Well welcome everyone to the abundance group, trusted advisor training comm number three for Tuesday, July 12 2022. Yes, are you hearing me now? I can hear you on.
Okay, good.
Thank you so much. Thank you. I haven't been doing celebrations on our trust advisor calls. But do we have any celebration that justifies recalls?
Well, I feel like I'm getting closer and closer to having a trust to advise somebody on or having someone with trust, to spies on.
So I just got off a call with a fellow who's Roman that, you know, he's pretty excited.
It's got getting revelations. So, on our last call, if you remember, we had gone over four different structures. And we did it twice. First, we went through the structures when we have active business income, we talked about the LLC plus personal trust the business trust, plus personal trust with no entity, the business just plus a personal trust with an entity with the assets owned by the personal trust, and then business transpose personal trust with the assets owned in the business trust. Last fall, we added to that, a foundation for each of those four structures. And by the end of the call, you guys had asked, Could I give you some examples, and let you guys tell me which of the eight structures you might use. So in that regard, I invited Joel McMinn to join us. Joel has a very interesting structure. So Joel, is here to join us to help me describe his structure. Joe, before you ever got started with the trust, how was your business setup?
How much time you got for that answer?
However much time you want to give us
so in a nutshell, five storage properties with two sets of partners and for ownership structures, LLCs, etc, etc. And my mom and dad, both deceased as partners serving my two brothers and I as CO heirs of their portion. How's that?
Like goodness? So the LLC has had two different ownership structures. Correct.
So for the LLC, I guess I should go on this. And that was a bit of a quiz for you, Gina? Oh, well, you remember, you've got a memory of an elephant, but let me go long on it. So I won't give the reasons but the three storage properties which are now partners with my brothers, via my mom and dad's just memberships membership in the owning, owning entities, properties. Two of them are owned by a multi member LLC, which submits a tax return and a k one to the members. Okay. One of them is the original structure I had intended, but it got filled up by Wells Fargo. Thank you. And that's a tenant in common, but the same beneficial interest members. Okay. So remember, I'm a I'm an air as well as my brothers. So the percentages were one thing before mom and dad passed, but now that they've passed, with 1/3 of their ownership coming to me, I'm 52% ownership in those three properties, my brothers are each 24%. The member, the structure remains two of those properties are a multi member LLC. One is a tenant in common. So that's three of the five properties. I can go on about the other two. There's simpler. That is, okay, so the other two we bought subsequent to all that. And wholly owned by Pat and I, my wife, gotcha.
And then what's the last LLC? A management company?
Ah, yeah. Good. Thank you. So, in the beginning, formed a separate management company as guided by an attorney. Let's try to keep your management as far apart from the owning entities as possible. And have it be basically a flow through that manages payroll payroll expenses, receives our rents, and then keeps track of the books and issues, the tax returns and so forth. So that is our operating company. It's a single member LLC, under my EIN. Oh,
you would love it. At least three of the LLC is to go away. It should be on a microphone.
Yeah, I like to be down to just one LLC, the operating LLC. And why would I? Okay, here's a quiz. Why would I want an LLC at all in this arrangement?
Oh, so we're gonna let our trusted advisors answer. So, given the for LLCs, five, self storage. Who wants to take this time it? What trusts structure is in the book, we've talked about? What worked best for Joel?
Thing Joe needs to figure out if he wants to go for maximum tax reduction. Or if he wants to get get all the LLC has gone and put it all in the business trust. And then once he says that, then you can make a solution either way.
I want both said.
Yes, sir.
I'm a demanding customer.
structure we want to recommend How are your job? To say again? How philanthropic Are you? Right?
Oh, yeah, we're brothers and myself really aligned on giving. And in Christian interests, and but we realize, you know, there's no sense in distorting stuff that God's given us, it's, we need to do a lot of turning around. So we also have employees who embrace a lot of the same values. And yeah, so we do have the trifecta. We have
a guest unit. Go ahead.
Okay. Yeah, I was definitely gonna say the trifecta, I think that's gonna be the best for in most cases, for like, jointly owned properties probably number is in the that's, that's to me at the knee. And the jointly owned properties likely would want to be in the business trust so that you can distribute funds to the other owners, if they don't have a trust, or even if they do, maybe still one of them the business trust. You know, obviously, Joe's personal assets he owns 100% himself probably would want to go in the personal trust, you know, you'd probably have a business trust division for that, you know, active management, one of my questions is about employees, whether you'd want to pay employees directly out of the business trust, or maybe another entity, that you're like, an LLC that you're paying employees out of, and then the private family foundation, obviously, you know, you get a lot of leverage out of and would send, you know, a good amount of the profits from at least the management business to the private family foundation.
Totally agree. Yeah.
Yeah. That would really
go go long on why why the three properties should be owned by the business trust instead of each my brother's as personal trusts also.
Okay, they also have personal trust. Well, you could, I mean, you could fractionalize You know, 1/3 ownership into the real estate properties. I don't know that that would be the stitch Gachon administrable property the exact reason why you would want to get that faction as I think it would be best to answer that one.
didn't have a good reason for putting those properties in the business trust instead of a third in each of the three personal trusts,
isn't the the personal trust, you can't list percentages, but the business trusts you can.
It's a big part of it. So unless you want to have 33, and a third 33, and a third and 33, and a third,
just to correct that it's actually 5224 24.
Right? That's my point. That's exactly my point. So that further it, why else.
So if we have a total of five properties, in all of them have some percentage interest, Joel's personal, just three of those five, we have some percentage in each of the brothers personal trusts, we're putting all of our eggs in one basket with one purpose. And although there's ironclad asset protection, it would be very difficult for someone to get the assets. If they sue and ever get to one asset, they could get to them all. If we instead make use of the business trust, we can set up five divisions, one for each of the five properties. Each one is like its own little self contained trust. Each one has trustees and beneficiaries and a separate purpose. And if something happens in Division, number one, they are not ever going to get to divisions 234 And five, then a management division would also be in order given the scenario that he gave us. So there will be a total of six divisions within the business just now on payroll, anyone have a different answer than Anthony that you can take care of it in the business just before you could take care of it and then entity?
Oh, that's right.
Oh, if
you look, you don't want to put payroll in the business trust and say you got to do it somewhere.
In the business, just
because you don't really want to you don't really want the IRS poking around for payroll taxes. With your business, you don't want to subject it to that fiduciary duty.
It's not just the IRS, depending upon the unemployment date is many is five or six government bodies that can be poking around in your business just if you're doing payroll out of it. Not a good thing to do. So Joel, you're keeping one LLC. Now, let's make life just a little more interesting. And this is why I invited Joel to join us. There are two parts of Joe's income. Number one is short term, I'm sorry, long term rental income from the storage units, which is all passive income. Surely you also have active income in this businesses, don't you?
Yes, it's come up recently, as I kind of listened close, and looked at my way of doing business, our our management software is really cool. It's all cloud based. We can switch between facilities in a blink. And, and it also arranges the merchant services and direct deposits into the bank, every check or every payment from a tenant. Cool. Well, that one payment is comprised of, let's say, rent $90 insurance $8 any bottle lock for $20 at one time, guess what those other two components are active income. So that's, that's gets bundled merchant services grabs the bundle several times a day deposits the whole mess in one account.
So oh, that's
a reason deal with this.
That's a reason to not be leasing. Well, maybe it wouldn't be applicable in the rental field and the rent house field. You might want to lease people their appliances. I'm just wondering if that's active.
They've got the insurance payment to
as long as it is a rental for 31 days or longer. It's faster. Okay, but in Joe's case, the insurance that's active, the locks that's active. So how do we handle the combination of passive and active in these five response,
which is each one of the, if I combine the five, let's say there's 100 to 200 bank deposits a month that are meshed with active and passive and each one of them
can you have a different division for the insurance for the lot for the rent,
okay, but we don't need to. So here's that we are going to have all of those deposits go to the management company, the management company is then going to take the net of the rental payments, and pay it to the appropriate division for each of the five rental properties. that additional income that comes from insurance locks and anything else that's considered active income. What are we going to do with it, Joel,
we're going to donate it to the foundation, all the active income.
And when we donate it, it's $1 for dollar reduction of the active income, so the only income that's then going to pass through to beneficiaries becomes passive income. So it's 100%, tax deferred and perpetuity. That's where the foundation comes in. So and, and we can do the foundation two different ways, we can have the foundation as a non beneficiary, because it's a 501, C three, we can still make the donation, we can have it be a beneficiary of either the business trust, three personal trusts, also, we can have it be a beneficiary in any division. In this case, it doesn't need to be a beneficiary in order for us to handle the active income the way we just discussed. So just gonna make the donation taken as $1 for dollar reduction of the active income, bringing the active income to zero, nothing passes through to the personal trucks. So
I have another picture, maybe each of each of my brothers would enjoy the write off from a charitable donation through their personal trusts. And as as that right off happens, then that would allow them to actually draw money out of the personal trust, taxable money, and employ that write off on their 1040. Is that right?
So it depends. If you want to do it you just described, then the management division would have to pass that income through to the personal trusts. At the end of the tax year, all of the income in the personal trust is going to get combined. All of it used to satisfy valid trust expenses in each of the three personal interests at the net income of formula will get applied to determine what portion came from active income versus passive income. That portion that came from active income if you want them to do what you just described. But after I put them on a 1099 basis, it would then show up on their 1040 return. And then 30% of their total income, the adjusted gross income on the 1040 return could be donated to the foundation. But done that way. My bigger concern is depending upon how much income there is from active if they don't have enough additional income, they're not going to be able to offset 100% of the tax liability done that way.
Well, both off they're all receiving Social Security. Other incomes, one brother has holdings, I think eventually he'll push them on to the trust.
So really, the only thing that should remain in their personal return is just their Social Security. Right? So depending upon how much they're a third of the active income equals 30% might be more than they need.
And there they'll be in a low tax bracket already.
Okay. But if we do it the way we initially said If the management division makes the donation to the nonprofit, we could have that done in a way that you're going to divide the active income up and put it in in three payments. payment number one is on behalf of beneficiary number one, which is your personal trust. payment number two is on behalf of beneficiary number two, payment number three is on behalf of beneficiary number three. So accounting wise, you can still have what we want to do with the foundation and have each of you have separate checking accounts. And however you want to divide that up is totally fine to do. Does that make sense?
Yes, it does. And I'm so glad this is being recorded. And I'll be sure to get the link from Ben.
When you just refer to each of you have your own checking account, are you talking about an account for each of them in the business trust or otherwise their personal
liaison, okay, so they have the trifecta package, which means structure number eight, hay foundation. Now, in its foundation, you can't have divisions like you can within the business trust, you have a foundation. But they have three separate families, they all have adult children. And each one of them might want different fringe benefits, they might want different projects, etc. Yes. So we are creating divisions within their foundation formalizing. The way that we're doing it is creating three sets of books under the foundation. All three brothers are co trustees and the foundation. Each one of the trustees will be responsible for a separate checking account for the foundation, all using the same EIN number. And throughout the year, each brother will create their own set of books for the foundation, and year end, the other G brothers will report their books to Joel, who will then combine all of it on a single tax return. Okay, got it. So for families like yours, Andrew, where you've got Matthew, Annie and Andrew, and then dad, you guys can all operate out of a single foundation easily. And especially for those of you that still have income, such as the W two income in dad would have, that would be a great help in mitigating taxes on their W two income if they just set aside 30% of their AGI and donated it to their foundation. In so doing, remember that your foundation can easily do joint ventures with your business trust. So what a bunch of money in that foundation, it's not in a black hole that has to go be used to do good. It can be used to fund more real estate purchases. It can also be used to take care of pseudo for any beneficiaries 21 or over. As long as at anytime you guys sit down and talk about the good work you want to do to do the foundation foundation can legitimately pay for food.
That was a question I had out of listening to the last call.
Yeah, I haven't one come up yesterday. That really blew my mind. So I'm gonna go get Rick's answer and read it to you guys. I have a prospect just considering purchasing the trifecta package. And that particular guy is wanting to buy a scarab. Brand new, beautiful work, not a cheap thing to do. Well, he wanted to know if you could actually pay for the boat out of the foundation. I thought about it and I said Okay, number one foundation has to be set up. It has to be funded and the dollars have to be in the foundation before they could be used to buy the book but has to have a charitable purpose. You can't just go pay for fun out of the foundation just because it's gotta have a charitable purpose. And I love what Rick came up with is when he says my thought as an any business or funds allocated for entertainment to further business relations of the Foundation. and thinking that if he was using the boat for a similar purpose, ie joint venture charitable project, funding for charitable project, potential grants, etc. I think you get my drift. I see no reason why the foundation couldn't buy the boat. The IRS does not necessarily distinguish one type of boat or plane from another. It is simply a foundation asset used for foundation purposes. I had a picture of an airplane with the name of the foundation on it, but I can't find it done. He may want to do the same, might be a great way to promote his charity. What a great idea. And a great way to think outside the box on this
wimps are a lot better for that. You blimp.
You wrap your boat, you wrap your
money. Funny. But why not right wrap the vote, it's certainly going to be a really good advertising vehicle for the charity. If nothing else.
Our charities, our charities name, our foundation's name is weather mark. And for anybody who knows sailboat racing, that that's a buoy that's the race committee has planted and sailboats go around it. I could just see naming a boat whether mark and sitting out there.
That's too funny. That's way funny.
I do have a question. And thanks for putting up with me this is this has been fun really helped for me to have it all. But back to my receipt of rents. I have understood that the best process would be for each division to collect the rents
can be done either way.
Any advantages or disadvantages instead of instead of the operating division collecting all, each division collecting rents?
So how did they then pay the management fee?
The the operating division builds them monthly. And they pay the operating division? Or excuse me, the operating division based on those them? Yeah, the management, right? Sales, the sales, the monthly for expenses plus management fee, that residual gets dumped down to the beneficiaries.
straightaway, yeah, that is totally fine to do. It can be done either way. Whatever makes it easiest. And what I want all of you to take to heart is this. Our goal, especially when we're using a business trust structure for a client, it is always to have as minimal impact on day to day operations as possible. It's hard enough for somebody to wrap their head around the concept of trust, especially when we're adding a second and a third trust to it. If we're going to do a major upheaval and how they operate, it's going to make it so overwhelming that they're not going to use it. And they're just not going to do it. And they're going to not be very happy about it, because they spent all this money for something they're not using.
So one of the happies and easy transitions is our 1000s of customers can continue writing checks to the name of the division, they don't even need to know something's happened. Correct.
And as long as we name those divisions in the way that they're used to paying should be totally fine. Right? Yeah, is it? Okay, anyone have any questions for Joel about this?
Yeah, so if you're gonna, you're gonna have the rents paid into the division as opposed to the management division and then pay and then just pay their fee. That's an interesting point. And I don't think aggregating the rents in the management company like I'm planning on doing is a deal breaker. But I can't help but think that if you have the money going into each division that further substantiates each division as a separate entity, so I think it might be slightly stronger. From a legal protection standpoint, would you have any real reaction to that Gina?
In real estate, property management firms are so common. Yeah, I don't think we going in one direction or another, they think is just as strong could be an issue if we had a property management division. And instead of putting the money in the each of the operating divisions, it instead sent the money directly to the beneficiary, which would be the personal trusts. Hey, wait. So we have to make sure that the bookkeeping is done properly, and it goes from management division to operating division, or operating division gets an invoice and pays an invoice either of those two is fine. But it can't go from management division directly to the beneficiaries and bypass the divisions. Make sense? Yeah.
And then. So I don't want to get too far in the weeds here. But what I've got is a management company that takes the rents from each individual property. And then I've got ownership divisions, there's one for each house that has no bank account. And then, and then if if all the houses are owned by one of three owner sets, I've got three different operating bank accounts that take the distribution from the management company.
So that part's totally fine. And here's one, Joel is set up so that the money in the management division is going to get paid to the overall business trust, but documented on the books of the divisions my right jaw, that's how we decided to do it, right.
The money in the management division,
I'm sorry, you're going directly to the divisions with the ranks, right? That's right. Do they have separate bank accounts? Or is it does the business
shall separate separate bank accounts. I've already said I've already set up like 12 bank accounts under the one ein of the business trusts, and I can name them anything I want. And we go down to the DBA story, which probably is not, it's out of scope for this conversation. But when when all is when the dust settles, each division has a separate bank account, it's under the one ein of the of the business trust.
So in your case, if you've got three owners, that's Andrew, the money can go from the property management division to whatever owner sets bank account is most appropriate. But with in the books for each of the three owner sets. I would set QuickBooks up I would use I always forget the name of the function. I think it's categories or properties, some
classes.
Thank you. So that each division is a different class. And you'll still be able to pull separate financials for each division doing it that way, would you not? Yeah. I think that's totally fine.
That's what we'll be doing. Yeah. works either way.
Yeah, but I think that's totally fine.
Okay, thank you. That's helpful.
So Gina, we have the operating LLC, and the operating division. Yes. Ideally, ideally, there'll be like named the same
Management, LLC and management division. Yes. Right. Because the other losses are going away. Right. And we will create a professional services agreement that ties a management division to the management LLC.
Okay, so then my question, I think you just answered it. Through that operating agreement, the operating LLC will create one bill to the management division for all payroll. And then the split of those payroll costs between the various properties is up to the the management division within the trust to split it and Bill each property. It doesn't get split by the LLC. It's one charge, but it gets split within the management division and build out to the separate properties. That
makes total sense. Okay. Management division would in addition to the professional services agreement that it has with the LLC, it would also need to have an employee lease agreement. You'll find it in the business trust sub folder of the conveyances folder. Basically, the lessor will be the LLC, the lessee will be the management division. That's what will allow the man Management Division to make payments to the LLC so that it has the money to cover payroll.
Gotcha. So the operating Hello, the management LLC. I have no reason to think I need to change it from the existing LLC, which is under my EIN. Yeah, so all the the activity from that flows through into my personal returns
it's gonna have very little to no profit, right? So yes, the activity can flow through, but it's not like it's gonna have a whole bunch of tax consequences.
That's that is the tax reporting for that Management, LLC. Is to my tax return.
Correct. And that's fine to do. Totally fine. Now, if you tell me that you think the LLC is going to have a bunch of profit, then maybe we want to make your personal trust and 90% limited partner in the LLC. We didn't have to go there because it wasn't supposed to make a bunch of money. Interesting.
Yeah. Well, at this point, I don't see. But keeping the flexibility to do that in a future time. I don't know what part of the the joy of this is, as we've learned about that, as I've learned about joint ventures and having the LLC is involved as beneficiaries. We can expand the business, we can solicit partners. Ideally, we convince them to get a personal trust and be partners who enjoy all the goodies, so that we can really grow the business, we got a model that's not just static and stuck on five properties and three owners.
Totally agree. Totally agree. Okay, so let's go on to the next example. And it's gonna be another complicated example. Andrew, Are you game to play?
I'm tired enough, but let's go for it.
Okay. Before you got on the phone with me that very first time, what did your businesses look like? Right.
So we have a law business.
And that is dad's business, correct.
Dad's bankruptcy practice. And, and he's coming in. And he's just gotten to the point where, well, let's talk about before any of that. Okay, so, law business, Dad's bankruptcy practice, property business. 20 or 30, depending on what point in time
how many LLC is to go with those properties.
We had one LLC that was holding all the sub LLCs Okay, for each property sub LLC
is one for each property.
Yeah, yeah. 2020 something and then we had an LLC for management purposes. Okay. So there's a law business, there's a property business, the property business is two part I've been talking about the rent the single family rental business. Okay. We also have a land rental business. cropland. Ah, okay. The single family rentals is 130 each. Annie, Matt and Andrew siblings, which dad has already by putting it into the LLC, he's already divvied up our share that he hasn't given any control. He's still the manager of the LLC. Now, the land rental business is is three quarters sections. In Nebraska, and and that and I originally bought it at 20 Ay, ay. And so my Samantha mais percentage is currently 47 And the little brother and little sister are 27 each. So it's a similar scenario to Joe's where he's got a little bit different, you know? Yeah. So I got and that has that has an LLC of its own. Yay. Okay, so there's two there's basically two LLC is one that holds the single family rentals and one that holds the land And they've got. And when I say there's different owner sets, it's the same people, there's just different percentages. So you don't really want to commingle that cash in a bank account or QuickBooks or something like that. So,
yes, no, was in the law firm that is currently owned by that. PLLC. Right.
Yeah, that's set up as a PLLC. Of course, it has payroll. So we've got to keep the PLLC according to Oklahoma law.
But it's even more complicated than that. For the last 25 years, that has spent a lot of money on TV commercials. And those TV commercials have created some extremely valuable intellectual property. And for many years, the family has been trying to figure out how that intellectual property could benefit the two kids that are not attorneys, as well as the one that is an attorney.
Let me let me give a little bit of background in there that I think will help people. Money from the property business, which is a third, each teach to the kids by rights was taken for advertising of the law, business by dad, he just considered it all fungible. And so my little brother Matt, who's just got out of college and was not working in the businesses at all. Oh, word, my word, my inheritance go well. So in theory, that advertise there's a debt, even though we don't have it on the books, anywhere, there's a debt in our head that the law business owes back to the property business.
Yes. Which should note to the three kids and whatever percentage they have. And since then, Andrew has started a tax practice of his own since he's a CPA. And his lawyer sister wants to start a dog grooming business, just for fun. So wants to take a step, which structure might work best for them on family?
check ins. Let you guys agree that at a minimum, we're talking about a bunch of personal trust on the business trust. Yeah. Yes, no, for sure. Okay. And we have to keep the PLLC because of the licensing requirement for a law firm, so it can handle its own payroll. We don't have to handle that business trust. So why don't we do within the business trust for this?
Professional Service Agreement?
Professional Service Agreement between a division PLLC Yes. Hey, it's a good start.
Number one, asset conveyance from the PLLC to the personal trust. To set up the lease the lease or licensing agreement between the business trust and the personal trusts
between the division and the personal trust, right, the division is now PLC is only owned by that. So the assets go from the PLC to all four personal trusts.
That would depend on who you want to distribute the income to so if it's only dad, making the PLLC income, probably only want to do the asset conveyances to Dad's personal trust, because he's the one that's going to be, you know, receiving that income that we're converting from active to passive.
So, in this case, because Annie is eventually going to take over the practice, we would convey those assets to Dad's personal trust and Annie's personal trust and lease them back to the law firm division of the business trust. Now, what do I do with the intellectual property
that in any home or what happens with it goes in the personal trust or the IP trust?
Sure, oh, close.
The dad's IP trust and then from the other kid It's their personal trust could just be beneficiaries, right?
So, IP income, according to the IRS is passive income. No, there isn't a rental income. The one time business just can't actually own assets is if those assets break passive income, or capital gains income. So what if we set up an intellectual property division within the business trust we make any Matthew Andrews personal trusts the sole beneficiaries of that division. And a law firm conveys the intellectual property to the IP division of the business. That IP has to be used in marketing. So the IP division goes and hires the agency that runs all of the TV commercials and does any other marketing for the law firm. It gets invoiced to the PLLC by the IP division. And that invoice includes both costs needed for paying for the agency. But it also includes a licensing fee for the IP. So now we have some profit in the IP division that comes from the licensing part of it and gets 100% tax deferral when distributed to the three beneficial trusts for each of the kids. Because we've found this so far. Yes. Andrew, how excited were you guys when I came up with this idea?
That's fantastic. I mean, it it basically, right before the call, I told you that any and I had a deal. Today, literally, we just had breakfast this morning, alone and struck a family commercial deal. That wouldn't have been allowed. I don't think without this structure. I mean, it just we just couldn't have worked together very well in LLCs, I just don't think it would have ever happened. So.
And it was the number one biggest reason that the family chose to move forward with trusts. They have tried for years to find a solution with the IP. It was the thing that got them to say, Okay, we got to do this. Because without the business just doing what it does, there's no way they ever could have come to an agreement on that IP, it's too valuable. Then everybody had a hard feelings over that take the money out of the property LLCs. Now the rest of it is easy. So what did we do with all the properties? Because
it wasn't hard feelings, but we were definitely you know, I was definitely counting.
So it was Matthew, he had to be I mean, Daniel was the only one that wasn't because she was the one that was gonna get it. Right. So properties are easy. One division per property, and then an overall property management division, when they're a division for Andrew to run his CPA practice out of any division for any children, her dog grooming. So now, another thing we haven't talked a lot about yet is, as you all know, each division there are separate trustees, separate beneficiaries and a separate corpus. The one rule with regard to trustees in each division is that it least one trustee must also be a trustee of the overall business trust. So who do we mean as trustees of the overall business trust?
Anybody?
Well, it would be wouldn't it be just Andrew or his, it's all three of them might be all three of them. And then
as the overall business trust, and then each of them can be their own trustees for each of their separate divisions, so any for the dog grooming business, and Andrew for his CPA business and then Matt, the for all the other, you know, a co trustee on any of the properties that he's a
Matt's gonna ever get named as a trustee not in the near future. But dad is also a trustee of the business trust, because dad will be the sole trustee in the law firm. The Right. No other thing that's a little different,
Gina? Yes. One thing to say about that is with dad and Annie and I, that's three. But when dad passes away, comes down the line or whatever, then it might make sense to bring in Matt. So that we have
like, if I were to, yes, at that point, I would. Yeah.
Go ahead, I'm sorry to have interrupted.
So the other thing that's unusual about the business just that's different from the personal just in the personal trust, who has the power to add and remove beneficiaries and add and remove justice? trust protector? Oh, has it in the overall business Trust?
Trust deeds of the actual business trust, right.
trust protector, if we're talking about overall business trust, yeah. But in the divisions, it is not the trust protector, there is no just protection, the divisions, there was only a trust protector of the overall business just in the divisions, the individual that gets to add and remove just is an add and remove beneficiaries is the trustees of the business trust. Oh, they are the protectors and keepers of the divisions. Because the divisions technically are owned by the business trusts. It's no different than it would have been in a series LLC. If dad, Annie and Andrew were all members of one LLC, and that LLC owns a whole bunch of other LLCs. Well, Dad, Annie and Andrew would all be considered owners of those sub LLC does. Same sort of thing happens here. But the people that have a power in the divisions for adding and removing of trustees adding and removing beneficiaries are the trustees of the overall business trust.
So just to clarify, so if you have a business trust with two trustees, and let's say it's Bob and Tom, and Bob is the sole trust protector. But in one of the divisions, Tom wants to be a trustee, and they're bringing one of his business partners outside into that division. So Bob, the trust protector is not a part of that time can still add and remove beneficiaries or trustees of that division, even though he's not the trust, protector of the entire business trust
was only talking about trustees. Bob can add Tom as a co trustee in the division. The beneficiaries still need to be added and removed by the overall trust protector of the business. And that's a protection for every single beneficiary in those divisions.
So it has to be if there's two or three trustees of the overall business trust, it needs to be unanimous, or
it need to be unanimous. One can do it.
Anyone can do it. Yes.
Okay. In the operational rules of a division, you could modify that doesn't require unanimous of all business just just ease to add or remove adjusted. But then the trust document itself Yeah, in the any one of them acting on their own.
Got it, thank you.
But the trust protector of the overall business trusts still is the one that adds and removes beneficiaries under the Uniform trust code. But if you want the trust to have the ability to add and remove beneficiaries, it cannot be given to a fiduciary. A fiduciary can have the power to add and remove another fiduciary but they cannot have a power to add and remove beneficiaries. It's a protection for those beneficiaries. The other thing that mentioned with this scenario is the basis accounts. Within each division, each beneficiary has a basis account. Think of it like a capital account, in a corporation, whether it's a C Corp or an S Corp is irrelevant. They all have capital accounts. And because of that basis account, you don't necessarily have to have a demand note attached to anything. It's a basis account. So anytime a beneficiary is going to sell assets into a division, it gets added to the Asus account. If the division decides through its trustees, that they want to retain some of the income in that division, so that they've got operating capital, expansion, capital, etc, those dollars still are going to get put into the personal trust. And the personal trust basis account in that division will therefore increase, because the dollars are staying in that division. It's just simple accounting or straightforward accounting, in my opinion, because they're still going to have to report the income to the beneficiaries. Because business trust must have a zero sum tax return, I always say you have to show the income that passed through to the beneficiaries of the divisions, and then the beneficiaries contributed it back to their capital account, to the division, if that makes sense. And that's going to be really important again, especially with the law firm that needs operating capital. equally true of the IP division needs operating capital to do the advertising. And it may also be true within the property management division as well. Anybody have questions for Andrew?
I have a question on that last, back and forth transaction. So you know, our model, I intend to pretty much empty the divisions, except for a small operating residue, which would be drawn from as needed. But if we come to a major purchase or something, can I ask the beneficiary trusts to transfer back to the division using that method?
Absolutely. Cool. Yeah,
that furthers the cause of get the money out of the business trust?
Yes, absolutely. Likewise, you know, business is about growing, it's not about staying stagnant. So if at some point you want to expand, especially in a structure that incorporates all three trusts, you've got so many different ways you can expand, you can take a loan from the foundation, you can ask each of the beneficiaries personal trusts can attribute, you can do it so many different ways. Or you can have the equivalent of routine earnings within the division. Last and flexibility that is not typically present, when all you're using is an entity. This is why everyone has to go out and raise capital all the time. So running a decent sized business that wants to grow. Now you get to raise capital within three trust structure. It's a beautiful thing.
So as we raise capital, that would vary the percentage ownerships, which is, I guess, simply a matter of amending the, the operating agreement of that division when it happens.
Okay, so when we talk about it, we can't say quote unquote, ownership, because in a nongrantor, just the reason that as ironclad asset protection is because ownership as a thing is divided among multiple parties. There are two parts to ownership, there is one of the largest and beneficial interest. The equitable interest is held by the trustees. And in the title, the stuff is held by the trustees, but the beneficial interest is held by the beneficiaries. The basis accounts will start out in what ever percentage that beneficial interest is divided. So let's say you bought Business, putting $5,000 worth of assets into it by conveying those from the personal trust for the individual to that division. And you're gonna hold that 50% and beneficiary number one's name 25% and beneficiary number two's name 25%, and beneficiary number three, that's going to mean that basis accounts will be joining in 50,000 125,000, honor and 25,000.
We translate that to shares in the business trust name shares,
that it is called units of beneficial interest, units of beneficial interest, it's usually done as a percentage. And whatever the value of the assets in that division is what gets divided out in the basis accounts, it's how much capital was contributed to that division. Now, if you want to go out and seek for capital for an expansion, you've got choices. You may choose in the operational rules, not to alter the percentage of beneficial interest, even though a contribution of capital can make the basis accounts be different percentage wise, then what the units of beneficial interest are. Let's say in that same example, that beneficiary number two contributes $100,000 of capital, they can still have a 25% of the units of beneficial interest. But now that 100,000 makes their basis account, do you want a quarter instead of one and a quarter? That makes sense.
Yeah, so how do I adjust they're like monthly distribution
depends on how it's done in that example, you wouldn't necessarily have to adjust them on the distribution, it could be that under an amendment to the operational rules, you state that they're going to receive some amount on an annualized basis as interest on the additional capital that they put in. But they aren't going to actually get paid back to the principal, until that business is sold, or shut down, or an asset is sold for some other things. And then, percentage of profit, that's still getting split the same way it always did. 50% 25% 35%. That's the same about the operational is being done the way that they are between the operational goals, talking about the units of beneficial interest, and the operational goals talking about the basis accounts, you've got some flexibility that you maybe didn't have before. That was the you can also choose to issue additional units to beneficiary number two, that are not Class A units as a lion's share in management. Sharon profit you get, as you said, class C units don't have any management rights or voting rights, that are just a protection for the investment. That's easy to do.
If protection of protection for them to know that, should the property be sold, they have their portion. Yes. Okay. Yeah.
So the whole class A units 25%. And then I'll have some portion of units that they'll receive as class c units. Lots of different ways of doing it. And that's why I love talking about structure with businesses making use of the business just, it's a level of flexibility that just isn't present when you're talking about typical entities and the level of growth that the business might have, as a result of the tax mitigation. They can grow so much faster, because they've got so much more cash on hand by virtue of the fact that they're not sending a big check to Uncle Sam every year. And it's in the operational roles that you specify our that's gonna work. And you do like the template you sent me for the 12 page operating agreement. Yeah, and I am working on templatized that for you.
I love that Well, I would love that to see
more articles of formation in an operational rules set for you guys. And eventually, my goal is to have trusted advisors, all helping to create a library of operational rules. The articles of formation are just like Articles of Organization. They don't say a whole lot. So we really don't need a library of articles of formation. But it's the operational rules that are massively flexible. And if we can create a library of all different kinds of businesses, then clients can come in, go through the library, say, Okay, I've got a dental practice and grab the dental practice operational roles, they can still modify it, but it gives them a better starting point. So when we get to that point in the train, which is probably going to be week, nine, or 10, I think I will, I would love for you guys to volunteer to do instead of operational roles for some type of business so that we can really get started on that library. That may be very helpful. Okay, any other questions about the two exam?
I don't see the the certification of trust for division in the business,
alright. Yesterday, I thought there was it's under the word divisional.
In the business trust folder,
here it is short. It is not yet there in PDF form, because Shelby had no computer last week, and then she got mcaren left, but it is in Word format. It's template dash divisional certification of just in the business just folder. Okay, we're done with Dash divisional certification of trust.
Looks like this. Oops,
there it is. Haha. Good deal. Okay, thank you.
For anyone that was getting a new business just from the abundance group that used to have a Rosen and Rosen business trust. When you have just advisors getting assigned to people like that, you need to be aware of something that I really don't want to talk about. But I'm going to have to. It's the reason that abundance grip trust was created in the first place. I realized when I was working with Bruce and the law firm of Rosen and Rosen, that the business trust, has the trustee also acting as the trust or of the business trust. What is the trustee is the trust or the trust or is the equivalent of the grantor. So you have no settler in the rosin arose in business trust. It is a self settled business trust. That means it is not in unrendered just like it purports to be. It is actually a grantor trust. That was a huge issue for me. And when I realized it, I bought it to Paul Rosen, who didn't understand the trust's at all didn't even realize that that mistake was made is very much a mistake what was not something they intended to do. So I offered to rework the business trust for us and and Rosen at no charge just so that I'd have a better trust to sell. I was an animal to it. And for several months, if me every Saturday, going over the changes, I was going to make the business just and then eventually to the personal, so beneficial just that he stopped showing up for meetings and stop responding. And six months later, I opened the doors to abundance group trust. So for clients who have purchased the support package for a business trust, we cannot use their existing trust EIN. They must shut it down and do a final return for it. And we must create a new EIN number which in The new name so that the new trust is truly not self settled and is not accidentally turned into a grantor trust. And who just realized this morning about his trust? Thank goodness, he didn't have anything in the business trust. Yep. So it's a perfect time for us to wind up the old EIN number and open a new one. But if you run into any clients who have a Rosen and Rosen business trust, or what's called a master's business trust, we have a few of them, they need to make sure that we didn't just do a chant that was shut down, they just open the new one. It's, it's really important. It's the only way that I feel comfortable letting clients put assets into the business trust, if they still have the old EIN number. They should not ever, ever, ever old assets in that business, just because it is self settled can be a problem for asset protection. So Andrew realized that because in the divisional certification of trust, it talks about settler. And it talks about the settler not ever being allowed to be a trustee. Well, that's why it shouldn't ever allow the settler to be a trustee, even though in the old trust the trust or was the trustee, that was the point. Okay, so next week, we are going to jump in with both feet to step one of the instructions for setting up a personal just go get as far as we can. On next install. And then the next week was pick up where we left off until we're done with the personal Justin structions. Any questions for me today before I let you guys go?
Thanks for letting me chime in. I don't have the bandwidth to study up to be advisor maybe in the future life?
Well, you know, Joel, if you want to listen to the replays, you're welcome to do so because it will help you in managing your own trust, too.
I get that having participated here. Where are they found? Are they in the same
way? Man? It's so difficult. It is in abundance group.com forward slash advisor podcast do we? Do we have transcripts just like available for? Well, of course we of course we do. It's in the exact same place that it's in in all the other podcasts. Each episode has transcripts. And Lu if you want to go through those transcripts and edit them as you go through them, just let Ben know, to send him the edited version and we'll modify the podcast has the edited version. You're welcome to Okay, thanks. Okay. I know that sometimes that helps you learn. It does. Okay, guys. So that brings me to my favorite part of the trusted advisor calm. Where do you taken away from today's training?
Everything is so complex. My biggest takeaway was that IP trust you came up or your IP division you came up with. That's genius.
That's one of my best honors. I wanted to use that
was so bad. But I said I think she's probably come up with some kind of solution that she's created. So I'll let you take it away on that one. And I was good for weightings. I learned something
as Ganju when I came up with that one, I could barely contain my excitement. Right, Andrew? I was so excited. I'm like, oh my god, guys.
Yeah, it's good stuff.
Really is thank you for that.
It's, it is a lot to take in. But it's it's much easier for me to take everything in and understand it and comprehend it when we have real life examples like Andrew and Joe gave. So I appreciate that.
And I promise you guys throughout the course, I will absolutely be inserting examples. If I get the client to join us to give you the example. I think that's the ideal, because then you can ask the client questions. So really use the times that I'm able to bring clients in as an example, to ask away. This is the time to learn you're not gonna learn without asking them questions. Thanks, Ben. Any other takeaways? Let's do one more and then we'll go
I gotta take away as an interloper. Go ahead. I am so excited really singing this last night before. Yeah, that, that there are a group of people kind of determined to wrap themselves around the stuff that gene has done as really a life thrust. And we've got both expansion, opportunity and continuity. That is really looking strong for this. I'm really
pleased. Right with our young people like Anthony, Ben and Jolene in the group. I know that at some point in time when I decide I'm not going to continue doing this on at the level I am today, that we are going to have plenty of young people to carry the torch and really support the generations to come with a whole succession plan in place. It's going to be amazing. For generations. I can only dream about the impact that can be made through all of the future generations. That's so exciting to me. I am so blessed and I am so grateful. Thank you so much, everybody. See you all tomorrow on my personal just bye for now. Bye bye, guys. Thank you.