Why You Should Use a
Business Trust or Massachusetts Trust
To Own & Operate Your Business Domestically or Internationally
“A business trust is created by a written trust agreement that sets forth
the interests of the beneficiaries and the obligations and powers of the
trustees. With a business trust, legal ownership and management of the
property of the business stay with one or more trustees, and the profits are
distributed to the beneficiaries.”---Business Law Today: The
Essentials.
"A
'business trust' is an unincorporated business association which is created
by a trust instrument, pursuant to common law or enabling legislation, under
which property is held, managed, administered, controlled, invested,
reinvested, or operated, or business or professional activities for profit
are carried on, by a trustee or trustees for the benefit and profit of such
person or persons as are or may become the holders of transferable
certificates, issued pursuant to the provisions of the trust instrument,
which have either restricted or unrestricted transferability, evidencing
beneficial interests in the trust estate, including but not limited to a
trust of the type known at common law as a business trust, or Massachusetts
trust..."---Indiana
Business Trust Act at IC 23-5-1-2.
“Although not used as widely as other
business entities, there are several highly specialized types of business
activity in which business trusts—both statutory and common law—are used as
an alternative mode of business organization. An increasing number of
mutual funds are organized as statutory business trusts, and the statutory
business trust is a preferred “special purpose vehicle” in asset
securitization and other structured finance transactions. Real estate
investment trusts (“REITs”) are also often formed as business trusts. The
principal advantages of the business trust as a mode of business
organization are: (i) the lack of federal entity taxation (unless it issues
publicly-traded beneficial interests) and (ii) its extreme structural
flexibility.”---National Conference of Commissioners on Uniform
State Laws, Uniform Statutory Trust Act, Meeting in its 114th
year, Pittsburgh, Pennsylvania, July 22-29, 2005. [underlining added for
emphasis]
Going back to the 18th Century in England, a
business trust is a legal business entity established and organized in a
written trust contract (agreement), which sets out the objectives, terms, and
conditions of the business trust organization. The business trust, a
valuable
virtual organization for owning and conducting international business in
today's times, is a legal entity and an
artificial individual, with rights almost equal to a natural person,
and thus able to own property and conduct business like a natural person.
The new
Japan
business trust law enables Japanese business trusts to be available for
organization and business use in Japan no later than June, 2008. Read the
business trust legal
history. Read important
business trust
court cases.
A business trust begins its
existence when one or more persons (known as grantors, creators, or
transferors) transfer the legal ownership of property, capital, and/or a
business to the business trust trustees, with power vested in the trustees to manage and
control the property, capital, and/or business and to pay the profits of the
enterprise to the founders of the trust or their heirs, assigns,
and successors.
The business trust, in actuality, is invested capital or a business
vested in trustees who manage the entity with a profit objective for trust certificate
holders. The trustees accept such trustee responsibility as fiduciaries
acting on behalf of, and for the
benefit and profit of, persons who hold or may acquire transferable (or in
"bearer" form) trust certificates that are comparable to the stock
certificates of a corporation, Trust certificates from the business trust
provide individual holders evidence of ownership interest in the trust
estate (assets/income), and the certificates convey 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.
The trust certificates are personal property which convey neither
legal title to the trust property nor any voice in the management of the
business trust or the selection of trustees. Although business trusts are
most commonly utilized in English-speaking, common-law oriented nations such
as the USA, Canada, the United Kingdom, Australia, and New Zealand, business
trusts are also used in tax and asset havens like Belize, and business
trusts can be established and operated in most nations.
If a business trust has an active
business presence inside the USA, or inside another country with high rates
of income taxation, the net business income made inside such a domicile may
be reportable and taxable in that nation. As far as USA tax law only,
compare an
ordinary trust versus a business trust. If a business trust, will it be
taxed as a partnership or as a corporation? Read
business trust taxation.
USA business trusts can be created either
privately by utilizing established business trust common law concepts and
wordings (private business trust agreement), or by specific reliance
on business trust enabling laws in existence
in many USA states. Whereas the precise number of common law-based business
trusts is unknown, there does exist
an estimate of the number of statutory-based business trusts in three
American states, as shown in the chart below---
The Number of Statute-Based Business
Trusts in 3 Key U.S. States in 2006
Delaware 17,208
Massachusetts 10,370
Connecticut 1,624
Source: The 10th SCIBL Conference on
the Regulation of Wealth Management, as reported at
Law.NUS.edu
Many U.S.A. court
decisions and legal treatises have explained what a business
trust is, in fact, and how it should be treated and taxed:
●In 1935, the U.S. Supreme Court
held in Morrissey v. Commissioner, 296 U.S. 344, held that
common law business trusts have so many corporate attributes that they are
taxable as corporations. When properly
constructed and operated, a business trust may be taxed as a partnership or
a corporation for purposes of the U.S. federal income tax code.
●"A business 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 ratably 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.
●"A business trust is a common law entity formed by contract, and
thus, is not subject to the same types of state regulation as a
corporation." - Elliott v. Freeman, 220 US 178; and Crocker v.
Malloy, 39 US 270.
●"The business trust also called common-law trusts, are created under
the common law of contracts and do not depend upon any statute." -
Schuman-Heink v. Folsom, 159 NE 250.
●"One of the objectives of business trusts is to obtain for the trust
associates, most of the advantages of corporations, without the authority of
any legislative act and with the freedom from the restrictions and
regulations generally imposed by law upon corporations." - 13 Am Jur 2d,
Page 379, Paragraph 51.
●"One of the main objectives of a trust contract is to obtain most of
the advantages of corporations, but with freedom from the burdens,
restrictions, and regulations generally imposed upon them." - Ashworth v. Hagen Estates,
165 Va 151, 181 SE 381
●"A business trust may be organized to engage in any business in
which individuals or corporations may lawfully engage." Wagner Oil and
Gas Co. v. Marlow, 278 Pacific Reporter 294, 137 Oklahoma 116; Weber
Engine Co. v. Alter, 245 Pacific Reporter 143, 120 Kansas 557; and 46
American Law Reports 158.
●"Statutes may authorize limited liability of partnerships and
corporations, but those statutes do not by implication prohibit the creation
of Contract Trusts to enjoy similar immunity by virtue of the Common Law." -
Goldwater v. Oltman, 292 P 624. 71 ALR 871 Annotation
●"It is established by legal precedent that business pure trusts are
lawful, valid business organizations." - Baker v. Stern, 58 American
Law Reports, 462.
Ten Major Advantages in Creating and Operating Business Trusts
1. In sharp contrast to a corporation that is created by the state as a
privilege (and therefore subject to having its corporate benefits
diminished, limited, eliminated, or heavily taxed by the state government},
the existence and operation of a business trust are controlled by its
contract, not by ever-changing state corporation laws, regulations, and
court decisions. A business trust 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.
2. 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 trust
certificates. "A trust certificate, while valuable, has 'no determinable
value' when exchanged for assets, and thus there is no taxable event because
of this exchange, as determined by the U.S. Supreme Court." Burenett v.
Logan 283 U.S. 404), also (Stern v. C.I.R., 747 F. 2d 555 (1984) "The
Unites States Circuit Court of Appeals for the First Circuit has long held
that full and adequate consideration is met by issuance of trust certificate
units in exchange for real and personal property invested in a "pure" trust
organization." Carpenter v. White, CIR, 80 F 2d 145
3. If so established in the trust agreement, the trust certificates
become void upon the death of the holder and, thus, have no value to be
subject to inheritance tax, estate tax, or probate administration and
expenses. Interests which terminate 'on' or 'before' death are not a proper
subject of the Federal Estate Tax." - Knowlton v.
Moore,
178 US 41, 20 S Ct 747, 44 L Ed 969 (1900): YMCA V. Davis, 264 US 47
(1924), 44 S Ct 291, 68 LED 564: Goodman v. Grander, 243 F 2d 264
(1957): Babb v. US 349 F Supp 792 (1972)
4. Because the business trust assets do not go through the probate
nightmare at the death of trust certificate holder,
a business trust and the decedent's trust certificates cannot be challenged
by persons falsely claiming to be heirs or by creditors of the deceased
person.
5. Whereas corporate officers and directors (and sometimes shareholder
names) and financial dealings are a matter of public record and detailed
annual reports, business trust affairs are private and not a matter of
public record.
6. Business trust property cannot be seized by creditors'
attachment nor sold upon creditors' execution for the trustees' personal
debts. Personal liability of a trustee cannot be enforced against the trust
property. But if a trustee personally owned any trust certificates registered in his
or her personal name (in contrast to the wise use of "bearer" certificates
that are unregistered and are owned by whoever possesses the physical trust
certificate papers), these trust certificates can be attached and executed
upon (sold) by the trust certificate holder's creditors. In addition, trust certificate holders cannot be held liable for debts incurred by
the trust itself. The certificate holders are not personally liable for any
obligations incurred by the trustees or by managing agents appointed by the
trustees.
7. Business trusts can provide needed flexibility in the
21st century in obtaining lender
financing. "In a financing, counsel has a number of alternatives to the
corporate form to use when choosing a special purpose entity. These
alternative entities have certain advantages over the traditional
corporation. The limited liability company and limited partnership forms
offer greater contractual flexibility and require less observance of
formalities than the corporation. The business trust has these advantages,
plus the possible advantage of establishing a favorable tax situs." - Ellisa
Opstbaum Habbart and Andrew G. Kerber, attorneys at law, in their article
"Getting the right fit: Some suggestions on finding the best way to
structure a financing transaction," Business Law Today,
American Bar Association, Volume 11, Number 2 - November/December 2001.
8. A business trust can be formed by utilizing the basic
contract laws of most states, provinces, and nations.
9. A business trust is very helpful as the legal
foundation for an effective
internet
business company, the innovative and new international business
organization entity for the management of international business. A business trust can
also be the transferee/annuity payor
pursuant to a private annuity agreement.
10. A business trust is eligible for
business
trust bankruptcy protection under the U.S. Bankruptcy Code.
For help in the formation and use of a domestic or international business
trust, please contact Certified Tax Consultant Phillip Fry---
please
email Phil
at
incometaxplanning@yahoo.com,
or
phone him
63-906-510-4000
or 63-919-375-0302
(Philippines)
7 p.m. to 7 a.m.
Eastern Time (Canada/USA time).