Maybe its Time for an Unincorporated Business Trust
What in the world is a Business Trust, you may ask. Well, before we answer that question directly, maybe you should also ask yourself: “Just how do I preserve my privacy, protect my assets against judgments and lawsuits and significantly reduce income taxes but not be exposed to the inherent risks of a sole proprietorship?, partnership?, corporation or other legislatively created business entity?"- A Business Trust can and does accomplish all of these factors. But...again, what is a Business Trust?
- A Business Trust is recognized by the Internal Revenue Service
and the courts as a U. B. O. T. (Unincorporated Business Organization Trust) (UBOT).
A Business Trust (UBOT) is a powerful entity by which individuals may combine their resources to operate a business for profit without the inherent liabilities of a partnership? or the double taxation of corporations.
The UBOT is an organization created and managed by trustees for the benefit and profit of persons who hold or may acquire transferable Trust Certificates. Similar to stock certificates of a corporation, Trust Certificates provide individual holders evidence of interest in the Trust estate (assets/income).
A UBOT is often called a “Common Law Trust" but this phrase is not descriptive of any of the peculiar characteristics of such organizations. The basis for the terminology "Common Law Trust" is that they are created under the common law of contracts and do not depend upon any statute for its existence. See the United States Constitution?, Article 1 Sec. 10, Clause 1.
As indicated by its name, a Business Trust is an estate adapted to business or commercial activities. Reduced to its bare essentials the UBOT consists of some form of capital vested in trustees who manage the entity profitably for Trust Certificate holders or beneficiaries.
A UBOT 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 creators of the Trust or their successors.
In its typical and characteristic form the UBOT is brought into being by two basic documents: a Declaration of Trust and a Trust Indenture. These two documents make all the provisions of who is who and who is responsible for what, relative to the Trust activities.
The UBOT which had its beginnings in England in the 18th Century, adapts the ordinary trust to the new purpose of carrying on a business.
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 debut in Massachusetts in 1827. 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 but not only 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. (Hecht v. Malley, 265 U.S. 144 (1924), (446 U.S. 458, 469)
This UBOT method of transacting business in commercial enterprises originated in Massachusetts as a result of negative laws prohibiting the development of real estate without a special act of the legislature or in other words, without "permission" of the State. So, the Business Trust was created under Common Law right to contract? to obtain legislatively constructed business organizations advantages but without having to gain "permission" to enter into a business activity and suffer under the burdens and restrictions that are placed on "statutorily constructed organizations".
During the last century and through the mid years of this century the tax laws and State regulations strongly favored corporate structures, detrimental and restrictive changes in these laws in the past 10-l5 years have resulted in the resurgence of the use of the UBOT. For example, in 1985 the Scudder Capital Growth Fund, Inc. and Kemper Money Market Fund, Inc. changed their forms of organization from corporate to a Business Trust Organization.
There are nine basic advantages of operating a business as a UBOT which cause it to operate lawfully.
1) The UBOT is formed by contract between the parties setting forth the purposes, terms and conditions.
2 ) The UBOT is a legal entity and an artificial individual, with rights almost equal to a natural person (a human being), able to own property and conduct business like a natural person. It is irrevocable and no one has any reversionary right to its assets.
3) The UBOTs assets are owned and its business activities managed by the trustees who accept such responsibility as fiduciaries on behalf of the beneficiaries.
4) The beneficial interests are divided into Capital Units, evidenced by the issuance of Trust certificates, conveying to the holder the limited rights to receive their pro-rate share of any distributions of income or assets that may be made by the trustees.
5) The Capital Units, are personal property which convey neither legal title to the property nor any voice in the management of the business or the selection of trustees.
6) The UBOT is subject to taxation on its distributable net income. The beneficiaries are only taxed on what they receive.
7) The assets of the UBOT are never subject to probate? or estate tax? because, as an artificial person, it never dies. Unlike a will?, the UBOT is set up in contemplation of life, not death.
8) The Capital 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 UBOT can be extended as deemed advisable or terminated at any time by the trustees in accordance with the Trust Indenture (contract).
Since the Trust Indenture is a contract between the creator and the trustee, the indenture controls the activities, powers and responsibilities of those who administer the Trust. No one has legal authority to change its provisions except those so authorized by the indenture. Foremost among the advantages of trustee-ship over the standard legal devices is its flexibility.
The document creating the Trust is the law of the Trust, not statutes created by the State.
Courts have long since supported the principal of the trustees carrying out the terms of their Trust contract and agreement. Also, Trust property cannot be held under attachment nor sold upon execution, for the trustees personal debts. Personal liability of a trustees cannot be enforced against the Trust property. If the trustee personally owned any amounts of beneficial interest, these Units of Beneficial Interest (Trust Certificates) can be attached.
This doctrine is supported in the case of United States National Bank of Omaha v. Andres Kaminski (Civil Action NO 77 Cv. 1830, District Court of Jefferson County, Colorado, June 16, 1980), the Bank alleged that Kaminski owed them $20,000. When he had no personal assets to seize after they obtained a judgment, they tried to seize the assets of his Trust he had set up several years earlier. The Bank’s action failed and they were unable to penetrate the Trust.
Beneficiaries cannot be held liable for debts incurred by the Trust. "If, in fact, a true Trust has been created (and this is very important, i.e. the Trust must correctly be written and executed), the certificate holders are not personally liable on the obligations incurred by the trustees or managing agents appointed by the trustees.
Exposure to liability and potential law suits is one of those worries most of us lay awake at night thinking about. Especially if we have a business where liability potential is omnipresent.
The past several years has seen the rise of multitudinous bankruptcies being filed. Even many of the long thought of stalwarts of American industry have gone bankrupt. More than we care to count. Big ones (including a big 8 accounting firm) and little ones like those of us who make up 90% of America’s gross national product.
10 BIG ADVANTAGES OF A BUSINESS TRUST
Although businesses are organized as corporations, partnerships? or sole proprietorships?, one even better way to organize a business is as an Unincorporated Business Organization Trust (UBOT).
"A business trust or common law trust, commonly known as a Massachusetts trust, is a form of business organization consisting essentially of an arrangement whereby property is conveyed to trustees, in accordance with the terms of an instrument of trust, to be held and managed for the benefit of such persons as may from time to time be holders of transferable certificates issued by the trustees showing the shares into which the beneficial interest is divided, which certificates entitle the holders to share proratably in the income of the property, and on termination of the trust, in the proceeds thereof.” (Corpus Juris Secondum 12A 495.)
"The essential attribute of a business trust is that the property is placed in the hands of trustees who manage and deal with it for the use and benefit of the beneficiaries." Enochs & Plowers v. Roell, 154 So. 299, 170 Miss 44.
The U.S. Supreme Court recognized the existence of business trusts and explained their advantages in the case Morrissey v. Commissioner of Internal Revenue, 56 S. Ct. 289, 296 U.S. 344, 80 L.Ed. 263.
Common Law Trusts are not new. Some major US businesses that were originally organized as Common Law Trusts include: American Express, Pepperell Manufacturing, Massachusetts Electric, Chicago Elevated Railroad and Associated Simmons Hardware.
The common law trust is created by a private, written contract. A trust contract is basically created by two or more individuals: trustor or grantor and trustee. The trustor or grantor (the owner? of the assets being transferred into the trust), makes an offer to the trustee to manage the trust. The trustor exchanges his or her assets (such as business interests, real estate, stocks and bonds?) to the trustee for Certificates of Capital Units (personal property similar to shares of stock in a corporation).
The advantages of a business trust far exceed the benefits of a corporation.
- ADVANTAGE No. 1. Because the corporation is created by the state as a privilege, corporate benefits may be diminished, limited or eliminated by the state government, whereas business trusts, or unincorporated business organization trusts (UBOT) existence and operation are controlled by its private contract, not by state corporation law.
- ADVANTAGE No. 2. The state charges incorporation fees and ongoing annual fees. The UBO, as a privately created entity, does not have these expenses.
- ADVANTAGE No. 3. A corporation (expect for a Subchapter S corporation that is taxed as a partnership?) can be subject to double taxation (income taxes on corporate profits (unless zeroed out), then income taxes on dividends paid now or in the future from those profits to shareholders). In contrast, a UBOT does not pay income taxes on its profits if it must distribute all of its net income to its beneficiaries - thereby escaping taxation as a simple trust.
- ADVANTAGE No. 4. Likewise, capital gains taxes may be entirely avoided by a UBOT that sells assets at a profit if the trust contract specifies that all net trust income is to be distributed annually to the certificate holders (beneficiaries) who will be the ones to report the capital gains as taxable income and pay any due taxes.
- ADVANTAGE No. 5. Corporate officers and directors (and sometimes shareholder names) and financial dealings are a matter of public record and detailed annual reports. UBOT affairs are private and not a matter of public record.
- ADVANTAGE No. 6. The avoidance of probate? administration is one major advantage of a UBOT. If ones assets are all owned by one or more trusts, at ones death, there are no assets in the deceased persons name to go through probate?. The trustees and successor (beneficiaries) continue the uninterrupted administration and benefit of the trust assets and income.
- ADVANTAGE No. 7. Because the UBOT assets do not go through probate?, a UBOT cannot be challenged by persons falsely claiming to be heirs or creditors of the deceased person.
- ADVANTAGE No. 8. Assets can often be protected against creditors while beneficiaries are alive because the UBOT holds legal title to the trust assets with the result that beneficiaries cannot have their shares of capital units attached by creditors if the trust has valid spendthrift clauses.
- ADVANTAGE No. 9. Like the initial funding of a new corporation, there is no income or transfer (gift) tax to put initial assets into a business trust (structured to be like a corporation in the initial funding process) because the transferor? of the assets receives back a proportionate share of the Certificates of capital Units.
- ADVANTAGE No. 10. Whereas corporate stock owned by a stockholder is liable for death taxes (to the extent the value exceeds exemptions and deductions), the assets to a properly structured, funded and administered asset preservation trust will not be part of the grantor who originally funded the trust when the trustor / grantor dies.
See Is the UBOT Trust Legal?
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Page last modified on Monday 03 of May, 2010 11:36:17 UTC