Welcome, everyone to another abundance group platinum call for Wednesday. No, this is an abundance group platinum calls. Welcome everyone. It's an abundance group trustee trust advisor for week six. And today we are going to be talking about the last part of the personal trust instructions where we left off last time. So what is the like, like this year? Are you talking to us or somebody else? Oh, I'm sorry. Thank you. Okay, so before we get started, do we have any trust advisors, celebrations or just advisor questions from our prior trainings?
Okay, so we will jump in, as they say with both feet. And this is part three of the personal trust instructions. We stopped after the purchase of assets and liabilities but sheet, which means we are on step four. And step four is all about trust bookkeeping. For most of you, I think today's conversation is going to be a review, not necessarily new information. Now, there are so many different ways of doing trust bookkeeping. And with clients, we have pretty much everywhere you can imagine that they are using, my preference is always going to be to encourage them to use QuickBooks Online. The bigger the state, the more important it is for them to use something like QuickBooks Online. However, we do show them in the training that they can use something as simple as an Excel spreadsheet, called a deposit expense register, it looks like this. It's basically just like a check register. The only difference is the addition of a chart of account number. We have a bunch of clients that don't want to pay for QuickBooks online that are using nothing but deposit expense registers. The problem with that is if you use QuickBooks Online, things like journal entries are very easy to do when you use a deposit expense register, a little trickier. And because so few clients are really familiar with bookkeeping, they have no clue what to deal with journal entries. So their books get all messed up pretty quickly and easily. Unfortunately, I can't make them go by QuickBooks Online. So if anybody ever has a really good suggestion, and how we can get them to use QuickBooks Online, oh boy, I will be all in. We also have clients who use other platforms, they may have active business like I have one client that used to own a masonry business. He has since closed that business and has transitioned to strictly doing real estate investing. But he's still used the accounting segment from a software called masonry, which oh my gosh, is it confusing, it's worse than a deposit expense register is got 27 years of history in it is not gonna switch to QuickBooks Online is. So we have several different ways that they can get our team doing bookkeeping for them. And that really is the best option use Quickbooks online and have our team do it. But if they don't want to pay for it, you know, you can only push them so hard. So the people that can do bookkeeping are all listed on the vendors page, they can use their existing bookkeeper. If they're familiar with business, bookkeeping, they're going to be able to pick this up pretty easily. The only difference is going to be what's called a chart of account number 260 or 265 account. It's what tracks the note that the trust owes to the client for the purchase of all of the assets and liabilities other than that account. If somebody is familiar with business, bookkeeping, they'll get the trust bookkeeping very easily.
So, Chart of Account Number is something all of You will need to be familiar with simply because clients ask about it all the damn time. And again, it goes back to the fact that clients just aren't bookkeepers. They don't understand chart of account numbers. And therefore, they'll come to me with like 20 transactions sometimes, well, what account do I use for this? What account do I use for that? I don't know of a way to make it more straightforward than what's in the document. Now. Again, if anybody has any suggestions on how to approve it, please let me know. Because it's, it's something that's troubles clients a lot. And because it's also new to them, expect the clients to try for perfection. And it will keep them from doing their books, because they aren't sure how to make it perfect. I tell them all the time. With this, it is so important that even if it's not perfect, do your best and get it done. We can always go back and change the chart of account numbers or do things to fix problems down the road. But don't let it wait. Because the longer they let it wait, the harder it's going to be.
Gina, this is John, I got a question for you on that. So since you're saying a lot of these clients have older systems, or do they have their own CPAs, you know, that do their taxes and work with them on their accounting.
More often than not, they will have a somebody that does the tax prop, but that's it. They don't use them for tax advice. They don't use them for bookkeeping, they only use them for tax prep. Especially if they're not using QuickBooks Online. Those using QuickBooks Online are much more likely to have a CPA that does bookkeeping, and tax work and tax advising. But it's all over the place. Especially lose clients. Lose clients aren't super huge as states. And they're trained by Lu, anything that has a recurring fee, look for alternatives to so for them to buy QuickBooks Online. Oh, boy, it's really hard to get him to do it. His bigger clients will use modest smaller ones.
I'm not an advocate of QuickBooks Online. As you know, I've been using QuickBooks Desktop since like 1999. We have a few of those too. Yeah, is a preference of online security.
Yep, that and that's very common with lose people as well. So I'm okay with QuickBooks Desktop, it's a far superior alternative than the simple Excel spreadsheet called the deposit expense register far superior. The harder part with it is, you don't have a way to share it with our tax team at tax time. So you're gonna have to know a little bit more so you can run the financials to get over to the tax team. But if you've been using it for years, you're probably pretty adept at getting financials pulled for anything. So
that on top of the fact that I also share with my tax attorney, the actual QuickBooks files, the accounting version, gotcha. There's a way to transfer information to they get what they need.
Yes, but it requires them to have QuickBooks Desktop, and our teams do not have QuickBooks Desktop. So
we need new vendors.
Okay, no, I
have QuickBooks Desktop. If you need any help, I should be able to help out if you need, VA. Thank
you so much. That's really helpful. Thanks, Anthony.
Also, there's a wave financial is is wave apps that calm. It's like QuickBooks, but it's, it's free. So
for those also money dance, which is free, and there's a paid version, it's like 50 bucks one time, when there's lots of alternatives. I used to recommend GoDaddy bookkeeping, which was only $10 a month, but unfortunately, GoDaddy just shut it down a couple of weeks ago.
Yeah, so I had a church that had all their stuff and exhale, and they just wanted to be able to start with QuickBooks. And so I was able to work with them with the Excel spreadsheet, like you can have stuff like that, or people have the accounts, they can change it into a CSV file or bring it over to Excel. And then you could bring it into QuickBooks for them. That's not that difficult. So I'm saying that because you mentioned lose
client that they would never do that they won't use Quickbooks online because it's cloud based. They might use QuickBooks Desktop if they're big enough, but that's about it. So on the chart of accounts, there are two versions, there is one for the personal trust, there is a different one for the business trust. The reason for the difference is there's a lot of transactions that a business just is going to have that personal trust aren't likely to have. So there's two charted account numbers. For those accounts that are the same in both chart of account numbers, then it's the exact same numbering, whether it's for personal trust, or business trust. On today's call, we're gonna focus strictly on personal trust. So one of the things that I found most helpful, as I was learning about trust bookkeeping and trust taxation, was to look at a sample trust tackers tax return. Just looking at the sample, helps you better understand how the bookkeeping works. So what will happen at tax time is, whoever the tax preparer is, first thing they're gonna do is create the financials in a business trust, that means financials for each division, then they're gonna cumulate them into a set of financials for the overall business trust. Until the business trust is done, we have no idea what the numbers are gonna look like for the personal trust, because the business just needs to issue K ones to the personal trust. So step one has all of the stuff for the business trust, step do they then do the personal trust financials. And once they have financials for both, then they actually prepare the returns. This is an older return, just because this is what I have access to. But in the first section, this section here where it talks about income, we're going to see interest income, ordinary dividends, capital gains, and then rents royalties, partnerships, other estates and trusts, etc. In other words, passive income. There are eight different categories of income that get accumulated into this top section on income. Then totals the income, and then we look at the deductions. Interest is a deduction and that means interest payable, or interest paid rather, taxes is a deduction, fiduciary fees. Most clients do not have fiduciary fees, charitable deduction, attorneys, accountants and return preparer fees are deduction. Other deductions, attach a schedule. Now you're gonna see the the number here, see if I can make this bigger since it's so fitting, the number here for other deductions is very small. The next line is bigger. And you'll see why in just a minute when we go to the other deductions schedule. This is where you're going to see on the other deduction schedule, the extraordinary dividends calculation. Then we go into tax and payments. And you'll see down here that it's a zero sum tax return. That's typical on both the personal and the business trust, there should be $0 in taxes. There's Schedule A the charitable deduction, their schedule B for income distribution deduction, then the tax computation and payments and it should always come down to a zero underpayments.
It is the other deductions that helps you with Trust bookkeeping, so on other deductions we put up at the top but it is a nongrantor, irrevocable, complex discretionary spendthrift trust, then bank fees, medical, dental and wellness. And that's for both trustees and beneficiaries. Any dues that got paid medical insurance, life insurance, repairs on any of trust on properties, that includes trust on vehicles. Just office supplies, telephone education, food for minors, clothing for minors, vehicle expenses, and then the all important extraordinary dividends allocated to Corpus per IRC 643 be the total number, total amount and other deductions is pretty close to equal if not equal the total amount of income from things other than capital gains income. And that's why it's a zero sum tax return. Everything is a deduction. Now we have to be really careful on the deductions because they can only deduct things that are valid trust expenses. So, if I asked the question is, is there a valid trust deduction? Or valid trust expense and therefore deduction? Is it?
Me buddy, no.
No. Yeah, because of the personal, you know, the personal aspect of it. Yeah.
dependent, it's a beneficiary. Would, would that not cover that?
It would not, it's still a personal expense. For beneficiaries, food and clothing can be paid for under the age of 21. Or if their special needs at any age, but you can pay for things like haircuts
would be in fashion.
But if we do it one way, fashion, it's truly a personal expense. If you've ever read the abusive trust tax schemes pages in the IRS website, the number one thing that they harp on, and claim is a sign of it being an abusive trust tax scheme is when the trust is paying for and taking deductions on personal expenses. So food for those 21 and older, that's a personal expense, that's not a allowable expense, under 21, is allowed special needs, it's allowed. But your clients have to learn that if they start paying for truly personal expenses, like fun, they go to the casino, they take $1,000 out of the trust. That's not a trust expense. And if they try and deduct that on their trust tax returns, it is going to raise all kinds of issues, if it's ever an in an audit, and you don't want to jeopardize the wonderful tax mitigation that the trust affords, it's not worth it. And for most clients, the total amount of spending on those things that are truly personal in nature, it's just so small that it doesn't justify the risk of invalidating old trust and turning it into a grantor trust, that doesn't get to take any of these deductions. So we need to emphasize that with clients early on in implementation, and get them in the habit of not using trust monies to cover personal expenses. Now early on, they're gonna make mistakes. If they do, then they're going to be able to fix it by using what's called the 260 account or the 265 account, which means the demand note account so
just real quick before you go too far beyond but like you just said Gina for the for the food, but if it's an actual trust, like for trust travel, then it would be like in the entertainment like in the typical Ira 1040 bucket where you can deduct that Correct?
Correct. So let's say you're going to a real estate conference and the trust is a real estate investor. Then the food and the travel are all allowed trust expenses and can appear on the other deductions page. But I would make receipts for it.
Yeah, no, we are and then we're doing minutes but I'm just thinking cuz like, Lou buys this pizza occasionally at the event and things like that. So I know he wants to know as well.
Absolutely. So as with any book Keeping system, our chart of accounts is divided into assets, liabilities, equity, equity being the 260 account, a 265 account. No distributions to beneficiaries is equity, and then expenses, income and expenses. It's the same in any bookkeeping system. I wish I had his unless he's here, and I just didn't see him is Dave here? No, he's not. So, Anthony, you want to help me with this? I want to talk a little bit about like, big groupings with in chart of account numbers, assets. What are those account numbers that are in the Assets category?
Yeah, so one, it looks like one is going to be different cash accounts, transfer funds between so one one, it could be transfers between bank accounts. Could you go any further on number one? Because it says explanation used when transferring between accounts? So is that between personal and business accounts?
Or that would be? That would be trust account? Number one, transferring the trust account number two,
okay. Okay. So that's just a cash account. All right. So the first, the first one is going to be simply cash accounts, which when you have your bank accounts connected on QBO, then it'll import all of that information, it'll be straightforward and easy to track cash accounts, reconcile to those every single month. So the best way to do trust bookkeeping, and what a CPA or bookkeeper would do is, they would take a look at your month end balance for your cash. And then they would make sure that that cash balance on QuickBooks is the exact same as the cash balance on the statement. That way, you know, all of the cash flow in and out is perfectly accurate. The only potential mistakes are in the categorization of the transactions that have happened in the cash. So cash is probably the most important one, when you're doing business taxes. When you do interest taxes, you got to make sure that cash, that number is accurate.
And that brings one other thing up. Clients cannot do their personal returns until the returns for the business just in the personal trust are taken care of. Because there may be K ones issued to them personally, there may be 1090 nines issued to them personally. And I have had so many clients that actually file their personal returns before their business and personal trust returns or even completed. Somebody's gotten background hauling. Yes. Julie, do you see that is calling you?
Yes, no, I completely, completely agree with that. And that's why they have different tax deadlines for the different returns. Yeah, partnership, flow throughs are March 15. And then trusts are, you know, April 1 For most trusts, gives them time to create the K ones and put them on to the personal returns. So that that is cash. Next is accounts receivable 110, which would be mostly applies to businesses that sent out an invoice that has not yet been paid for trust. There's not going to be too many situations where you'll have an account receivable, maybe a note receivable for loans back and forth between the trustee or beneficiary, but in most cases, you know, the personal trust is not sending out invoices. So
do not make loans to trustees only to beneficiaries. Okay, gotcha. But where are the accounts receivable would come in? Is if it's a real estate investor and a tenant is late on rent. That's an accounts receivable is it not?
It is? Yes, exactly. So that is one situation where accounts receivable would absolutely be necessary. Let's see. So 120 Savings Accounts similar to cash 125. So then you get into the fixed assets, which is going to be 125 Land 126 buildings, 130, furniture and fixtures, equipment, vehicles. So with land and buildings, there is an allocation when you purchase a property. There's an allocation to the land and there's an allocation to the building because land is not depreciable as it doesn't go down and value were the buildings, those are depreciable assets that are created, and then immediately they start putting wear and tear on them. So the government gives you the economic benefit of being able to deduct the purchase price, or the build price of the building and the assets that you create. So that's why there's a split between the land and the building. If there's no clears, split, sometimes you'll be able to find it on the recorder, the county recorders page where the assessment or the assessors page, the assessment will give an allocation. You know, its assessed at 100,000, the assessor says that you know, 73,000 of it is allocated to the building 27,000 of it is allocated the land. If you can't find that, you can easily just give it a at 20 Give it 7525 or 7030. That's pretty reasonable range for most CPAs, when you go to calculate the depreciable basis of the building, and the value allocated to the land.
And why that becomes important with our clients is when they're conveying their properties to the trust on the bill of sale, which is the document that selling the asset to the trust, there should always be an exhibit. So under the description of property, it will say see Exhibit A. And on exhibit A, it will list out the value of the land, the value of the buildings, and sometimes even the value of the furniture and equipment. So that you then have them all totaled on the front of the bill of sale. But most clients don't understand that. So you have to explain that they're going to need to figure that out, they can go back to their old tax returns, sometimes they'll find it on that. If their investment properties, they can always go to the original closing documents, which will have the allocations and whatever the ratio is between land and buildings, apply that to the total basis of the property. And you're gonna get a pretty decent number that is a reasonable standard that you can rely on. Gina?
Question, this is John. Mostly from a real estate investing standpoint, we use land and buildings so we can depreciate the building. And but under the trust, is it my understanding that depreciation is no longer an issue or concern or we no longer track because of the way that trust is structured for capital gains,
there's no reason to deduct with the trust, because you're gonna still get honor percent deduction on the income, whether it's capital gains and income or revenue and lease income. So we don't usually do depreciation, but the sale of the asset to the trust absolutely takes the depreciation into consideration, because it reduces the basis, which becomes the price at which the trust is purchasing those assets. So if you've taken depreciation on your tax return, yeah, data deducted from the basis before you sell it to the trust. Otherwise, you're gonna have a taxable gain on your 1040 return for the first year that trust inception.
So basically, we're doing a depreciation recapture from the personal to the trust side. So that's why we're doing doing the bases with
appreciation, recapture Kevin. Purchase Price, add to it, the improvements, subtract from it the depreciation, and that becomes the sale price to the trust. There's no recapture of depreciation.
Well, but since it's the reason I'm thinking of it that way is since that's what's in the regulation of and I would have I have to dive back into it. But that was one of the questions I had because it seems like since we're going from one domain to the next and then we're not really able to depreciate anymore, we basically are sort of giving that up.
So you're able to, you're able to depreciate in the trust. depreciation recapture is really when you have a taxable gain, it reclass is the classification of that income from long term capital gains to ordinary income because you got the benefit of depreciation offsetting, you know, ordinary income rates, then when you want to sell instead of getting the double benefit of now your gains are taxed at capital gains rates, you'll have to recapture the depreciation taken and just pay ordinary in income tax rates on the amount of depreciation recapture. So if there's no if there's no capital gain,
okay, so recaptured. So then really the IRS is doing that from the standpoint of they don't want us to get the double benefit. They want to make sure that they're getting their their ordinary income benefit. Is that what it is? Anthony?
Yeah. So if, if you bought a house for 200,000, depreciated it down to 100,000 Sold it for 300,000, you would pay long term capital gains rates on 100,000 of the $200,000 gain. And you would pay ordinary income tax rates on the other 100,000 of the $200,000 capital gain that 100 We already
got, because we already got the depreciation benefit. Got it. Okay, got it. So then I was
to the trust, you're not adding a capital gain. You're selling it at base base. No depreciation recapture necessary. Okay.
No, I was. Yeah. And I was looking at that as a way of the way that we were recapturing. But yeah, it's not really recapture in that case. It's just we're, we're just classifying the bases correctly,
correct? Yes.
So my original question, and now that we're, we've done the cost basis, took the depreciation and have it in the trust. I heard Anthony say that we can also depreciate those assets within the trust, is that our intent, because, you know, sometimes,
it's really not necessary. I would expect that if you were depreciating within the trust, and you're also getting the benefit of the deduction for extraordinary dividends, whether it's from capital gains income, or passive income doesn't really matter. And then there's an audit, I bet you the IRS would have a field day, it, it looks like you're double dipping, you're not really but it looks like you're double dipping. It is way safer, does simply take the extraordinary dividends deduction, and don't worry about going depreciation. Because upon the sale, you'd still have the depreciation recapture. And when you get that depreciation recapture, now that just at ordinary income tax rates is going to be taxed at the highest personal tax bracket plus three and a half percent on the amount that the trust depreciate it. You don't want that to happen. Better to take the extraordinary dividends that declaration on your capital gain and just make the whole thing go away. Does that make sense? John?
Yeah, yeah, just from a complexity standpoint, then, you know, do we really want to, you know, talk to clients about splitting the land and buildings, you know, in this account, or just use the land in case they just purchased land itself is not not a building on on,
you have to do the calculation, but from sending it from their personal names into the trust already, that that amount. And so it's just a matter of allocating that those amounts. Even if you don't depreciate any further, you just already have those totals. So you might have
needed on that 1040 return for that. Initially, you're making the sale to the trust.
Okay, all right. I was confused about that. Because, you know, I kept in my mind that we're not depreciating in here. So, why am I taking time to Allah reallocate, and I did it on the cost basis. I knew what was depreciation, what was land what was building, but I didn't think I needed to carry it forward into the gonna have
to carry it forward any further than just on the bill of sale for the convenience to the personal trust. Okay. Okay, Anthony,
let me add one more level of consideration to this. Many of my clients have been trained by us over many years to do cost segmentation on their properties, also known as cost segregation, meaning that the property is if it's income producing property is made up of many different component parts. And these component parts can be written off over five, seven or 15 years, and the balance of the property written off over 27 and a half years. Most CPAs take the straight line method because it's easy for them. But many of my clients have recognized the intelligence of doing this. When you do this, what happens is the traditional say 20% for land suddenly becomes 10% or 7%. Because so many component parts have Have so much value, that it reduces the value of the land correspondingly. So just keep that in mind as you're looking at this transition that some people have been componentized in their depreciation and have already written off certain parts of it. So for example, if they've had the property, they've been doing cost segue for seven years, all the five year property has already been written off. You know, so it really depends on where they are in that process.
Really good point. I haven't seen as many of your people doing cost segue, as I expected to. Maybe I just haven't seen them yet.
They might, they might have been taking it in as education, but not actually applying the education ago.
And now I'm here, but not very many. Go ahead, Anthony.
Something I can't say I'm certain of is, it would be pretty convenient to be pretty nice when you convey the property that has cost segue study done on it when you convey it back into the trust, because you're not really concerned about accelerated depreciation anymore be just, from an accountants perspective, pretty convenient. If you could reallocate back into buildings and land, I'm not sure that that would be possible. And if it's not possible, then all that would go under another asset account, which you could do, you know, 120 7.1, and 120 7.2, would just go down the line and list out all of those itemized items that got conveyed into the personal trust for the building. What do you think about that?
I think that's a good idea.
Well, it's still an amount already allocated to land, right? Go down to zero, but it's just less than the traditional 20%, let's say.
Right, just just the point is that having to transfer on a depreciation schedule, land and building is to line items and putting it onto a tax return, putting it on to bookkeeping, is, you know, two line items were on the tax return the person's tax return. Now it's got, you know, 15 or 20 line items, then to convey it from that tax return, and put it into the trust books, put it into the trust tax return, when we're not even really concerned about depreciation to have to add 15 accounts of, you know, of the pipes. And I agree with you,
I wasn't talking about continuing to do it that way. I was thinking about the fact that the numbers may be skewed because of the fact that they were already doing that. Yes,
no. Like with everything
else related to the trust or business. Always start with the question, what outcome Do you want to accomplish? If there's a good reason for it? If it's gonna help them in some way, then continue it? If it's not, then just go back to land and buildings and nothing else?
Okay, that's, that's really what my question was, is if we can go back to just allocating between land and buildings, I can only
think of two people that I've worked with in the last four years plus, that had costs done. And it didn't really make any sense at all to make use of that in conveying the assets to the trust. All we did was the land and building allocation and that was it.
Okay, that's the point is what is the land and building allocation at that point? Is it what they are carrying forward from there?
It look at the costs egg, you look at the cost sake and add the components together for those things that relate to the building, and that gives you the allocation of the building? And what remains is the land.
Okay, so even if it's not the standard at 20, correct, right, whatever that is. Okay, got it.
Yeah. All the componentize items
are late to the building
gonna be from the building Exactly. Awesome. So to move on, we would go to I mean, kind of touched on furniture and fixtures, we touched on equipment, to vehicles, these are all fixed assets that can be owned by the trust, like Gina said, in
the vehicles get conveyed at Kelley Blue Book value. If a client's vehicle is really in fair condition, encourage them not to use excellent condition numbers. They need to be truthful. It's not worth a couple extra dollars. On the demand for the vehicle, so just have them honestly report what Kelley Blue Book is for that vehicle.
Yeah. And in a business could be depreciation recapture considerations, you know, with if you're conveying it from an S corp, there could be some, you know, just reporting requirements necessary.
Gina, I find these comments to be very valuable. And where it says explanation, if there could be either an extension or a sub comment related to this, that would be really good. Okay, I'll see if I can do that. So for example, where it says post vehicle purchases, yes. And sub comment would be used Kelley Blue Book, etc.
Yeah, I can do that. Now, it's the trust buying the vehicle, then it's whatever the trust pays for the vehicle, I'm only referring to when they initially conveyed to the trust use Kelley Blue Book value. And was that person?
Yeah, it was due to Kelly Blue Books would that be Kelley Blue Book retailer, Kelley Blue Book wholesale?
Retail? Okay,
that's what I thought I just want to make sure so somebody doesn't use wholesale. Okay, that's it.
So the last two on the chart of accounts are assets is intangibles in IP. Which, what are some good examples of some IP I guess, the in the personal trust to IP personal trust me there's an entire trust for this specific category. Things like, you know, ownership of music rights, or potentially what oil and gas reserves? Well, that's, I mean, that's royalties. I don't know if that's maintained, I would make
mineral rights of any sort, a separate subcategory of intangibles. I would not lump it all together in the 150 account. But patents, copyrights, trademarks, customer lists, prospect lists, Operation manuals, they're all examples of intangibles or intellectual property.
Right. And so, intangibles, I don't know if this is a relevant detail to the trust, because we just had this same conversation about depreciation, but intangibles, have a process called amortization, which is very similar to depreciation, usually over a life of about 1015, sometimes 25 years. And that's the process of essentially getting a deduction benefit of the intangible asset but again, being in the trust, probably not necessary, or completely irrelevant.
Well, that's relevant from the standpoint of the conveyance to the trust. So I'm finding that for most clients that have intangibles being conveyed to either of the trust's, more often than not, their balance sheet is just void of the intangibles. I can't tell you why that's true, I can just tell you that more often than not, when I go to look at it, there are no intangibles, which makes it a lot harder on the client, because they're not going to be able to get a value. But if they do have it on the balance sheet, they usually do have some amount of amortization that's occurred, which is just like depreciation, going to impact the basis at which they can convey to the trust. If prior to the trust's inception, they don't carry on their financials, the intangibles, so they don't add a value to it. There's two schools of thought a couple of the tax attorneys I talked to say, then you convey it to the trust at a nominal amount of $100 $1,000. Not a big amount, because there's no proof that it has any value at all. The other school of thought is, there are several different formulas for valuing intellectual property. And if you google how to value intellectual property, you'll find that there's generally four or five accepted ways to value intellectual property. As long as you document through things like meeting minutes, the reasonable standard you are using for valuing of intellectual property and you're not artificially pulling a number out of thin air. Then, the other school of thought which is more common with CPAs is that Create the value using a formula and convey it to the trust at that value. Now, if it's not on the financials prior to the trust, it's going to create a taxable gain that they need to report on their tax returns when they convey to the trust. So, for most clients, they don't want the trust creation and implementation to create a tax consequence. So when I tell them that they usually go, Okay, I'll do it at $1,000. It just depends on the client. But moving forward, because any income derived from intellectual property in our IP, personal trust, or IP business trust, is 100%, tax deferred in perpetuity. And because down the road, they may choose to actually sell the intellectual property, or license the intellectual property. Because of all of those things, it is a good idea to actually find a way to have $1 amount to convey it at but make sure that the client knows they should not artificially inflate because they will be taxed on that. So don't just pull a number out of thin air just because it sounds good. Okay, last one is investments
that's, that's on the IP, that's definitely one of the most challenging ones for me. And the reason why IPE oftentimes is not recorded on a client's financials is because they created it through, you know, work through time invested, I mean, a customer list is built up over time, intellectual property is built up, you know, on pieces of paper, where there's not always, you know, direct investments that go to build that up. So that's definitely a challenging one and one that, you know, Gina knows we're facing right now with the client, that I'm trying to help convey their assets, but almost all of their fixed assets are completely depreciated. And the you know, they still have this business that's worth quite a bit. So, you know, how do we convey all those assets into the trust without creating the largest capital gain? And then, obviously, they're going to sell that that business based on a valuation? You know, I'm a business valuation expert in that industry. So definitely a relevant conversation for me so far.
Yeah. Yeah. Before we go to investments, can we let me throw an example out? And how would you deal with it? And this is probably good for you too, because let's say a client bought a course, like a looky loo course. And they've taken that course in real estate investing, or whatever, and built up their client list, build up their processes, or standard operating procedures and so on. They've written off the cost of the course from their within their business stuff, and now they want to transfer all that information over to the business, the business trust. How would you look at that, you know, in terms of the cost of the course, the cost of all the SOPs that they developed internally? How would you address that in the IP, intellectual property arena?
So this is a client that has been purchasing things, not selling things? Correct?
Yeah, they purchased a course like a new course. I don't know what courses new has, but I'm just using that as an example. You
should know, John, you should, sorry.
gotten all the courses from way back when before you knew your name? Anyway, so I purchased a new course, like for $2,000. And then, you know, I've been using it over the last five years, or my business bought it. Now I got this trust, and I've developed all these standard operating procedures, you know, based on what I've learned, and what I actually do, you know, to implement what Lou teaches. So now I want to move that into the business trust as an intangible intellectual property. So there's one is of course itself at this point, which we've already written off as a business expense years ago. And then to there is the intellectual property that of, of my standard operating procedure of how I implement one system would you be
I don't think they can they lose courses to either the business trust or the personal trust. Once you've purchased them and consumed them, and then apply them in your business. You don't have income derived from that intellectual property, just because you use those systems to create your own systems. So there's no need to actually put them into the trust. At that point, putting them into the trust is really only for quote unquote, asset protection. But I can't say that I've ever heard of a lawsuit where someone's going after all the courses that judgment, no judgment creditor, but someone who has a judgment against them has paid for. I've never seen that happen ever. So I don't know what the why you would even want to have to worry about putting it into one of the trusts.
There's an interesting distinction here. We don't sell courses, we sell licenses, we sell a license to us. So transferring that license?
Well, I will tell you that for a fact that in any course doesn't matter what it is. But if you're going through an information business to get it, it's always a license to use. It's never a purchase of a course, it's always a license to use it.
Except that their sales tax with product and we don't have product, right? So we
don't any course there's not ever sales tax on because it's always hilarious,
my dear Oh, my goodness, yes. I do this stuff all the time. And you know, different states definitely have their emergency physician
have sales tax on a license to use. Okay, so there's a couple of states where that is true. A license to use creates a sales tax, but you're not ever buying it outright as a product. The only time you might be buying it as a product is if you're buying the business and you're buying the actual intellectual property.
Well, let me just say it this way, we have dealt with this for years. And we actually have a licensed number that is assigned to that particular client, as you should. And when we do deliver them. The the download of the documents, for example, there's a license number attached to that. And I will tell you that from an industry standpoint, others don't do that period. So we need something different than what other people do. And to John's point, the transference of the license is of value because that is what we're supporting. We support the license, we don't support the product, for example. So that licensee, whomever that licensee is, is who owns the license to use that product.
And if you guys didn't realize it, when someone invests in a trust, what they're investing in is a license to use a specific piece of intellectual property. And each piece of intellectual property has a unique serial number. And we are supporting the license to use we are not supporting the creation of the trust, because that would be considered practicing law without a license. So same exact thing in our world blue that you have. Yeah, yep. And there is value in it. So in that case, there is reason to have it conveyed. But you're assigning a license, you're not selling a piece of intellectual property. It's an assignment of a license.
So now further to John's point, what value do you put on that? Because definitely, that access to that license has been used to build perhaps a multimillion dollar business. And many of my clients have multimillion dollar businesses as a result of the license to use. So what is it that they're transferring and at what value?
So in both your case, and in my case, our client agreements state that they are not allowed to ever transfer that license outside of their organization. Mine definitely says that does yours as well, John?
It does, it does. It's, it's exclusive to the purchaser.
So, at best, we can go to Lou and say, Hey, Lou, I want to sign this to my trust. Lou's definitely going to allow that. But in terms of value, the maximum value that could be ascribed to it would be the quote unquote, basis, which is what you paid for the license.
So the fact that it was written off to John's point in years past,
but bring it down to a zero basis.
Uh huh. And I'm not sure I still am not 100% sure whether it needs to be conveyed into the product, this is like a informational product that you use just to grow your information, your knowledge, to me, that's not really an intangible asset that needs to be put into the trust.
In the case of loose system, Anthony, John's heirs, whoever takes over his business, they are going to still want to use the systems that are in the license to use that Lu offers. Okay, it's, it's something that would pass down generationally. So there is a good reason to assign it and take that all the way to the level of going to lose organization and making sure that they know it was assigned. Now with the trust, the personal trust isn't ever going to, quote unquote, be assigned. Right, it's just going to be utilized by the family and with through the successor, successor trustees, successor trust, protector, beneficiaries, etc. Right? With the business trust, however, the investment in the business trust, could actually get a sign the license to use, it could actually get assigned in the future, if the business was ever sold. Then which is the new buyer would need to have a personal trust in order to continue getting the tax mitigation benefits. And again, the value of it would go back to the amount that was invested in it. Whatever the basis is, right. But those are both intangibles. So on an assignment of the license and lose case, you might use $100, if the whole thing is already been written off.
Does that answer your question, John.
This is a good discussion, this is a good discussion in there's gonna be a lot of people coming in and out with this kind of type of issue. And I've always had a problem with intellectual property.
And the thing that does have value is the intellectual property you've created as a result of making use of your license to use the system that adds value that you absolutely can include in the commands. Meaning your operations manual, your customer list, your prospect lists, the systems that you have created to run your real estate investing business, those have value.
Yeah. So how do you value them? Yeah,
there are four, five known ways to value intellectual property. You can use any of them. But document which one you use, and why in meeting minutes. And pray that the client actually has a value of the IP on their current balance sheet before the inception of the trust. Because then you just use whatever amount is valued at on the balance sheet.
But who do I mean, so few people that we're working with now would have ever done that? I'm aware of what you know, establishing that value is dicey business, it seems.
The problem with it is, whatever value you're going to ascribe to it, it's going to create a gain that should be reported on your 1040 return. And it's a balancing act, clients are going to want the Deus Ex to your juice 65 account to have as high a balance as possible. So they have the greatest amount of money that they can take out tax free plus interest. At the same time, they're gonna balk if they have a negative tax consequence for implementation of the trust. So it's a balancing act. Some clients are going to choose to pay a little bit in taxes to get the addition to their demand. No. Other clients are going to want to pay as little in taxes as possible, even if it means a smaller amount on their demand. And everything in between. With those two extremes, I don't ever sit down and calculate the value of the IP for the client. That is something that the client needs to do, we can guide them on how to do it, and how to document what number they choose. But we should not be doing it for them. And the things that are out there as methods for valuing IP, they're pretty straightforward. There are even several companies out there that you can hire for reasonable amounts of money, not super gargantuan, you know, 10s of 1000s of dollars, that will give you a proper valuation with documentation and everything for IP, the bigger the estate, and the more IP that's there, the more likely I'd be to recommend that we use one of those IP valuation companies to come up with the actual number that gets conveyed.
Do you have some suggestions there?
I'll try and put a list together for it. I haven't done that. But there's three or four that I know of that I think would be good. Thank you. Yeah, that I can definitely do. Okay, any other questions about assets? Or can we go into liabilities?
Okay, Anthony, take it away on liabilities.
Awesome, very good. So the next four or five, all these payables are current liabilities, and a current liability is one that represents an obligation to come due within one year. So that's what all these accounts payable are. Accounts Payable is like a invoice that you received from
didn't do investments. 160
Gotcha. Okay, want to hit that would be me investments would be an investment in a company, it would represent equity ownership of a business or have, you know, some kind of got to
think about it slightly differently. This is the trust's investments, that might mean brokerage accounts, that might mean crypto accounts, that could mean an investment in the business. If the trust is investing in a business. It can mean lots of different things. Right?
So the reporting, it's it's just going to record the cost basis so that we can establish that 260 account, it doesn't seem necessary to, you know, track fair market values. But you're just going to insert and the investments, it's going to be investment in, you know, TD Ameritrade brokerage, Oh, 123. And that's for equals the cost basis. And then it'll be, you know, investment in, you know, Metamask wallet or in Coinbase. For what wouldn't cost basis?
Wouldn't that also include the basis account of the business trust, since the personal trust? Is the beneficiary?
Is there any investment? I'm trying to understand what I mean, I guess, I guess, if there's
no, that's why I'm, that's why I'm bringing it up. I'm just asking. So when we create the if the business trust actually connects to the personal trust, does the basis account in the business trust? Do we ever get any credit for that on the as an investment on the personal trust? You know,
say that again, Kevin?
So since we're talking about the 160, what my question is, is, since the personal trust is the beneficiary of the business trust, as the basis account of the business trust, is that considered an investment? So if the personal trust is technically the owner of the business trust, would the value of the basis account be in the 160? For the personal trust?
And that's an interesting idea, isn't it?
I think no, go ahead and change my answer if you think better, but I think no, because that's kind of just keeping track of the fair market value or like your current status, where, you know, this balance sheet is more for, you know, establishing all the assets on at their cost basis on it, similar to how you wouldn't track the fair market value of your stock portfolio. You know, you're not exactly establishing balance sheet values for some sort of track.
Do you take it a take it a step so go take a step back? So does how does like Coca Cola you know, when you look at the Collavate Buying
the for instance, I wish it was here, I'm not going to be able to give you an answer on this one today, Kevin,
that's fine. I just was bringing it up because it just popped in my head, I was like, we're a
bunch of clients that have conveyed properties to their personal trust. Let's say they have 50 properties, they put all of them in the personal trust, they recorded it. And the income has been flowing through the personal trust for one year or longer in many cases. Now, they want to move it to separate divisions in the business trust. When we go to do that, in the business Trust, the personal trust will have a basis account in each division. And the value at which the property is conveyed to the business trust is going to form the amount of that basis account. I would think that we should have some way to track that investment that's being made in the business just for the personal trust. But I don't know how we would do that. It is an asset. It's monies that are due the personal trust at some point in the future. It's an investment.
Right, it seems that seems reportable on the big I mean, just a piece of financial information that would be reported on the business trust.
Wouldn't that be a sale from the one trust to the other trust, though, since it's a conveyance?
So this is one of the things that I've actually got an outstanding email to different x attorneys asking the question about
well, that's why I always go back to them the stock side of things, because this gets done all the time, when you're buying companies. And that's why I just look at whether it's a property a building, like, like a piece of real estate, yes, it's slightly different. But just treat it like since each property is like its own little business, why not look at it like you're buying a business that has a number of different producing assets alike. And that was why he was going down the road of Coca Cola and its subsidiaries because like, Coca Cola spent a billion dollars to buy Dasani, just because they wanted the branding and all the goodwill that came with it. Because then they were going to put all their other sort of water assets underneath that, that banner. Yeah.
Interesting, the
different reporting requirements for a public company regulated under GAAP financials versus cost and recording cash basis, you know, taxpayer, but,
but that's what I mean, Anthony, so they have a much higher bar, but that's why I was saying they, we could look to them as an example. And as long as we're, you know, maybe we don't go to that level of accounting, but it's, it's at least then something that's sort of hanging our hat against, because then they're not only dealing with their additional Sarbanes Oxley requirements, they're dealing with, you know, they're dealing with the tax code, just like we are.
Yeah, I mean, they, they got to keep their books for their, their, you know, public financials, they also had to keep your books for for tax bases. And so tax, I mean, just just us following it for tax basis would be primarily cash basis reporting and not, you know, items of other comprehensive income where we're, you know, marking up items to fair market value. And staying, staying at a just cost, you know, cash basis method of accounting, and, you know, preparing the QuickBooks for tax preparation is, is all that's really necessary.
I'll get back to you guys on that later on when we get to the business trust segment, but I don't have an answer today.
Well, Lou would since he's coming for NAS wouldn't bill be a guy to ask Virgina? Because mill Knoll is
attacking could be. Yeah. And in fact, I have a meeting with him today.
Yes, he doesn't get the complex trust. So I don't know that. That's gonna be helpful. If you want to bounce it off of them feel free. Sure. Gotcha. Okay, now we'll go on to liabilities.
Yes, payables quickly, or just whatever amounts are payable as of the year end, as you can see in the explanation, you know, list year end balance. So whatever amounts you owe to potentially a contractor on invoices, on interest on loans, on any taxes that are still owed, or you know, 1099 contractors that you need to pay out, that's going to be the short term, the current liabilities that aren't 200 to 20, to 25, to 30 to 50, notes payable, oftentimes, that's no longer term. So that's why that's separate. If you have to pay any loans that are, you know, decades long, then that's what the notes payable would be notes on a home notes on a big investment. So those are the majority of the liabilities. And those are pretty straightforward and simple. No Depreciation or Amortization there. So next is the trustee accounts and the beneficiaries accounts, which represent a liability, because whatever assets were contributed into the trust at cost basis, the note the activity, the trust, issues a demand note back to the trustees, or the beneficiaries equal to that cost basis. So it represents the obligation to pay that amount back at some point. So it's similar to a note payable, but you'll specify, you know, whose note it is under 260, under 265.
So let's go into a little more detail on interest payable, and the 260 and 265 accounts. The 260. And the 265. Accounts are the singular, most important accounts in the clients trust long term. And they're the thing that the clients get wrong more often than not, because of the fact that the clients who you have bookkeepers now are utilizing people who are bookkeepers who don't understand our trust. I have seen on so many occasions, I can't even count them all, that the bookkeepers that are using, just don't put any numbers into the 260 or 265 account, because they just don't understand it. And they don't bother to reach out to me to figure it out. That's a problem. That's a giant problem. And especially for those clients using deposit expense registers, in order to document any of the liability accounts, it becomes journal entries on the deposit expense register, which again, is something that clients struggle with. So they just don't do it at all. You need to emphasize to the client early on, that the reason we have them do a purchase of assets and liabilities spreadsheet, is so that during the first tax year for the trust, whoever does those taxes can make sure that the assets and the liabilities are documented properly on the financials for the trust. Is it a perfect way of doing it? No. But by having the purchase of assets and liabilities spreadsheet being thorough and detailed, it's a double check for the tax professional. If they're not seeing those numbers on what the client gives them for their books, then they can at least go and have the client go back and they can guide the client in getting it under this right. Because it's crucial that they have those. I'm so sorry, guys.
So if the client started out as a trustee, and they created a 260 account, because they were a trustee, they then play musical chairs. And now in conveying the majority of their assets, they have become a beneficiary. Tell them not to create a second account for that. Use one account to track the whole thing. Otherwise, they're going to end up with multiple demand notes. And it's going to really make the situation worse, not better. By virtue of the fact that there is something called a 265 account, which is used when beneficiaries convey assets to the trust. That also means that beneficiaries can convey assets to the trust if the trustee allows them to it's always going to be up to whoever then in power trust. Is as to whether or not they want the trust to buy those assets. But if there's a good reason for it, they can convey assets to the trust as a beneficiary. I usually tell the client that if they intend to file if they intend to play musical chairs, don't start out with a 260 account at all. Start out with a 265 account right away. It just makes more sense. So when they do the initial conveyance, like, let's say they're opening up Trust Bank Accounts, and they have put $500 into the Trust Bank account? Well, that is something that gets tracked in the G six here, the G 65 account, tell him even if they started out as trustee, and deposited that 100 bucks into the Trust Bank Account, document in a 265 account, not a 260 account. Why do I suggest that? Well, because of the whole reason that they're playing musical chairs, it's a related party transaction, if they're acting as trustee, if their intention is to really be a beneficiary, document it that way from the start, it just will make more sense if there's ever an audit. And in question about liabilities, or two 610 265 accounts.
And just from what you just said, then if we're basically doing the musical chairs and staying beneficiaries, for sort of the term because we've gotten everything conveyed, then we basically continue to be beneficiaries.
But if you go back to being a trustee, you're not conveying any more assets to the trust. But that doesn't change the fact that the trust owes you money through your 265 account.
Correct, right. But what I'm what I'm, what I should have maybe worded it as is, is we're only chit converting back when you publish a new update. So that basically is the reason that we can then utilize it is IRS comes knocking.
So that is one reason, but there could be many others. So if a client is playing musical chairs, they must make it look and they must see it as they're stepping down permanently. If a client ever said to the IRS, I stepped down as trustee and became a beneficiary just temporarily, that's a really bad thing. The IRS will say that whoever got put into the role of trustee was there as what legally is called a straw man, meaning is still the client acting as trustee through another person. In that case, it would be treated as a related party transaction, in which case, the client is going to either have to do a gift tax return on the difference between the sale price and fair market value, or they're gonna get taxed on the difference between the sale price and fair market value. So we tell the client when they stepped down, they need to see it as permanent. But the trust, utilizing the uniform trust code, makes it possible for the trust to be amended based on changes of circumstance. Changes of circumstance could mean lots of different things. Let's say the clients daughter has a baby, and they go, You know what, we're gonna add the baby as a beneficiary. And at the same time, if we're going to do that might as well go back to being a trustee. Totally legit thing, even if they just finished the conveyances last week, it's a totally legit thing. There's a change in circumstance that could justify them going back to being nasty. Got it? Okay. Our trust fighters program is another change in circumstance that could justify them going back to being trustee, which is why I really want to get one to two updates out per year. So the clients don't have to wait too long to go back to being a trustee. But law and changes in circumstance can justify the transition of going back to being a trustee. They were just gonna base it on an arbitrary amount of time.
Sure, sure. And we are going to basically between the trust watch will be documenting and then that can be put in as meeting minutes for the client. Correct? Whether it's us or another client. All right. Yeah. Okay, cool.
So Gina, when you come in and you're starting out as a beneficiary and you so you're, you convey your house to the trust that goes, will at the beginning to go to the 265 account, or were they go to the 260. If you come in, you know, the doing of musical chairs.
When clients start out, they usually start out as trustee, not as beneficiary, because it makes it easier to open brokerage accounts and bank accounts, right. In order to open those accounts, they have to put something in them, right? You want to instruct them to put a nominal amount in them don't move everything upfront. Okay? Because otherwise, it's a related party transaction. Now. In the case of cash, if all that's happening, is cash is going into the brokerage account and cash is going into the bank account. You're not moving securities into the brokerage account yet? Well, cash is conveyed at fair market value anyway. So here's of the trustee, and it's related party transaction. Cash is conveyed at fair market value. So there's no problem with doing that. Right. But before they convey anything added value of less than fair market value, they should consider stepping down to become beneficiaries. So they don't have to worry about tax being taxed on the gain.
Okay, gotcha. Okay, I'm writing that down, step down as Ben, okay, then step down, step down as beneficiaries
don't step down as trustee and become beneficiary,
okay, as trustee and become okay. And then Okay, right. So once they shut down, right, so once they do that, then they sell the I mean, convey that everything, right, convey everything. And then that's when like, because when you first do your home residential desta, 250, right, or if you're married 500k,
right, primary residence has to be conveyed at fair market value as well. Right. So if you have a gain of less than 250, if you're single, or 500, if you're married, then you're not going to use all of your homestead exemption. But lately, it seems like especially our California clients, their value on their homes, has increased way more than the federal homestead exemption amount. In which case, I don't know what to tell them because they can't convey at less than fair market value. They can go out and find a realtor potentially, who would write a letter stating that the value is this on this date. And if that's low enough, that they're not going to have to be an actual game. That's awesome. Otherwise, they're going to have to do a gift tax return for the difference between what they originally paid for it, plus the improvements plus the federal homestead exemption, the 250, or the 500. Whatever that total is, and what fair market value is, whatever the difference is going to have to be put on a gift tax return. I have yet to find more than two clients, where they'd already used all of their gift tax exemption. So more often than not, they're going to have some available exemption to use in conveying their primary residence. They can convey the primary residence while they're a trustee because it's being conveyed it FMV and not at bases.
Okay, um,
everything else, though, has to be done with them as a beneficiary unless they're prepared to file a gift tax return.
Gotcha. Okay, and then what if they if it let's just say all the values workout in because I haven't gotten my demand note yet? I'm trying to figure out does that come back on demand note to the trustee when it's done properly? The Homestead amount
if that's what gets added to the 260 account, or the 265 account, is what's going to show up on the Demand No. So just because you don't have your demand, no. Doesn't mean you don't know what the value of the demand note is.
Right. Right. So yeah, so I was just trying to say
you're selling your property Get your primary residence to the trust at fair market value. If that is if the FMV is greater than what you paid for it, plus the improvements in it, then you make use of your federal homestead exemption up to fair market value without going over it. So let's say that your purchase price plus improvements is 500,000. And you're married, so you have a $500,000. homestead exemption. Right, but FMV on your property is currently 750. The gain is 250. So you're only going to use to 150 1000 of your $500,000 homestead exemption value that gets added to your 260 account or your 265 account is the full 750. Okay, all right.
Cool. Okay, I'm following I got you. Thank you.
Okay. Equity.
What is the equity account? Anthony?
I'm actually question for you. I'm just trying to start I'm struggling where to actually allocate this. I'm looking at myself and a couple of people using an IBC Infinite Banking concept, where we purchase a life insurance and fund a life insurance policy and take out loans against it. So would that be in the trustee account? investment account? You know, I'm not sure actually where we would use life insurance policy?
It depends. Who is the buyer of the policy? Like who's paying for it? The trust? Who's the owner of the policy? The trust? Who's the beneficiary of the policy? The trust? Anthony, what account number would that go to?
Well, so you'd have premiums that you're paying monthly, or annually. And so you would record an insurance expense? Because that would be an eligible deduction? If it's the beneficiary
Infinite Banking concept, there's cash value in the policy day one? Yeah.
So. So that would be I mean, that right there would represent an assets. I'm trying to determine what the what the other side of that would be, because you would come in again, this is the concept of kind of tracking the, the value so you could establish an asset of the cash value that you have accessible to you. I'm trying to think of what the other side of it because an asset is a debit. So you establish the asset, and then, you know, the credit that you would establish corresponding, I
think it would be an account payable, it'd be a combination of the expense and the account payable,
right? There's just a, there's likely a discrepancy between the amount of I know the amount that you contribute and the cash value and that income, that is, you know, that discrepancy total is non taxable. So that would essentially just add to your equity. Which isn't a distribution to beneficiaries, not this 310 account, but it's, you know, tax free income.
Well, it's, I was considering it as a note or a loan against the policy. Because I can pay it back and increase my cash value.
That's only if you take out the loan, I would, I would avoid establishing it on the balance sheet until you do take out that loan.
stablished it on because of the expense upfront. So it's gotta go on somewhere.
Well, it just meant you're just record the expense.
Couldn't you put it under a 120 savings account? Then also, you did have it under an accounts payable? Yeah. The death benefit portion of it, I guess you'd actually only track the cash value. So that should That's
correct. I'm driving the cash value.
Right. And then when you do a distribution or alone, you set it up as alone. And then with an accounts receivable on it.
I love the fact that I have smart People on my calls
I talking about? Yeah, I don't know about that, because I'm gonna, I'm gonna say I tend towards, you know, disagreeing with establishing the cash value as a,
it's because it's an IBC not a life insurance policy. If it were a life insurance policy, you would not do that. But the idea of an IBC, you would put a
policy versus a whole life policy. So if you're going to take out a loan against the policy, yeah, you're gonna want to establish, you know, the cash received, you're gonna want to establish the loan, and then, you know, pay it back. But I don't believe because you wouldn't establish it, you know, I mean, there's no real reporting requirements as a, you know, an individual with a, an, you know, an insurance policy. So if you, you're paying the insurance policy, yes, you're recording the expense. If you're taking out the loan, then yes, you're recording the loan that you have to pay back, but just tracking, you know, the premiums still owed, and tracking the current cash value? And then you know, you're going to, what are you going to do are you going to plug the rest to, you know, unrecognized income or, you know, not on non taxable income, you know, for the growth in the cash value that is in excess of the premiums contributed? I don't think so I think just keeping it off the books completely, until which time you take out a loan against it. That's what I'm gonna lean towards. I'm obviously not 100% Either way, but I don't think establishing it on the balance sheet is necessary, I think just recording the expense payments. And then
can I make a because I'm not what I want to say competent on this one. But I wanted to make an incompetent statement. So that can be clarified. If they've taken out a loan from let's say, it's an IUL. When it comes to it can not go into the 260 account, because it's tax free.
Now, if you're using trust monies to pay for it, you cannot put it into the 260 account. If you take
like one of the things we a lot of people aren't, they use the Infinite Banking concept, it's basically their checking account. So you're gonna have to, at some point account for because they'll just have monies put in, they'll pay various bills from it, leave the balance of the funds in there, at some point, pay against it, take a loan against it, whatever the values are, as they build up. It's, it's more than just a standard whole life or permanent policy that
are you get a loan from? Are you paying directly out of the account? Holding the cash value? Or are you transferring from it transferring from the policy and putting it into your bank account? And that's where you pay the expenses? Are you do you have an account for the policy that you're paying directly out of?
Yeah, a lot of times, it'll you'll receive the funds as a loan to pay out. So you'll pay it, then you'll write a check back into it, like a loan back out of it, and so forth. So people use it very occasionally, and some people operate out of it.
Yes. So if it's, there's an actual account that you're paying expenses out of that you are operating as an actual bank account, then as it would make sense to track that because you want to make sure you're recovering and recording all of the expenses that are paid of paid out of it. But if if you're taking money from the policy and putting it into the Trust Bank account, then you just need to track the expenses that are paid of paid for out of the Trust Bank Account, where the the transactions going from the policy to the the trust are essentially issuing a loan, and then paying that loan back. So you would record the loan, and you would record the expense. But again, I wouldn't really track the cash value of it, because it's, it's changing consistently. So if it takes the form of a loan, then you I'm gonna go with what I said. But if you can actually use it as a bank account, like really, as a bank, you can take from the cash value that you are you're paying for, you know, a 711 trip with a card based on the cash value, then yes, you'd want to track it, but if you have to first send a check from the cash value to the Trust Bank account, and then pay for expenses out of the Trust Bank account. Then I would just record loan interest and says
to, to make a comment on that, because I'm only familiar with IU Elle's infinite banking is too much. But if you're doing the, if you're taking a loan from the IUL, or let's say this, you're getting your W two funds, and you're putting it into the IUL, then you take him back, let's say that's 3000, you're putting 3000 into the IUL. And then you're only taking back out 2000. When you're taking that 2000 out, it's going to your trust account. So when you're doing that, then you create a record for the loan and then a record for the expense. It doesn't go on to the 260 account, correct?
Yeah, trust dollars, you don't use the 260, or the 265 account when you're using trust dollars.
When you use the trust would be the owner of the policy. If you as trustee, we're still owner of the policy. That would probably be one scenario, but the trust should be the owner of the policy. So it's all trust business. 100%.
Okay, so if in that I'm happy, sad, because maybe that's where my mind is confused at. So if the if the owner is the trust, the said, buyer is the trust but the beneficiary is first if this Yeah, but if it's a person, because if you are establishing it out, you can't transfer it over it, you got to establish it as a person first. So
if the I don't think so I never have.
Okay, so, maybe the owner
and the beneficiary, it absolutely can,
okay, owner and beneficiary and then
the insured as an individual, that Okay, so
that's what I'm saying wrong. Okay. That's, that's what I'm saying. Well, okay, then. Sure. Okay, that's okay. So right. So the insurance is a person, right? The insured. Okay, well, okay.
Yeah, that can be a trustee or a beneficiary or somebody that is a predominant importance and trust structure of some sort.
Right. Okay. Now, now, okay, I was saying the incorrect thing. I'm with you now. Okay. So again, that loan will come into the trust, but it would be you just create a little a tracker for the loan and the expense. But I just don't understand why it doesn't come into the 260 account, because this cash in that I just, I'm missing something.
To 60 as a trustee account,
oh, for the
silver trust, somebody put money into the trust, or just had income from assets that someone put in the trust. When the trust goes to buy something, let's say that trust is going to buy a house, right? It doesn't impact the 260 account or the 265 account at all, it's trust on the money that is being used to buy a trust owned asset. Okay. In this case, the life insurance policy, while the insured might be a trustee or a beneficiary, it's just their life that's being insured. The money being used to buy the asset that's owned by the trust is trust money, not just the money. Gotcha. doesn't impact the two six year that 265 account at all? Okay, yeah.
So 260 60 is interesting, because it's a liability when, normally an account like this would be an equity in, for example, a business, because the way I think about it is a 260 account is your contributions and your distributions. So anytime you put money into the trust from you personally, then that's a contribution. And it's going to increase to 60. Because whatever you put into the the trust, personally, the trust owes you the cost basis equivalent. Anytime you take dollars out to distribution, and you're going to reduce the demand note. So when you pay for food funding fashion, because it's not an eligible trust expense, it is considered a distribution, and therefore paying for food for under fashion, meals, entertainment or clothing is going to reduce the demand Nope. Consider the distribution of that, you know, the amount owed.
Okay. Yeah, everybody. Thanks. John, I'll have to look into that further. Ask your tax professional, what they recommend on it.
No problem. Sorry to make everything so complicated.
Well, you're not the only client we have doing IBC. So we really should get an answer that we can actually add to the notes at the bottom of the chart of accounts. So it's consistent across the board for everybody.
Right that it's good to wrap our head around the concept.
Yeah. So going back to where we were, which is the equity account. If you're distributing monies to a beneficiary throughout the year, then in doing that, if the beneficiary didn't have a 265 account because they didn't convey any assets to the trust, then that beneficiary is going to get a k one at your end, for whatever amounts were paid to the beneficiary directly. That's the equity account. It's going to track what ever happens to be whatever is going to report on the k one. Once the tax return is filed and the k one is issued, then a contra entropy happens. So it zeros out the equity account. At urine, it should always get zeroed out by virtue of the fact that the k one data issue. That's pretty straightforward. If a beneficiary has a 265 account, it's up to the beneficiary, whether they want that distribution to be done through the 265 account, or whether they want taxable income, they get to decide. That brings us to income and expenses. They should be fairly straightforward. income from interest, which is a 405 account. One way in which interest income occurs in the 405 account is when the client has one ad that they take out through their 260 account or their 265 account. There will be an amount of interest attributed to it. If it's an the first year of the trust, that.
You did anybody lose her audio? Either we lost her.
I thought it was just me.
We lost she lost her internet. She lost her internet for some reason. Yeah, cuz it dropped her.
The second, I think the most important thing with the income statement is tracking the different classes of income because you can have ordinary income, short term capital gains long term capital gains. And while all of it is eligible for deferral in perpetuity, if the income were to ever be distributed to a beneficiary, it would retake the form of that income. So it is necessary to track when you're deferring income, that to track the nature of that income. So when you have, you know, income coming in, that's why it's important to class interest income, short term capital gains, long term capital gains. The expenses are not as you know, obviously, you have to categorize all of them to put on the tax return. But, you know, expenses just go to offset that income, where, you know, it's not expenses are being distributed, in the same manner that ordinary income, long term capital gains or short term capital gains are.
So for an example, sorry, go ahead.
No, go ahead, sir. I have a simple question. Oh,
so for an example, when you do the W two income that comes in we know that goes to the 260. But does that does that affect these accounts?
No, because W two income is earned income to the individual. So that is not an income that's being you know, that's that's not an income that's being recognized by the trust. So really, what's happening is you're contributing cash to the trust, you're not contributing w two income. So that's what right 260 account because the entry on the trust would be to increase cash, and to increase the amount owed to you. Because you contributed that cash. So if you give the trust $10,000 That trust owes you $10,000 That demand note whose safety account represents the $10,000 that the trust now owes you because you gave it that $10,000 So because it's w two income gets taxed to you. And the trust the trust can't receive w two income.
Gotcha. So which I understood I just wanted to make sure I still was okay with that. But then if it's like a rental property, then you break down. What would that fall under?
That would be ordinary income. I believe on the chart of accounts genius and have it up. It's not up anymore.
I'm sorry, I got kicked out. Don't worry. Find it. would she come back?
If there's an account for that rent or lease incomes? And yes, it would be classed in that manner.
Okay, ordinary. Okay. Thank you.
So my question was simple to is there as a CPA and stuff in like some of the literature is there actually a, because I've had debates with various EAS and CPAs and stuff on certain categories for expenses in the past, I just didn't know if there's a, like a guideline that the IRS publishes or that CPAs have, so that I can clarify, because I'm also utilize would utilize it for this spreadsheet that we're putting together.
Like, the common categories versus,
yeah, because like you can, you know, you can sometimes you have different ways of thinking about it, depending on what industry so like for us for real estate, you know, if you're doing a lot of rehabs, then there can be different ways of thinking about it. But I just was wondering if there's sort of like a CPA standard that we should be going off of?
I would say, not really like publication, specifically for expenses, like all of the different topics, like, you know, looking at real estate related expenses, they're going to have different publications for that specific industry, or, you know, kind of tax question, you know, on passive activities. You can go and find on the on the, you know, instructions to the 1041 instructions. So, the 10, for production for the Schedule II, you know, they're going to discuss all those eligible related expenses. And there's a category on there, really, it just matters more than you know, because obviously, it matters less the category and more the, I guess, the substance of the expense. And however you are to categorize it, as long as it fits under the ordinary and necessary, you know, the standard there, then it's going to be an eligible expense. So they definitely have those common categories, just on the Schedule E on the schedule C on the different business returns. But in terms of a, you know, the common categories? Not that I know of maybe I'm missing something, but they don't really have like a list of here's the most common categories of expenses, other than what they already have in the forms.
Got it. Okay, perfect.
Just show the screen again, I can do that. I think.
Actually, what while she's doing that, I'll add one more question, your regular mortgage will come out of the short term.
So that's, that's going to be paying off the mortgage. Right? Where it's not really going to affect the income. On this, yeah, this is an extreme mortgage. When you pay it off, what happens is you you credit cash, because you reduce the amount of cash you have. And you're going to debit both the liability for the principle total. And you're going to debit interest expense, because you're paying both mortgage interest and you're paying mortgage principal, when you so it's going to it's going it's gonna have a section where you're paying, you know, whatever percent under interest expense number 500. There another amount on the the loan balance, which can be, you know, 200 or I'm not looking at the asset anymore, whatever account number that is, right.
Cash. Oh, you said something, and it broke out something cash.
Oh, you're just paying it with cash. That's the corresponding credit. After you, you know, the account that gets reduced when you reduce the total, you know, loan payable.
Oh, okay. All right. So yes, the principal comes out of the interest. I mean, I'm sorry, the interest payment comes out of 500. But the principal comes out of the two something 100 We were guessing.
Yeah, so
basically, the, the accounting equation is assets equals liabilities plus equity. And double entry accounting says that for every debit, there must be a corresponding credit. So if you pay $2,000 for your mortgage payment, what happens on one side you're paying cash. So reduce cash you credit cash by $2,000 If you have a credit, corresponding debit. So what is that? $2,000 debit. Well, when you pay off a mortgage, you pay off both interest, and you pay off principal. So the interest, say it's $500 worth of interest, you have $1,500 with the principal that you're paying off. So that journal entry, that accounting entry would be a debit of interest expense, which is that 500 account for $500. You would debit the liability, because you're reducing the liability, the 220 account. Yeah, 220 or 250. When you're paying off the
200 accounts, interest payable, no notes payable
250. Exactly. So it would be five. So account 500, you would debit 500, because that's $500 for interest expense, account 250, the note payable, because 1500 of that, of that payment. So you debit that 250 account, and then, because you paid $2,000 of cash, you credit 2000
Gotcha. I just likewise, when a client is conveying a property that's subject to a mortgage, to the trust, they're gonna conveyed the property on a bill of sale, they're going to break it down to land, pause buildings. So we'll know what the amount is, that's going to get debited to the two asset accounts for land and buildings. Simultaneously, they're going to assign the note, which is the mortgage to the trust, whatever principal amount, the balance of that note is, is going to get credited to the liability account, which is 250. That's what happens when they convey that asset and liability to the trust. Now, on a monthly basis, the trust is now going to make the mortgage payment. When the trust makes the mortgage payment, you do exactly what Anthony just walked you through. It impacts multiple accounts. This is why I hated accounting. Double entry accounting counting just makes my head spin.
Well, I don't hate it. I love it. I just wanted to make sure that I was following. Okay, I just That's why I thought that I was wrong on this topic. Okay.
So let me get back down here to the expense. One of the other comments I want to make about expenses overall, every single line item that's in this chart of accounts as an expense is absolutely an allowable trust expense that is deducted on the other deductions schedule. So this is why should in tax return first, and then said, Hey, this can help you better understand what to do with your bookkeeping. If you're ever wondering, is this something I can pay for out of the trust is or the legit trust expense? Go back and look at that sample tax return? And then look at your chart of accounts. Because it's gonna tell you is it an allowable expense or not? If you look at all of the expenses, and you go, Oh, gosh, I don't know what expense category to put this in. It probably means that it's not an allowable trust expense. And therefore it should not be paid for by the trust. If it got paid for by the trust anyway by accident, then it should be something that is taken and applied to the 260 or the 265 account as if it was a return of principal plus interest to the client.
Okay, continue Anthony.
So we just went over the different types of income, where you can see there, there is the interest income, dividend income, short term capital gains, long term capital gains, rental property, IP related income, looks like the the personal use lease, royalties, business income and k one and while Gina's internet was out, we kind of quickly went over the fact that tracking the different types of income is necessary because while they're being deferred, obviously, all of those forms of income are eligible for the deferral whereas the the the winter, if it were ever to be distributed, then it would re take the form of the income initially received. What other information would you add to that, you know,
if it is a capital gain, that got added to Corpus and declared as an extraordinary dividend on the tax returns so that it has a zero sum capital gains tax, as long as that capital gain remains in Corpus for a year in one day A, when it goes to be distributed, it gets distributed out on a k one as an ordinary dividend, not as ordinary income. But it has to be interest corpus for a year on one day before that can happen. Now, keep in mind that when I say kept in Corpus, I'm not saying that the capital gain has to be staying in a bank account, as long as it's being used in the trust's name doesn't matter whether that money got re re put back out there as buying a new property, that's still in trust corpus.
That's all go ahead.
Awesome. So that's that's a different forms of income. You know, K, one income business income. So let me know any questions there quickly jumped to expenses. Again, like Tina said, All of these are eligible trust expenses, if there are any that you incur, that might not perfectly fit into these categories. My recommendation would be to add one, you know, add it add an account under the Chart of Accounts, if you're going to consistently have an expense that doesn't perfectly fit into one of these categories, but is an eligible trust expense? So
real quick, I was just I just got to thinking, Do you know how should we sort of visualize or think because the way the 1040 is sort of working is they're assuming that, you know, the individual that's might be the business owner is pulling, you know, either a k one or another document from a business. And so what I'm trying to figure out is, is some of these lines to talk about, like a business expense and business income piece, we're talking about, typically the business trust in our world. So I'm just we're but we're going to be getting a k one from the business stress. So would we always just ensue, assume that it's going to be k one income?
Its parents. So if it's going to be active business income, active business income, has two parts to it. First, if the assets are held in the personal trust, and leased to the business trust, that converts the active business income to the business just to being a passive income, rental, rental lease income to the personal trust in the business just gets a deduction, for paying that lease payment to the personal trust, then we have the second part of it, which is the balance of that income, the balance of that income is going to pass through to the personal trust, it's going to get mixed with all of the other valid trust, trust income, all of which gets used to pay for valid trust expenses. And by doing it that way, we then get down to the net income to the personal trust and apply a formula to determine what portion came from active versus passive. What ever part came from active is typically going to be paid to the client, and it will report on a 1099. If the client is a trustee in the business trust, and a trustee in the personal trust. If the client is a trustee in the business trust and a beneficiary in the personal trust, then only then would it report on a k one. If the client has a trifecta package, however, it can also be donated to the foundation so that no k one or 1099 gets issued to the client at all.
Okay, no, and that's exactly sort of where I was thinking. And so I'm trying to just visualize the flows and just sort of make sure I'm thinking correctly in terms of there's really like you just said three different domains depending on what we all have or what not only us, but the clients have and then how we're gonna basically and I know the tax advisers will be dealing with this, but I just thinking so if they have questions, because I know a lot of them to where they were trying to wrap their heads around it, how do we sort of point them in the right direction, and I think these documents as we sort of point them out to folks will help sort of be a good guideposts
If all else fails, send it off to go talk to their tax advisor. Right now 100% of new clients are working with Dave Phillips team. They're not working with any of our other potential tax people. Yeah, they're still free to utilize in our day if they so choose. But I'm not referring business directly to Susan, for first year, they're always going to Dave. Got it. Okay.
And speaking of what he was mentioning, oh, no, you mentioned Trifecta package, which made me think of, there's a code 26 Us 170 that talks about charitable and contributions. And then in it is section three, which talks about future contribution. So if someone only bought the business trust, and the family trust, but they didn't get the foundation, this code talks about potential, quote, unquote, future contribution. So it's held in the trust until they're ready to release it. So I don't know if you look into that. I guess that should be the first question. And if so, because someone mentioned like you can create another line, is that possible to do?
It? I don't know that I've followed the question well enough to answer it. Can you just give me one more time?
Sure. Sure. Sorry about that. So the code is 26 USC 170, which talks about charitable contributions. So if someone only had the business trust in the family trust, then that means the money gets stuck in the family trust, right? That's because they don't have the foundation to move the money to. So I was saying, even though we know our stuff is deferred, would it be
okay? On that's not true, necessarily. Okay, as long as they want to make a donation to any qualified charity. So any 501 C three, not just to a homeless individual, right, then it is a valid deduction, it will show up under charitable contributions. And a complex trust can donate up to 100% of its net income, even if it's not the client's own private family foundation that they're making the donation to.
Okay, so I must not be being clear. So I'm saying if the trust established a lot of money, I'm trying to dumb down what I'm saying. And instead of his saying that it made so much income, and it couldn't be, and they don't have a foundation to give it to, I'm saying this code is saying, for future, don't charitable donations, you can hold it under, like, could we create a line to say we can hold future donations in this accounting line is what I'm trying to say. Okay, that's yeah, that's what
that's not complex trust, you're thinking corporations, that's not the same.
Okay. That's why I was asking about the future interest that's under this code. That's why I was asking. Thank you. Gotcha.
doesn't apply to complex trusts.
I'm just reading that section of the code. So give me half second. Sure what it says, For purposes of this section only payment of a charitable contribution, which consists of a future interest in tangible personal property shall be treated as made only when all intervening interest in and rights to the actual possession or enjoyment of the property have expired, or are are held by persons other than the taxpayer, or those standing in relationship to the taxpayer. For purposes of the preceding section, a fixture which is intended to be separate from the real property shall be treated as tangible personal property. So understand what that's talking about, right? It's talking specifically about personal property. Let's say you wanted to donate a car to the American Cancer Association, just as an example. You can't take the deduction, and it's the trust on the vehicle that just can't take the charitable deduction. Until such time as it actually conveys that vehicle to the nonprofit guys, because they want to do it in the future doesn't mean that they can continue to hold on to it. Gotcha. Okay.
Thank you. Okay,
where were we Anthony?
Going over the final expense category. I mean, most of them are pretty straightforward. I like that we went over contributions, because that's an important one to track. What else would you think is necessary to cover? Gina
B? The only question would be, can you just scroll up a little bit? You know? I noticed. So I guess meal and expenses, which is a normal business one, we wouldn't basically do that unless we were utilizing that category for what I was asking earlier. So if it's an actual legitimate trust expense, then it goes into that category.
Well, no. So if it happens to be if it happens to be a situation where you're going to a conference and you're paying for food at the conference, then it's a 710 expense. But if you're taking your kids out for dinner, all of them are under the age of 21. Then that would be a minors underage and incapacitated beneficiaries, which would be an 815.
Okay, but like when you take us out for meals, that's a trust expense. So that goes in there, correct.
When I take you guys out for meals, to parts, so mine is always an 815. I can pay for my food every day because I'm incapacitated. Yep, yep. But usually, I have when I take you guys out for meals, I do it as a 715. That's it. Okay. Got it. Is we're always talking just business. Okay. Abundance group business. Yes, that is sorry. I'm just not looking at
it. Yeah, she may send me 11.
Yeah, but I, I don't do it out of the personal trust. Usually when I take you guys out. I do it out of the
out of the business. Got it. Yeah, yeah. But I'm just saying it's a similar similar
category. Yeah. Yeah.
And we are almost done with that. Exercise, meaning, it's other things have taken us away.
Good. Okay. Any questions about trust taxation and trust? bookkeeping, for personal trust? Only?
Yes, this is Lou. Hi, we record the note payable? How do I add the interest to it? The full amount of loan when
when you record the notes payable, so there's two different parts to it, right? There's at the time you convey the asset to the trust and simultaneously assign the liability to the trust. Right. What you're tracking is the principal amount due on the note? I Anthony, correct me if I'm wrong. At the time of the assignment, unless there was accumulated interest? That's Do you only track the principal amount of the note? Because the interest gets tracked as an expense as it gets paid? Isn't that accurate? Yes, it's accurate. So you would call your mortgage company the day you're conveying it to the trust? And find out if you were paying it off on that day? What's the payoff amount? That payoff amount, is what goes into the notes payable on the day it's conveyed to the trust. From that point forward, the interest is gonna show up as an interest expense, it doesn't change the note payable now.
You could use the amortization table. If if you may have received one, when you took out the the loan, just so you can determine what the estimated value would be on that date. If you do it in July, middle of July. You don't have to go on call. Just use the amortization table. Okay.
If there's an online account, you can look at your accounts online, you can find it
monthly statements if they have them. Yeah,
yep. And you can typically request your amortization schedule multiple times. So you can see like Gina was saying, do that and that way, then you have the what the current value is and then use that for going forward. Yeah. Thank you.
Any other questions about just bookkeeping and trust taxes? And this really, is it any of you that have actually worked with clients as trusted advisors? This is the thing that you're gonna get The most questions about with clients. No joke. Yep. It just, it, it mind boggles. And it's because most clients are a lot like me in that they aren't accountants, they don't like accounting, it's a necessary evil, because they're entrepreneurs, and nothing more. And we know enough to be able to run our business, but we don't know. True accounting things are not giving us credits and debits, for example, we're gonna say, add it as a practice. That's what most clients talk about it. And so they feel like they're in a foreign country, and don't know the language. And there's no Google Translator handy to help them. And that's why when you start working with clients, you're gonna find that trust taxes and just bookkeeping is the number one thing that just, they have a really tough time grasping. Now, what you want to assure them of, and continue to reassure them is that if they just get in there and do it for even 30 days, every time they get there, and track and cold, and do what they need you to get their books up to date, it will feel less fun. And it usually takes 30 to 45 days before they have that aha moment where they realize, Wow, I was making this way harder than I needed to, during that time, encourage them to use somebody other than themselves to set up their books. Usually, for most clients, setting up their books on QuickBooks, it's about 150 to 200 bucks, we're not talking about a huge sum of money. If they just have somebody else, set up the books, so that the books then all have the chart of account numbers that they see on this sheet. It will make it so much easier for them to then do the bookkeeping, and maintain the books on an ongoing basis with a tax professional doing a double check at tax time. If they're really having a hard time, that is the best advice you could give them. And assure them that by having someone else on Dave's team or Susan all day, set up their bookkeeping, that aha moment is going to happen that much faster. But for them to set it up themselves. I have clients that have been using their trust for two years that have still not fully set up their books. And I'm not joking. I even have one or two that are three years. They just haven't filed tax returns because they don't have books. That's terrible. And it can get them in big trouble. So what do you guys taken away today?
A lot. I don't know how to summarize it. But it was very helpful.
No, it is lots of good stuff. But the maybe the easiest way to summarize it would be to say that we just have to keep staying on top of in studying the chart of accounts is a good way of of keeping ourselves oriented.
Really good idea.
Right. And Anthony, I messaged you because I was trying to reach out to you on the side about this part. But yes, that's it. And Gina had a question for you. But once you stopped the recording, everybody can stay on. I just wanted to ask you after the recording.
Sure. Can I ask you something on the recording or off the recording? Sure, sure. If you wanted to go back through the transcript from today's call, and make some notes that we can add to the chart of accounts. That'd be really helpful. And I will definitely make it worth your while to help me do that.
Okay, awesome. No problem. Thank you. Yeah.
Any other takeaways today? Thank you so much, Anthony for helping me with this.
Worse Of course, hopefully, hopefully it was it was good information. Definitely taken away the fact that you definitely need a good bookkeeper and tax preparer good tax team.
Yes. And Anthony, part of the reason I asked you to help me with this is in part because you actually understand the trust better than you realize. Your challenge is taking what you know as a CPA and converting it into the layman's lingo that you're using every day. You think that there's a legal thing going on out out there that you're not grasping, you actually get it.
Well, that's, that's very good to hear, hopefully, hopefully, you know, I continue to get the opportunity to share that information and teach and implement it for myself. So thank you for the opportunity that to share anybody that has questions, I'm more than happy to do my best to answer.
Well, thank you, and go back and listen to the recording, so that you can hear how much you really know about the trust, and are spot on with everything. And this is for everybody. Everything we talked about today shows you just how legit the trust is. Go back and listen to the first part of the call when we went through the tax return. That straight off of the 1041 return, every single thing that's on the chart of accounts, you may not have a US Code section that you can rattle off for why it's able to be a valid trust expense in there for a deduction. But it can see and match up from the sample trust return to the chart of accounts that yes, in fact, they are all valid deductions. So that sample just returned is an actual client trust return, we just took the names off of it. And very obvious that the trust does what we say it can do when you compare those two things. So if you ever have clients, because we have a few of them right now, that just are still on shaky ground with being able to believe that the trust is legit. And therefore they're not fully utilizing our trust, have them go through the trust tax return and the chart of accounts to see how legit it really is. Have them even pull up the instructions for a 1041 return so that they can look at the instructions and compare it to the actual sample return, they will have a much higher comfort level that the trust really does what we say. We have anyone that wants to share one last takeaway from today. I need
more than clients know they need to keep up with the accounts or they need to have a bookkeeper do it. Because at the end of the year, it's really where it makes a big difference. And the clients need to know throughout the year, you know if they're spending money and properly crediting the different accounts, the sooner they know that the better. And I think it is important to really have somebody that understands what they're doing with it moving forward because if they learn how to do something wrong, it's hard to break an old habit.
Completely agree. I completely agree. And I heard a woman but I couldn't tell his voice it was
oh, this is Lou. I live. My takeaway is I need a bookkeeper.
You know, I think it would help you tremendously.
I really do.
Lou, I thought you had reached out to me you're new to the trust, right? Within Oh,
she's been in the trust forever. And she manages three personal trusts.
Oh, no, that's not the same person. I reached out. Okay, sorry.
And that's why she's trying to find a way to consolidate them into one trust. It's the bookkeeping isn't Lou?
Yeah, that's right. I thought I knew the basic and I thought I was fine. But then after this training during this training, I realized I need double entries. You know, reach out to Samantha. Samantha Yeah, okay. She's our vendors list. She is okay. All right.
Awesome. Well, have a great rest of your day, everyone. We'll be back tomorrow for the advanced just call. There is no call on Friday. I'm having a back procedure done on Thursday, and I don't think I'm gonna be in much of a good chip on Friday. So the doctor recommended that I just chill on Friday. Have a great rest of your week. If I don't talk to you tomorrow. Bye.
Don't hang up. Don't hang up.
I'm stopping the recording now. So hold on while I do that,
okay. Okay, go ahead.
Okay. The first question is, I was talking to James the unincorporated, the one that wrote the unincorporated. Wow. Yeah, so I had a question because his trust are the non grantor. I mean, his trust. Right, but he, he teaches how to do an LLC, like you teach how to do the trust without the state. And so I was wondering if you ever thought to combine that because I have the actual I purchased it, because I wanted to know what it said. Have you ever thought to in general, just you thought to combine then the non state LLC because it's a business trust, but it's just a grantor version of it? And it's a trust, it's an LLC tax, you can tax it however you want it. But that's, that's how it is. Have you ever thought to do a non grantor as the LLC attached to your I mean, I'm sorry, as the grantor attached to the non grantor is what I should say?
No, and you really have to be careful with that. Because the IRS considers a lot of times that it's stacking of trusts. And we have a grantor business trust attached to a non grantor business trust attached to the personal trust, who can raise lots of red flags, the IRS. Okay, so
if people just wanted to do the LLC, and they can't afford these, the business trust in that the non grantor trusts, they would just do a the grantor trust by itself as an LLC, then I guess, to not connect with anything,
but it's not going to give them any tax mitigation. And it's certainly not going to give them the level of asset protection that they could have.
Right. Right. Right. So, um,
benefit is for privacy purposes and not having to register with the state.
Right. That's what I was trying to say okay, but
the problem with it is this. If you use a grantor trust as an unincorporated business organization, usually when you go to get a bank account or brokerage account, that's going to be put in as a sole proprietorship. Okay. All right. And if that ever came out in a lawsuit, oh, boy. Okay, that'd be really risky.
Okay. All right. I only looked it up in my state because it says business trust and ahead unincorporated, which is an option, but it didn't have to be
randomized in one state, Maryland, and Maryland. That's because Maryland has a statutory business trust. Right. So the one that's not registered with the state in Maryland is a statutory Maryland business trust. It's a grantor trust is not a non grantor trust. But doing that. In Maryland, specifically, and this is true in Maryland, Virginia, Massachusetts, and South Dakota. All four states have statutory business trusts, all of which are grantor trusts, you must do it in compliance with the Maryland statute. We're not gonna have any of the protections that it could provide.
Okay, which means to register with the state.
Just because it's statutory doesn't mean you register with the state. It's still a private document. Right. But the rules for it, have to follow the Maryland statute. Gotcha. Okay. If you follow what the book told you, or what a product related to the book told you, if it's not prescribed in the Maryland statute for statutory business trusts, it could be a problem.
Okay, okay. Okay.
Studied. I have studied all four states, grantor statutory business trust in creating our business trust. Well, ours is not a statutory trust, it's a common law trust. I took parts of each of them. In fact, in our business trust, I'll see if I can put together a dummy version of it just to share with the trusted advisors. In our business trust, we actually have a big section in front of the trust indenture, where we go through the statutes of each of those four states and talk about their statutory business trusts and how they operate and why what the good things are, what the bad things are, just to help educate the clients. Okay.
Okay. Now that's, that's super cool. Yeah, that's I just was trying to see how that will work. Okay, so stalking is an issue, but if people
have big issue, in fact, when you look at the abuse of trust tax schemes on the IRS website, Okay, one of the biggest points they make is stacking of trusts.
Okay. All right. And and that was just me thinking that wasn't him saying that he did not.
Okay, he wouldn't. He wouldn't understand what ours are anyway, I've never talked to him. I don't think he's ever heard about them. But yeah, as you go through his package, if you see anything that you think I should know about, let me know.
Okay. Yeah, for sure. For sure. And then the second question is, I know that you say you weren't referring to Susan or Dan anymore? Is there something I should do? Because she's still with mine. I know less?
Well, the only reason I'm not referring to Susan, is because she can't scale. That's the only reason. Yeah, we have grown so fast in the last year and a half. She there's no way she could keep up. Well, neither can
the other person. And I was supposed to work with him with clients, but like, I signed the contract and everything and the communication is horrible.
With Dan, you mean?
Yes.
Well, Dan is no longer recommended person on our vendors list at all for anything.
Okay. All right. Yeah. So that was so bad. I just wanted to let you know.
So I would definitely reach out to Dave, I can tell you for a fact that Dave is looking for another bookkeeper.
So he didn't tell me. Okay,
reach out to Dave.
Okay. I will. Cool. Yeah, I'm reaching out to Anthony, to about questions, just to make sure.
We should definitely talk. Oh, cool. Yeah, does have a lot in common.
Oh, awesome. And where were you going to ask me?
Just could you help me with going through today's thing and adding notes like we wanted to our chart of accounts, if you want to read I do not have an original non PDF version of our chart of accounts. If I were to create a new one today, I'd probably do it on Excel, because I think that's the easiest way to get it to format like that. Right. But if you wanted to create the new one, and put some notes in there, just so I can add it from there. That'd be really helpful.
Okay, awesome. And to get when, when it's uploaded, I'll be able to get the script. Thank you. Yes,
absolutely. Every, every single recording that we have has transcripts. It's right on when you go to the podcast, before you click through to listen or watch those a link that says today's transcript that blah, blah, blah.
Right? Okay, awesome. And I was thinking of this the system you use, it's what is it called again?
Ott II, our otter.
Right. So I was thinking later, once I get everything together, is to do because everybody needs to do trust meetings, and I mean, minute meetings and keep up with their stuff. And I was trying to see how I can intertwine that with bookkeeping. Oh, with that crossed lines. Because if I sat with someone as a witness to something, then they can have their private meeting. And obviously, I would sign off on non disclosures.
But that's an idea. Okay. And one thing I wanted to tell you, Julian, I recently became Florida licensed document repairs. I heard that Yeah. And if you wanted to become a licensed document preparer, I would let you use the office address so that you can do it in Florida.
Oh, awesome. Because you know, I remember I went to the Law Library here in Maryland, and talk to them about it. And they research helped me read. There's nothing in the state of
Florida and California are the only two I've found so far.
And Florida can be used anywhere. It can't.
And a Florida licensed document preparer, you can use, you can get that particular license, so long as you're affiliated with a company registered in the state of Florida. And we are, Ah, here's our address, if you would like to be able to do that. When you when you set this up, there's courses, those exams, and you're joining an association, but they actually promote you on their website. And Julie has gotten a bunch of business from it. I don't have myself listed on there because I don't want the business. Right, right. Julie's gotten a bunch of business already, like in the last 30 days. Sweet. Look at it. Okay, it's
called it's down there. What's the name of that one?
Hang on. You asked tough questions.
Sorry. I can research it though. Just document prepare in a Florida I'll do that. Don't worry.
Hold on. I think I have it open, so I just gotta go find it. Give me one sec to get there. Okay. It is. I got it. Fa L. D like dog pee like paul.org Fa ldp.org association of legal document preparers.
Got it. Okay, I'll look into that. But I'll take care of everything else first before. Okay, thank you so
much isn't all that expensive? Oh, cool. Okay, even better,
even better. Yeah.
Good things. If you have couple minutes, I can actually send you an Excel file for both of the business and personal trials.
Oh, my gosh, thank you so much.
Yeah, I just have to scrub my stuff out of it before. Because I have information. I was able to download that. I got a question about that stalking thing. What are the I'm still having challenges with trying to get a loan on my personal residence and your idea of you're putting another trust underneath my personal trust. Isn't that stalking?
What depends. So if the trust is designed to do certain things, in a certain way, and it is not done for purposes of tax evasion, you can make a strong argument for it not being stalking, creating an abusive trust tax scheme. So for example, with the business trust, it is literally a pastor trust, it always has a zero sum tax return, because income is always gonna get taxed on the beneficiaries, not on the business trust, that's a legitimate use that is not considered stalking. The reason that it's allowed with sub trusts is because in a discretionary non grantor trust, as you know, there is no way of doing unequal distributions to beneficiaries. The only way of doing on equal benefit distributions to beneficiaries, is by doing it through sub trusts that are funded during the lifetime of the parent trust. So, because of that, it's not for tax evasion purposes. In your case, it would be done specifically for this one thing, so that every other asset that you have, can be held in the parent trust, you can have whatever beneficiaries you choose. And for purposes of that one asset that you want to get this reverse mortgage on, you're just distributing it to a sub trust, just to make it easier to get the mortgage. It doesn't change your tax situation at all. There's no income derived from that property. So there's no way the IRS could come back and say it's tax evasion.
And so that, to add to that question, that's why I asked about the grantor one, because it's, it's, it's just a private contract. So
it's with the business trust set up set up as a pastor trust. If we tried to tie it to it, I think it's gonna be a problem, not just the the grantor trusts to start with, right familiar enough with Maryland statutory business trusts, which is what you'd have to use, right? That even if we use the Maryland statutory business trust tied to a common law, personal trust, it could be a problem.
Okay, so Okay, so try not to tell Okay, okay. That's what that's what my mind was doing. Okay.
One of the four states, I can't remember whether it's Maryland or Virginia, but one of those two actually has a clause in the statute that prohibits other trusts from being a beneficiary.
It must be Virginia. I don't remember. Seeing that I can remember
the four states definitely has a clause to that effect.
Okay. Yeah. And I have not looked at Virginia, obviously. But
Massachusetts, Maryland, Virginia and South Dakota, are the four statutory business trusts.
Virginia, South Dakota. Gotcha. All right.
The other issue that might exist with some of the statutory business trusts, I don't think they would all qualify for corporate credit.
Okay, okay. So now, the way he directed it when you go and get your EIN you're getting it like you're not getting like you're not getting it the way you get your business the way you ought to your business dress obviously because it's set up as an actual trust isn't just set up as
not an elevated Business Association which all four of those states allow.
Right but he the wording is it's also you can go in and get your EIN as a as an LLC, like just as an LLC so you would put in other the other box on that SS for you will put business trust in the other box and then you would check banking purposes but when you're online filing you select LLC,
yes, but when you go to file with Dun and Bradstreet so you can get your DUNS number. Yeah, then get your Paydex score. Right. They do not allow any of the statutory business trusts to get DUNS numbers. Okay, okay, to get the application but they're gonna decline it.
Okay. All right. Okay, I think I know you keep saying statutory, but for some reason how he has it. I think it's nonstatutory. So I'm gonna try to see how I can send it to you.
Okay, but I'm telling you if you're going to do it in the state of Maryland, because in the grantor trust, you have to have a state situs do it in the state of Maryland. It's gonna make it subject to the statutory business trust for the state of Maryland. Gotcha. Okay. template doesn't say that.
Okay, I'm following. Okay. Okay. That makes sense. Yep. Thank you so