Business Trust: Scam or Savior?

Business Trusts: Scam or Savior? Is a Business Trust for You?


From Demir Barlas,


Filed In:

1. Small Business Information
   

You may be familiar with the multiple forms of incorporation including sole proprietorship, the limited liability corporation (LLC) and C corporations. However, a less common structure referred to as a business trust has begun to garner some attention. Learn what is a business trust and why, despite its purported tax and asset protection benefits, it can be an inappropriate and possibly illegal way to do business.

What is a Business Trust?

Legally speaking, a trust is an arrangement whereby a settlor (the person creating the trust) designates a trustee or trustees to manage the settlor's assets on behalf of a beneficiary. In personal finance, trusts have a number of advantages. Upon the settlor's death, for example, trust-fund assets pass directly to the beneficiaries, without the intervention of probate, and such trust funds also are exempt from estate taxes. However, the beneficiary must pay ordinary taxes on assets received through a trust.

In a business trust, the settlor also is the beneficiary, and there are often multiple trusts layered over each other in order to evade taxes. For example, imagine that John Doe runs a landscaping business. One day he sets up two trusts: an American trust and an offshore trust. The offshore trust owns Doe's lawnmowers, and leases them to the American trust (typically, at inflated prices). All the money that goes into the offshore trust is now foreign income for John Doe, and therefore non-taxable. Meanwhile, the American trust has racked up a lot of business expenses, and also has an artificially low income (minimal taxes). Neither of these trusts is treated as a corporation, so they avoid certain kinds of scrutiny.


Why Form a Business Trust?

Why would anyone engage in such a convoluted way of doing business? For John Doe, the reason is obvious: tax avoidance on multiple fronts.

As one might expect, the IRS considers this behavior illegal. In John Doe's case, the landscaping company has not only violated tax laws but also abused the very idea of a trust. In a legitimate trust, assets are genuinely placed in the custody of a third person. The settlor does not manage the assets after turning them over to the trustee. However, everything is under John Doe's control. He just makes it look as if there are different companies and trustees involved, but he's pulling the strings.

The vast majority of businesses,have no legitimate reason to enter into a trust. The business trust is perhaps most appropriate for mutual funds. The trustees (fund managers) of these organizations manage capital on behalf of hundreds or thousands of investors, who have a claim on the subsequent profits. This kind of business trust pays taxes as usual and is recognized by the IRS. John Doe's business trust scheme, on the other hand, is a particularly brazen form of tax evasion.

The Seductive Appeal of the Business Trust

Small-business owners already face a significant tax burden and are eager to try to retain more of what they earn. This makes business trust broker's pitch all the more seductive. After all, they are right in claiming that the business trust is recognized in constitutional and tax law. Where they go wrong is in assuming that the business trust is a legitimate way to avoid taxes. The Web abounds with flimsy authorities claiming to know secret tricks, usually involving offshore accounts, to make the tax-reductive business trust work for you.

While some business trusts have so far avoided audits, be aware that the IRS does target phony business trusts. Why take the risk of being audited, fined and even jailed? Put more effort into growing your business rather than agonizing over the best way to avoid taxes. Successful businesses grow not by avoiding taxes but by generating sales.

Better Alternatives

Why not consider an alternate - and indisputably legal - model such as the limited liability corporation? This form of incorporation will offer you many of the advantages of a corporation without some of the attendant difficulties. An LLC insulates you from personal liability, and taxes you only once, whereas corporate income is taxed twice. Or, if you consider an LLC too advanced for your needs, you can form a sole proprietorship or a partnership. Whatever you decide, you'll retain some tax advantages while remaining clear of the IRS.

Thanks for that information. It helped me with some answers.

freebird.....Thank you!! This was great information so we can better understand all of the options for asset protection.

A business trust is a bad idea for business period! AJ

ANY THOUGHTS ON JUST A FAMILY TRUST.

LLC. New Mexico.

Anonymity - limits personal liability - LLC allows many business's write-offs thus lower taxes

End of story

IMHO. LOL

God Bless

KatyPerryFan

Beware of Business Trusts! Need local atty to be on you side if there is a problem ever! google buss. trust, there is one for $100, but can't trust it! An atty saw someone convicted of tax evasion for such a trusts.

depending on the type of family trust, would be good for after tax asset protection. AJ

bobd wrote:ANY THOUGHTS ON JUST A FAMILY TRUST.

Agreed, He's gone, post in basket as soon as I send this ... we don't need people trying to scam personal info from members.

What next?

Sooooo, if I am reading this right, a business trust is a bad, and possibly illegal, way to go?

Sounds like it to me- It's not a good thing-People want to keep their money, not have it scammed out from underneath them-It's always somethin'-

Trusts don't evade taxes.... People Evade taxes.

But, Trusts are truly complicated and should not be entered lightly.

Can we have comments on a 911 Trust? I understand income from the dinar investment can go into this trust and not be taxed, and therefore, delays taxes until the money is distributed to the beneficiaries.

I would consider them suspect since the only people whith info about them are the ones selling them ... but I am not the expert ...AJ?

How do quarterly taxes work? A general idea please. I just dont want to be taxed several times for a one time profit.

drummer wrote:How do quarterly taxes work? A general idea please. I just dont want to be taxed several times for a one time profit.

If you are self employed you are supposed to send in a quarterly estimated tax return, (with payment), on Jan. 15, April 15, July 15, & Oct. 15, for the previous 3 months income,and a final for previous year or extension on April 15, so balance out your amount due.

Unlike a person who has a job who pays in with every paycheck.

After reviewing comments from other OOM ppl here re - Bus. Trusts, I cannot simply stand back and allow such gross mis-info. to be spread around about these entities being somehow illegal, esp. after successfully setting them up for many hundreds of clients over the past 25 yrs. w/ nary a problem when properly utilized.

Tho' I'm not an atty or CPA, I've carefully studied this field and know it well. I can state that as far as my clients are concerned, and many are IQD investors right here on OOM, a Bus. Trust is not to be considered or utilized in any manner to evade or cheat on U.S. taxes, for such would create big-time IRS problems. None of us want that.

Rather than act out of fear or ignorance, my suggestion is to research this topic for yourself as I did, starting nearly 30 yrs. ago. With a Bus. Trust, you can safely protect your assets and, regardless of what you may have heard, you can be your own Trustee! I'd be glad to share my Bus. Trust info. w/ any open minded person. Merely contact me: Jim@JimJenkinsMusic.com here in Seattle, (aka Jimbo) or call me: 425-788-2666.

Thanks Jimbo