
If more than one business is contemplated, there should be a trust for each business.
There is no limit to where a trust can conduct its business. It can do business in any and all states regardless of its domicile. And its method of conduct can be very creative.
Note: there is a difference between a UBOT which operates a business and a “business trust”.
The term “business trust” is a legal term used by most states in their taxing statutes and by the IRS to denote a special kind of trust that is taxed as a corporation. These trusts are distinguished by having “associates” (the beneficiaries associate themselves together to plan and/or promote a joint enterprise for profit). Secondly, a “business trust” usually has at least three of the following four attributes:
(1) Centralized management.
(2) Continuity of life.
(3) Limited personal liability of trustees.
(4) Easy transferability of beneficial interest in the trust.
A better name for UBOT would be: a Contractual company agreement under Common Law.
The UBOT does not have continuity of life because it has a termination date (however, the term of the trust can be renewed and its life extended to another termination date, etc.) It does not have associates. It only has limited personal liability of trustees when this is specified in the indenture and advance notice is given to creditors, and it does not have easy transferability of beneficial interest. The UBOT that operates a business is not a “business trust” and cannot be taxed as a corporation as long as it operates as a UBOT.
What If I Should Get A Divorce??
Legally, a divorce? has no effect upon the UBOT. Once a transfer has been made to the organization, neither spouse has any marital rights to trust property and cannot make claims upon trust assets in a divorce suit. However, a grantor type living trust is subject to divorce? proceedings. If you feel that there is a strong likelihood of divorce? in your future it would be best to agree on the allocation of assets before considering a trust. Then by implementing the trust beforehand, the assets don’t need to be listed in divorce? proceedings to be divided up by the courts.
If A Trust Is So Good, Why Doesn’t Everyone Have One?
Trusts have been used for centuries. The super-rich and those who are “in the know” use trusts all the time to preserve their assets and to let them grow. They, however, do not advertise their secrets for retaining wealth. It is our challenge to find out how they do it and to claim the same opportunities and benefits for ourselves.
Benefits
The Business Trust is a powerful entity by which individuals may combine their resources to operate a business for profit.
Privacy
A Common Law Trust (Unincorporated Business Organization) is created under the common law of contracts and is not required to be recorded by any statute.
Certain assets of the trust, such as automobiles or real estate may be recorded but only the name of the Trustee or Officer of the Trust needs to appear on the public record.
No other type of business organization provides such anonymity in personal and business dealings.
Limited Liability
By virtue of the fact that the UBOT operates as its own fictitious person and can operate just like you do, each has its own accountability and risk. In a UBOT, the liability can be limited to the assets of the trust. Separate trusts can be set up to isolate high liability items. Special provisions are made to protect Trustees from liability. Also, the Settlor and the Beneficiaries are protected from liability.
Freedom From Probate?
The trust property in a UBOT belongs to the Board of Trustees? and is not subject to probate?.
No Estate Or Inheritance Taxes
Unlike wills? and grantor type (statutory) trusts, the UBOT eliminates estate and inheritance taxes.
Minimize and/or Avoid Income Taxes
Unlike a Corporation, a UBOT is not subject to double taxation. Taxable income can be retained by the trust or distributed to beneficiaries. The trust is allowed 65 days after the end of the year to make a record of distributable income. Only the trust or person who ultimately possesses the income is subject to taxation.
UBOTs can be beneficiaries of other UBOTs and the tax burden can be split between the trust and its beneficiary trust(s). Taxable income that is distributed to a foreign beneficiary (trust) by a UBOT may not be subject to income tax in the United States or in the foreign jurisdiction if the appropriate laws and regulations are complied with.
Maximize Depreciation
Property exchanged into a UBOT (for Trust Certificates) can be appraised to ascertain market value and can be depreciated just as if it were purchased at that value (even though it may have been fully depreciated by the previous owner). It can be exchanged into another trust and depreciated again.
Reduce Capital Gains Tax
Property that is exchanged into a UBOT (for Trust Certificates) is not subject to any tax at that time. It is a fair exchange and, if the property is subsequently sold, the only amount subject to capital gains tax is the difference between the appraised value immediately after the property is received into the trust and the selling price of the property when it is sold.
Reduced Exposure
The trust offers reduced liability from potential lawsuits and claims of adverse parties - and discourages sue-happy lawyers by maintaining an effective “empty pockets” program. Allows you to deal with frivolous lawsuits and judgment creditors from a position of strength without being victimized.
Separate Investment Program
The trust may develop its own credit and investment program to provide security and protection for the beneficiaries at retirement.
And More....
What If I Don't Want To Pay The Price
In one respect, the UBOT is like any other commodity - you get what you pay for. However, unlike most goods and services, a UBOT usually provides cash benefits and other benefits far in excess of the cost of setting it up.
The wealthy and the well informed have not used these trusts for years just to be “good guys”. They are wise enough to know that the best tools can produce the best results.
If you need a UBOT and you don’t know it or want to pay for it, you will anyway - ten fold!
Avoiding unnecessary high taxes today is like the parable of the bridges. One bridge has a toll charge and you have the option of paying the toll to cross the bridge. Just down the road is a common bridge. If you don't want to pay the toll charge you can travel across the common bridge. That we can call avoidance?. Both bridges are perfectly acceptable. If however you try to run the toll bridge without paying the required excise tax, that is called evasion?.
KNOW YOUR OPTIONS!
DON’T BE A TARGET!!!
1 Alvard v. Smith, 22 Mass. 232.
2 Hecht v. Malley, 265 US 144, 68 L. Ed. 949
3-156 ALR 27
4-A contract was defined as a “meeting of the minds,” but this phrase must not be taken too literally. The law emphasized the document itself, if there was one, and the plain meaning of its words...Pg 245, A History of American Law, by Lawrence M. Friedman
5-One party must have made an offer, which the other must have literally accepted. Pg. 245, A History of American Law.
6-The common law...gives effect only to contracts that are founded on the mutual exigencies of men, and does not compel the performance of any merely gratuitous engagements. But it was an element whose presence and adequacy were not to be measured by the court. If one man exchanged ten dollars in consideration for a tract of land worth (apparently) vastly more, the law was not to interfere. A History of American Law pg. 245-246.
7- Generally, and as a matter of first importance, a contract should have definitely ascertainable dates of commencement and termination, and such dates should be determinable from the recitations in the contract itself. (citing. then, Greer v. Stanolind Oil & Gas Co. (CA 10 NM) 200 F2d 920.)
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Page last modified on Tuesday 04 of May, 2010 12:05:42 UTC