Well welcome everyone to abundance group trusts. Trust advisor Call Today is Tuesday, August 23 2022. And we are officially on week 10 of our training. What I intended to do today was to go over. Like, I call them case studies, almost, where I gave you guys hypotheticals and had you guys walk through what you think you should do with structure and implementation. But since we only have eight of us here, and we normally have more like 20 or more, I'm thinking we might want to do that next week. What I was going to do next week, instead, it was going to be what I'm gonna do this week. What we're gonna talk about today is a topic that comes up way more often than you would think. And that is the topic of what happens when somebody wants to sell a business. Quite often, we end up with clients that get the business trust, because they're in the middle of selling a business. And what they need to do, once the trust is in place to help with mitigating taxes on the capital gains that would be incurred from a sale of the business is a little different than what typically happens without just being involved. Yet, it's a really important topic, because it is what brings a lot of clients in, the bigger the client, the more likely that the reason they're setting up the trust today is because they've got a giant capital game down the road. I have a client right now, it's actually one, let's eight clients all together, that three of them are partnered in a business that is getting ready to sell. And it is one of the biggest sales I've ever had to work with. It's over $300 million, it's gonna end up somewhere between 350 and 400. And that's an awful big thing that the trust is going to have to handle day one. That's why there's so many of them setting up trusts right this minute. So eight partners altogether, three primary partners, five in something else, the three primary partners, all eight of these people are getting Trifecta packages, because they all have other businesses too. And they're not all partners together in those other businesses. So doing a sale at that level has lots of other things involved as SEC regulations happen FTC regulations happen. I don't want to get into all of that detail. I'm going to talk about typical sales of business, we have a vet that's getting ready to sell a business, I think he closes the 15th of September. And is is also a fairly large capital gain, it's gonna be a little over a $10 million capital gain. And that one's kind of typical. So what happens when they sell a business and they have the trust? First thing that has to happen is we have to get the assets into the trust ASAP. Because the sale of the business needs to be structured as an asset sale done any other way, they're not going to be able to get the tax mitigation benefits. The bigger the sale is, the more likely there will be complications with it that have to be dealt with, with the trust the vet that's getting ready to sell the business with a $10 million dollar capital gain. He not only owns the Veterinary Clinic business, he also owns the building, and he owns the assets within the building equipment and whatnot, is not going to sell the building. He's only going to sell the business and the equipment within it. So
if they're really in a hurry, and they can't even wait a week or two to get everything structured properly. What we tell them to do instead is at a minimum, set up an LLC that we can utilize to help us with this instead of the sale being from the individual or the trust or the current day. under D, make the documents say that the new LLC is going to be the seller of the business, we're not going to be able to do that quickly enough to get 100% of the capital gains taxes eliminated. But they'll still get 90%, which is better than nothing. But even if we do it that way, we gotta get the assets into the entity that's gonna get money at sale. So, typically, what it looks like is we set up the business, we set up the personal trust, we get the current entity, restructured as an LLC quickly, by filing a Form 8832 with the IRS, it allows you to change the tax structure of the business. A lot of times are set up currently as an S corp. Underlying the S Corp is an LLC. So it's an LLC with an S corp election, we can file a Form 8832 did change the tax structure from being an S corp to being a partnership. That's an easy change, then we don't have to do anything different with the entity, we leave the entity alone as an LLC. But once it's filed, then we can start conveying the assets of the LLC, first to the owner, then to the personal trust. Now we set it up as a sale of the business is an asset sale from the trust to the third party. Done That way, we get rid of all of the capital gains taxes. With most businesses, we can do it with a single bill of sale to convey all of the assets of the business to the personal trust. What we do need to be careful of and you want to tell the clients talk to their tax advisor on it is if they're not going to convert to an LLC, taxed as a partnership, if they then want to get assets out of either an S corp or a C Corp, so that they can convey them to the personal trust, there's almost always going to be a tax consequence from it. Because the IRS rules say that an S corp selling the assets to a shareholder has to sell at fair market value not at basis. That can be tricky. And that's why we convert it to a partnership. First, an LLC taxed as a partnership, then we don't have to worry about it. We can do an income distribution of equity, do what used to be a shareholder, that's now a member. And we can do that at basis so that they can then convey to the personal trust at the same value. And we don't have negative tax consequences to get the assets into the trust. The other thing we have to remember to tell the client is if they signed any kind of an agreement prior to the inception, date of the trust, the only way they're gonna be able to take the tax mitigation benefits the trust can give them is if they ditch that contract and after INCEPTION DATE enter into a new contract. That doesn't matter whether it's a letter of intent, whether it's the actual agreement of sale can take many different forms. But none of the documents selling to the third party can predate the date of the trust. It's really bad to let them just go ahead and leave everything as is just because it hasn't closed if it wasn't in the name of the trust. And for most clients, they didn't even know trusts could do what our trusts can do. So almost always, if they're in the middle of a sale, it's already underway in there some sort of a letter of intent or other contract in place. And it's just too risky to them, to let it sit there with part of the transaction outside of the trust and the closing inside of the trust. So they have to scrap that agreement and get it redone.
Once we sell the assets to the personal trust, they can go forward with their closing anytime they want. We don't have to worry about doing anything else. If there's more than one owner of the business, sometimes you might have several partners. You're gonna have to have the asset sale be a sale from multiple personal trusts. If we just conveyed each partners personal trust, in whatever proportion, their ownership interest is, with this big sale that's about to happen, the one that's almost between 300 and 400 million. The three partners each have an unequal interest. One partner has 49%, one partner has 26%, one partner has 25%. All totals up to 100%. So we're selling 49% of the asset to personal trust number 120 6%. Personal trust number 220 5%, a personal trust number three, and all three personal trusts together, are selling to the third party. No different than it would have been. If they didn't have a trust, they would still have sold in unequal proportions. Let's see, what else do I need to tell them about the sale of a business? Julie?
Well, if I If I could interject one of the most important things when you're dealing with these contracts, and what we have found is that people sign the wrong title.
Oh, my gosh, yes. Okay. And in
the instance that she's talking about, this person has signed incorrectly, in on so many different forms, which has caused this to become even a bigger mess. So that is just super important.
Yeah, and what we ended up having to do, we had no choice but to do this, because the documents that are involved in the business and therefore the sale, have wrong information on them. We ended up having to form a new LLC. In order to get everything accomplished, and have things straightened out by making things go through the new LLC. It's just a mouse.
And this was something as simple as a form that was filed with the secretary of state. It was just in by signing the way that he signed, he changed the names of the members, or the managers and the name of the members. And just by that one simple document.
That was unintentional. It wasn't that he did it on purpose. He just wasn't paying attention.
Or didn't know, I think that that's that's the clue in the thing that we have to educate. And I guess educate but that we have to insist and say, take a look at what you're signing, make sure that it it says exactly what it should say. And just like I think we talked about, I don't know if it was last week, that in a real estate transaction, I think if we were I'm referring to Dennis, Dennis signed a form that a real estate closing title attorney put in front of him, which has sent really created a as a miss for him. And invalidating almost innocence, his trust. So for those of us that are in the positions that we're in, we have to specifically say, Don't sign it unless you absolutely know what you're signing. Because just because that title attorney says you have to sign it, that is not true. One of the other things I found in referring to title attorneys, they say, Well, you have to sign it individually. No, I don't. Because I don't it as the trustee, I don't individually own anything. And I've had to argue with Title people, though I'm not signing individually. Because the trust owns it. I don't own it. And I'm not going to be responsible for it individually. So take so much care and with those kinds of things.
And if you're not comfortable advising the client, don't guess. Tell the client, you know, this is a little complex. We need to get either Dr. Gina or Julian involve Julie as a licensed document preparer is able to help with untangling the mess within the documents if necessary. I am also a licensed document preparer now. So one of us can usually untangle the web. So far, I haven't had anything that's completely stumped the two of us, although sometimes, Julie and I kind of feel that way. Like God, what do you think about this The right it can get really dicey sometimes. But the sale of a business is a really important part of what clients are looking to us for. Understand that, quite often, clients really do know what they need to do. It's an emotional situation that makes them forget everything they already knew before, this big huge amount of money was about to come into their hands. And so they act like during high school. If you can at least manage their emotions, you'll get better answers from them. And then you can actually help guide the process the way it means to work. But especially for clients who are just setting up the trust, because they've got a sale the business in the works. They're dealing with the emotionality of that. And now we throw this big overwhelming thing called a trust at them, or in many cases, three trusts at them. And it's just completely overwhelming to them. So, things they used to know, they forget instantaneously. When that happens. Don't you agree, Julie?
Yes, yes. And oftentimes, what what we're finding is, and I know Geno's, experienced this is that they push you, it's got to be done. Now it has to be done now. And they get the trust a week before the closing. Right. And then when you get all their documents, you look at them and you go, Oh, my gosh, this isn't what they told me.
Right? And happens a lot.
It happens a lot.
And usually, when we've got people in those situations, I'm not gonna throw them at a trusted advisor to pick up the pieces and run with right then in there. Usually, I'll take it on myself, just because I don't want to overwhelm any of you. But there's only so much Gina that goes around. And lately, there's so many people coming in that are all in the process of selling businesses. I can't handle it all on my own. So I will bring some of you in on those that I think are a little easier, not a lot complex. Just because there's only so much you know, to go around.
And if I could interject, often just accumulating the documents is enough, because it sometimes it's pulling teeth, can you give me this? Can you give me that? Well, I own it in a trust. Well, what trust is it? Well, they've got a person, they've got a
living trust,
a living trust. And then when you get into living trust, and you see that supposedly there's an LLC that owns the living that is the beneficiary, and then they tell you Oh, no, we never set it up that way. But yet, you've got a document that says it is and they're telling you it's not. Yeah, even just getting that information, and compiling, it will help Gina make some of these decisions.
Big time, big time. And I mean, with the closing with the vet, Julie, if you had not pulled all that together, I don't know what I would have done. There's just no way. I mean, it was it was a pile of spaghetti when Julie got done with all these documents.
And and, you know, it was document after document after document and then bring me this bring me that. And I've probably got 20 hours into gathering these documents to be able to figure out what mess this this person had. And ultimately, in the end, it's going to be easy.
But get really, really easy,
was amazing.
Well,
I think it's probably more than 20 hours, Julie, because you and I spent at least four together. And we were going online pulling documents together. Probably closer to 25 hours between the two things, right? And don't take the client at their word. If they say they have an LLC and they're the sole member. Go look it up. Oh, what state? Did you register that in? Go look it up. When you go look it up nine times out of 10. What you see on the state's registry is not what the client just said they had? Yep. Constantly. I am finding things that client says one thing what I see is totally different. And even if that's not a part of a sale of a business, it's important to get the client to fix the mess that they've now created before we attach trusts to it. Because once we put the trusts in place if there's mistakes that were out There, it can create tax consequences for that client,
significant tax consequences. Absolutely.
Because even worse when it's the sale of a business, but it happens, even without the sale of the business, just getting things into the trust the way that they should be, can create tax consequences. If what they told you isn't really what it was, what is it about 80% of the time, it's not what they say it is.
Correct. And oftentimes, for example, when we're dealing with LLCs, and I know, Gina has talked about it, the operating agreements have to say specific things. And many people don't even have an operating agreement. And Gina has created and put in the in our Google Drive, the ability to pull up an operating agreement, which they could use and would make, and would be compatible with being able to make the trust and 90% limited partner of an LLC,
and be able to get the trust to have 90% of the capitalization on the demand note, yes. Which you would think something that important the capitalization of a business, that every client that has an entity that's an LLC would have an operating agreement that has the amount of the capitalization in it. Honestly, until recently, in all the years am I doing this, I had not seen even one operating agreement that had the amount of capitalization in it. When four or five years I've been doing this, I've been doing it five, but four years before I saw the first one. So all those people that had LLCs, that were naming the trust as a 90% limited partner, they could not add any value from the LLC to the demand now, because the operating agreement didn't have a specified amount of capital in it. If it were my business, I'd go run out, amend my operating agreement just to have something to give me so that I could put it on my demand note. But they don't think about it like that. So with LLC is gonna get them to send you the actual operating agreement. If they say they don't have one in the Goodman's is folder in the sub folder for the business trust, there is a template for an operating agreement, have them go get that one and complete it. It is the governing instrument for their business. And even if they're gonna shut that business down, after the trust's are set up, have them go get it and do it. It's worth having. Having operating agreements that are unsigned is another big issue. Even those that are not mentioning capitalization, all the time people send me operating agreements that were never executed. It's not even worth the paper it's printed on if it's not executed. So another little wrinkle that needs to be looked at is that is it executed? And then is it properly executed? This closing that we're dealing with? We got operating agreements. But what the operating agreement said on the line that it was executed, didn't match what was filed with the state. It didn't always even match what was on the first page of the operating agreement. There were at least two entities that didn't match one. So Julie?
Yes.
No, not expecting the gern expert reading and understanding operating agreements. All I'm suggesting is get the operating agreement. Look through it to see if there is a paragraph for capitalization. If there isn't, then tell the client they might want to add that to their operating agreement. Don't tell them what to add, just tell them that it's missing. If they want to add value to their demand now, there's an easy thing they can do to do it. We can help guide them on the sale of a business that includes an LLC without seeing the operating agreement and without checking with the state. Now, because we're having the client structure, the sale of their business as an asset sale, oftentimes they'll say well what happens with the entity. Usually, the bigger the sale, the more important the entity is in the sale, the entity is a bonus. And they literally have to have two agreements, one that sells the assets and another that conveys the actual entity. If the business has been around for a while, there's a good chance that there's some value from a financing standpoint, to the new owners having the entity, the bigger the sale, the more likely that there are attorneys involved, that can help guide all of that, just tell the client to go ask the attorney, they shouldn't be closing on a business that seven figures or higher without an attorney guiding the closing. That'll take some pressure off of us. By having them go back to talk to the attorney, we just have to give them guidance on what to talk to the attorney about. If they're selling C corpse, or s corpse, they've got to get in touch with their tax advisor. There's all kinds of other ramifications that can happen with C corpse and s corpse in the mix. It still should be structured as an asset sale, if at all possible. But you have to take into account the tax consequences of it there being a C Corp or an S corp. That makes it a lot more difficult than if it's just a simple tax that asset sale with an LLC. And even I don't deal with the S corp and C Corp taxation issues on the sale of a business. It's too complicated. And there's too many rules that would apply. What questions do you guys have about entities and sales of businesses can be either or
I'd like to make one one comment we had a another situation where the person was insisting that they were the owner of their personal residence. And the property had had was held in a living trust. Well, most of the times when the person passes away a Living Trust basically will will divest itself of assets. In this case, it became irrevocable. And so now the person who thinks she owns the home, really doesn't own the home that it's owned by the trust, and they've been operating as if they owned it.
That's a bad situation.
It is. And so just going out and getting those documents, I can't stress how important though those are, and then giving them to Gina, and having her review them and pick through them and making sense of them.
In that situation, if the personal trust has not been created yet. And you discover in early on in the process, that there's an irrevocable trust involved, you need to reach out to Ben or Shelby immediately tell them to hold off on creating the personal trust until you get in touch with me. Because in that instance, there is one thing that can be done and only one thing. As long as we haven't created the new trust yet, we can do a decanting from the irrevocable living trust to a personal trust. And all that means is we're swapping out one instrument for another. Because it's the instrument that's getting swapped, the corpus stays the same. So we need to use the same name as the original name on the irrevocable living trust. But nothing needs to change with the assets or whatever assets are in that trust. That's the assets that are in that trust. Now, it might mean that we need to have the beneficiaries of the original irrevocable trust be a match for the beneficiaries of the new personal trust initially, but moving from an irrevocable living trust where you can't change anything into our trust. That's irrevocable. That's still discretionary. Once it's been decanted and now we've got the new trust instrument. At that point, the trust protector still has the ability to remove beneficiaries from the first trust. But in that the canting we must give notice to the Original beneficiaries that a de canting is going to happen. If it's just a living trust between a husband and a wife and their kids are the beneficiaries. It's not that big of a deal. It only gets complex if there's several generations involved. But that's the only thing that can really be done in that instance. Can't really do anything else with the property being in an irrevocable trust. What ended up happening with that situation? Julie?
She's having to contact her tax advisor, and then you're having in the she I don't believe anything has happened yet. And
she's on the calendar on Friday. Okay, I'll let you know what time let me go look. Okay. Because I don't think you got added to the calendar for that one. No, I did not. Say,
this is the person who believed that out, right. And that's what she believed. But when we got the paperwork, it was something completely different.
She's on it three for 30 minutes, Julie. Okay, I'll add it to my calendars.
Just simple, simple little things like this. She believed that she was the owner. But in reality, she wasn't.
Yep. Questions about any of this stuff, guys?
If the client needs an attorney do, do we have somebody that we can utilize
depends upon what kind of an attorney they need, and where they're located. Sometimes I do sometimes I don't. At a minimum, I am a Notre Dame Law grad. And we have an enormous network of people that I can tap into all over the country. So from time to time might do turn to the Notre Dame network, just depends on the situation. We do have Joe McHugh who's in California, he's an actual partner in abundance group. But as Juliet, and I just discovered this week, Joe doesn't always know what he's doing. Or maybe he's just moving too fast. Because he made a giant mess this week. We're fixing it. But it was not fun for the client or for me or Julie.
Yeah, it's never found having to correct mistakes. And also just let everyone know, with the team that I have a certified managerial accountant, an EA and by bringing on a CPA on board, so if anyone needs help with some of the tax questions or things like that, who feel free to give us a holler.
Oh, thank you so much, especially if the people you're dealing with are doctors of any sort. Shading works primarily with doctors.
In on the vet, that's selling the veterinary clinic because we were having some issues, but we did get it straightened out. Thank god.
Okay. Well, we're also going to be branching out into real estate, the CPA that we're bringing on those quite a bit with real estate investors. Soon anything with with us, as far as you know, selling a business. So pretty much going to break down very similar. Whatever we can do to help you be more than happy to if you
haven't talked to Dave Phillips yet, you should. Because I think there's some opportunities for tag teaming between your firm and is.
Okay, sounds great.
That's always a good thing. Anybody else? Questions, comments?
This question in chat.
Thank you.
It just before we change topics, so for that last, so for the living trust, what was the actual I guess detail? Because that I can understand that but it's just I might be missing something.
So originally, she thought that she owned the property. And it
original beneficiary died, correct?
Yes. Well, it was her father that it set up the living trust. Her father also Set up an LLC, and the LLC was owned by the living trust, then that died, the living trust became irrevocable. The trustees of the living trust aren't the client and her brother. They thought that meant they were the ones that were the members of the LLC. But they aren't members of the LLC. The trust is. But now we have assets that are owned in the name of the LLC.
Now I got it. Okay, now I just was missing that part, I got it now.
It's a huge, huge mess to try and fix. And to try and fix it with out negative tax consequences is even more of a mess.
This was an irrevocable trust, you should have been able to just began and simplify that because,
yeah, if we had no, but she's had her trust for a couple of years. So we could set up a new personal trust, but now she's gonna have to personal trusts. And as Luigi will tell you, that's not a fun thing either. So not good. Okay,
set up a new fourth, and then combine the trust. And so
I wouldn't want to combine a statutory trust and a contractual trust. And that's what that would require. And if we tried to do that with two personal trusts, as we discussed on yesterday's business trust, or foundation call, trying to combine personal trust into one. It turns the old trusts into trusts that are now insolvent. And because they're insolvent, they terminate in any of the tax deferral then comes due immediately. is not an easy situation. You don't want to create multiple versions of our trust, if you can help. Not for a single client. Yeah. Okay, Doug says speakings of clients being emotional, I have a prospect that has the relationship with her bank, and she wants to continue with this trust, if possible, with the same make her bank is BMO Harris bank. I don't have any experience with them. Do we know if this bank is able to do the trifecta trust? They have their own trusts in a State Department? I don't know what you might want to do behind the scenes, reach out to that bank. Let them know that we have a non grantor irrevocable complex trust that is not self settled, and see what they say. Okay. Oh,
to call our press department. Yeah.
Also, when the business has money from an eidl loan from COVID. And they have not paid it back? How would that have to be taken care of before the company transfers all assets to the business trust. So in that situation is kind of a pain, we have to leave the original entity intact because of the eidl alone. Now, although we can transfer the assets, we can't transfer the revenue,
you transfer death, right? So
what we would end up doing is setting up a professional services agreement between the business trust and the entity. We'd have the revenues come into the entity entity would take care of payroll and expenses, including the expense of the eidl loan. And then 95% of the net would be conveyed to the business trust depending upon what type of entity, I have seen a couple of eidl loans that prevent us from changing the entity structure. So I have a one that's an S corp, and one that's a C Corp that I can redo from an taxation standpoint to get them taxed as partnerships. And the bigger issue isn't what we Because of the EI del on at that point, it's if we can't change the entity structure, to turn it into an LLC taxed as a partnership, because the eidl alone restricts it, then they're gonna have a negative tax consequence to take assets out. In that instance, we may have nothing we can do to mitigate taxes for that entity, other than use the foundation. If they really want the tax mitigation badly enough, it's almost worth taking out a new loan to pay back the eidl. So that they're more free to do what they want. Or restructured a little bit. So we leave things intact the way they need to be not going to get asset protection on assets that are left in that entity. Take what tax mitigation we can get because of the foundation, and then split the business so that only some business stays being done in the old entity, set up a new entity that doesn't have any attachment to the eidl alone and have some of the operation go through that into the business trust, I did do that successfully once. But each situation is going to be different. And you would think anyone that got a loan, that's an eidl, on at least in the COVID days, that all of the loans would have the same terms. But I'm finding that that is absolutely not the case whatsoever. That depending upon the bank, the eidl loan went through, the loan structure may actually be different, they may have slightly different terms. So you need the client to actually go look at the loan document preferably give you a copy of the loan document. So you don't have to trust with the client saying if they don't want to do that, then at least look at it with them in a screenshare just to make sure that what they're saying is actually the case.
Right. So I'll look at that too. And it is an escort, so we'd have a couple of hoops to jump through on that as well.
Well, I have had eidl loans that didn't restrict them from changing to a different type of entity. So we were able to change the S corp to being an LLC taxed as a partnership. But I've also had two situations where the loan documents we did restrict it just depends on the loan docs.
If the company can pay it back, I mean, it has the money and it hasn't really used the money and it can just pay it back. But it'd be wise to pay it back to
Yes. That's me saying that right. I don't have the emotional side of it. This is not my business.
I understand that part. But because they don't, she really doesn't need the money for it. That's that's the thing.
She just she got it because it was cheap money.
Yeah, just came to it. Right.
Well, you know, anytime you've got a company carrying that, that they really don't need. It's stupid to keep. I agree. It's just gonna tie her hands for a long time. I mean, 30 year loans, 25 year loans, they're really long term loans. Sure. So
well, that would be my advice. So take my advice on, I just want to make sure that I'm I'm correct on that car.
Yeah. And if she's just attached to having extra money laying around, I would go reach out to the folks at Divi get ge T Devi di vvy.com They have a bunch of different kinds of business loans. More than likely, she could qualify for a line of credit at a minimum that she could tap into if she needs the cash and not tap into if she doesn't need the cash. Right. I would think that is a lot better situation than carrying that gun gonna increase the strength of the company from a financial standpoint to do that.
Right. Well, that's, that's good. I mean, because ultimately she wants to sell this company and in a couple of years, so I just like get rid of the debt and then keep the asset. You don't need the money whatsoever. It's not something
Yeah. Got it. Okay, so who is our iPad three that asked the question about decanting from a Personal to a business trust.
Oh, this is Lu T. Sorry, keeps the names.
That's okay. That's okay. So you cannot Diganta personal trust to a business just a completely and totally different kinds of trusts, not possible. And a business trust, you can't add a business trust on its own. A business trust is literally within the trust instrument. It is a pastor trust. In the LLC world, it might be called, still called the pastured business, meaning it does file a 1041 tax return, but it's always a $0 tax return, taxes are going to be accruing within either a personal trust another type of entity or an individual. It's not. Again, they can't from that, from a personal to a business because of that.
So it's a simple trust, because it's still complex. Okay.
It's just, it's a very different kind of trust. It's still same thing, non grantor irrevocable discretionary complex, spendthrift trust with dynasty provisions that's not self settled. So it's got all the components. But it's just structured completely differently. It's meant to be a pastor trust. Because the IRS has said, when you are stacking one trust on top of another, that is tax evasion and not tax avoidance. The only exception to that is when you're stacking trusts and the top trust is a pastor trust.
But when we, when we have the my other personal trust as the beneficiary of one of my personal trust, that's isn't that stacking.
That's different, because of the way it's done with sub trusts. The IRS does allow sub trusts, but this is why we can't make a personal trust the beneficiary of a land trust that stalking. Okay. What the IRS says is the trust instrument controls. So in the personal trust it man has provision for sub trusts. That's why it's allowed in the business trust, it makes clear on the trust instrument that is a pastor trust, and income will be taxed in the hands of the interest holder, not in the business trust. So it controls but if you have one trust, it's not necessarily defining the fact that it's meant to work with another trust, and then a another trust, it can't stack it.
So personal trust can be the beneficiary of business trust, not Karasek, just
a sub trusts still as a separate personal trust, the only thing that makes the sub trust a sub trust, it can be a beneficiary of an initial personal trust. That's what makes it a sub trust. But because they're both discretionary trust, if the purpose for which it was created, is gone, and you have no reason to distribute from the parent to the sub, then just have the trust protector and the parent trust, remove the sub trust as a beneficiary. And now they're just used standalone personal trust. They still have the ability to have sub trusts, but there still can be standalone does think about why we created sub trusts. We created it for people who have several children. And they want the ability when they're gone to having each of their children living out of their own separate trusts, because their children are growing up and getting married and starting their own families. And for them all to live out of a single trust is very difficult. So we gave the trust the power to create the sub trusts so that as families grow, they have the ability to move assets around so that they can then have families going off on their own. And that's not that unusual. If you look at some of the old family members in the US, like the Rockefellers think they have over 30 trusts now. It's just because they started out back in the early 1800s. With one trust in the family has grown and expanded and branched off into their own separate sub trusts that then go to become standalone trusts. Donald Trump's family's done the same thing. That's very common with old money, families.
So sub trust is different than beneficiary.
Sub trust is a beneficiary of a parent trust. That's what makes it a sub trust. But it was instrument is identical.
Okay, when you talk about the business, the beneficiary of business trust, as is the personal trust, that's called stacking?
No, it can be a personal trust, it does not need to be, oh, you can use business trust. Think of it. It's a business first and foremost. So oftentimes, you have partners. What happens if your partner doesn't have a personal trust? Does that mean you can't have a partner in the business trust? Heck, no. You can still have partners. And this is why we don't call them beneficiaries in the business trust. We call them interest holders. They hold beneficial interest. But it can be a personal trust. And if you want tax mitigation benefits, it better be a personal trust. That's the interest older. But it could also be an LLC and S corp, a C Corp or an individual.
We don't call them beneficiary,
you call them. But beneficiaries. Technically, that's not stacking. That is not stacking. The trust is designed for the interest holders to be the ones claiming the income and therefore paying the tax. Which is why it is not stacking. Got it? It's an unincorporated association is what it's called.
Gina, I have a question. On some of the business trusts, there are the beneficiary is a personal trust. But excuse me, the beneficiary or the interest holders, when it's a personal trust, and then they have named individuals. So does that mean those individuals will report their interest on their tax return?
Back? Yeah, they're going to receive the 1099 0k ones for that income.
So that so that means that anyone who puts their children in the position of an interest holder on their business trust that children will receive a 1090?
Yeah, you don't want that? Why don't they do that?
I've seen several business trusts that I've notarized, that the children are listed as beneficiaries, or interest holders, in their trusts.
Make sure they know what they did.
Okay, I will pull the few that I've done. And I'll I'll send you an email with those and send them straight.
Because there are definitely in both the written instructions for the business trust, and then the video and audio instructions. in multiple places, we caution them to only name their personal trust as an interest holder of the overall business trust. If they want partners, usually the partners are in the divisions not in the overall business trust. As anybody named as an interest holder in the overall business trust, is gonna have to pay taxes on income of that business. It's a pass through entity.
You and I recently discussed two different people that were clients and Dan's and I believe both of those people have their children named in the business as beneficiary or interest holders
that definitely needs to be fixed.
Okay. I don't believe those have been notarized as of yet so
thank god,
okay. In that case, we're gonna have to tell them that it's going to cost them 500 bucks, but we need to redo their trust. If they've already been printed and shipped. I think there may have been printed then we'll fix it
for I think they're very, very recent trusts. So I don't know that they've even been printed yet. So I'll look at them when I get back to my office.
See, guys, this is what I'm saying. Clients just don't listen. I and I really think it's because they're so overwhelmed. It's a combination of emotions, including the emotion of being overwhelmed.
It's been my experience, it's client fight change. And I have two clients that for the life of me, I cannot fathom why they just don't listen. But I think it's just human nature to fight the change. I think that's exactly. But they just fight it. And because, you know, they're, they're not under the gun, right? This very moment to get this done right this second, just drag it out. And it does get frustrating.
It really does. Totally aggression. Totally agree. Okay, so next week, I will see if I can get a couple prospects to join us. So we can walk through what it is we would tell them to do. If I can't get them, then I'll just bring the stories that I was prepared to bring today. But one way or another on next week's call, and I'll announce this on each of the calls this week. next Tuesday's trust advisor call. You guys need the experience of going through scenarios so that you can figure out what should you be doing with the client. And this is the safest place I know of to do that. So we will cover that on next week's call. I am still not quite done with the set of operational roles that I'm working on. I'm getting close, but still not 100% Complete. I expect to have those done by next Tuesday. And what else? I think those are the only announcements this week. Anybody have any takeaways for us this week?
There's another question in the chat.
There is. I'll just say, please do.
So we talked about I talked about this with David. I asked him Can I he seems to indicate I can consolidate my tax return for different branches in business trust into one under one EIN. Of course, there might be multiple ein it's
okay, so understand why he says that, and what he's saying and what you're saying may not be one in the same. So think of a business trust as being the same as a series LLC, and Google's series LLC. If you're not familiar with it, what that means is the overall business trust is like an LLC. And the divisions are just like LLCs that have a single member, and that member is the overall business trust. In a series LLC, even if each division has its own separate EIN number, they all report on the tax return of the parent company what's called a holding company. And the same is true with the business trust. Always, always always doesn't matter what the divisions do. If divisions have their own EIN number, their return is consolidated with the overall business trust so that there is a singular return that gets filed. That makes sense.
So is that's the way it's operating no matter how many ein they have, they can use just one return.
All the yes but on a consolidated return for let's say there's five entities. One is a holding company that holding company is the sole member of the other four. If there are five AI NS what'll end up happening is is each of the divisions will have a return that's prepared. But the income will report on the holding companies region as a consolidated return. from a cost standpoint, the more divisions that are owned by the holding company, the more expensive the return is because it literally creates five returns. It's just one filing.
They see. Thank you. Yep.
And what kind? Sorry, what kind of form gets used can change from one division to the next. If division number one only as one interest holder, that's one gonna return. If division number two has two or more, it's more like a partnership return. But all of the income reports on the overall business trust feature as income to the business trust. And then the business trust shows the distributions to all of the interest holders from all of the divisions. So basically, they have to create financials for each division, so that they can consolidate them together on financials for the overall business trusts. And then that gets put into the consolidated return. And you just listed all of the EIN numbers, it's exactly the same thing that happens with holding companies. Ron Legrand is a great example. He's got I don't know six or seven entities and all of them show up on a consolidated return for the holding company that's above them
all. Any takeaways from today?
Always read your clients documents.
Yes. Really? Good takeaways. Good job. And you know, that is yes. And if all else fails, get the documents and send them to me to read. If you really can't make heads or tails out of what you're looking at, but even you guys being the ones assembling the documents for me to look at is a giant out the takeaway? Have a great week everybody. See you guys either tomorrow or Friday. Great. Bye, everybody.