Secured Party

TRANSFERRING ASSETS TO A TRUE PURE IRREVOCABLE TRUST

TRANSFERRING ASSETS TO A TRUE PURE IRREVOCABLE TRUST
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(Commonly known as an Unincorporated Business Organization or U.B.O.)

The Unincorporated Business Organization (U.B.O.) trust is an organization born out of common law. It is different from a statutory trust in that it is a contractual business contract that has 100% legal ownership of assets vested in the Trust. (the more common statutory trust arrangements usually has legal ownership vested in the Trustee and equitable ownership belonging to the named beneficiaries).

The U.B.O. has Beneficial Interest Certificate Holders rather than beneficiaries—and these Beneficial Interest Certificate Holders have no equitable ownership and only restricted rights under the contract (i.e. they are entitled to a pro-rata share of any trust distributions during the life of the trust and a pro-rata share of any distributions upon the termination of the Trust).

However, since the Trustee(s) have total discretionary power (they can decide if and when to ever make a distribution), the Beneficial Interest Certificate Holders can only hold their certificates and wait for such a decision/distribution from the Trustee.

This rather “weak” position of the Beneficial Interest Certificate Holders is very important, because it frustrates the IRS in their attempts to immediately tax exchanges of appreciated capital assets into the U.B.O. (exchanges of assets of certificates). An exchange or sale would normally trigger a taxable event, but the actual date of the event is not yet determined—thus the certificates are used to create an exchange of “equal, but indeterminable value”. That is, the exchange of assets for certificates is deemed an equal exchange, but because there is no public market (i.e.: as a stock market) that can put a value on the certificates for tax purposes—and since the Beneficial Interest Certificate Holder won’t receive any distribution of money or profits until later, at the discretion of the Trustee—the exchange also must be viewed as having an “indeterminable value”. Since the certificates have no marketable value and receipt of any profits is at some unknown time in the future, the IRS is prevented from taxing the Beneficial Interest Certificate Holder on any “profits” at the time of the exchange. In such a case, the IRS must also wait.

Another way to view this issue is that the Beneficial Interest Certificate Holder does not report any gain from the exchange nor does the trust receiving the assets. The tax basis in the property exchanged into the trust is now reflected in the certificates and does cause the certificates to take on a taxable status, but any tax liability can only be determined later—if and when the Beneficial Interest Certificate Holder receives payment from the trust. If payment is never received, there will never be a tax!

There are ample court cases and/or citations to support the tax treatment of the exchange. Burnet v Logan, 283 US 404: “The U. S. Supreme Court ruled that if property received in an exchange has no fair market value, it does not represent taxable gain to the recipient.

American National Bank of Joseph v U.S., 92 F Sup. 403 (1950): “Market Value” for the purpose of internal revenue law is the price at which a seller is willing to sell at a fair price and a buyer is willing to buy at a fair price, both having reasonable knowledge of the facts in the trade”.

Palmer et. al. v Taylor et. al. 269 S.W.995 (1925): “Organization of a Common Law Business Trust was held to not be unlawful and subscription to trust certificates in such trust was determined not to be a gift, but an investment.

Note: For comprehensive discussion of court decisions regarding Business Trust Organization, consult Volume 13, American Jurisprudence 2nd Edition, under “Business Trusts: and Volume 156, American Law Review 1st Edition, under “Massachusetts or Business Trusts”.

EXCHANGE PROCEDURE

For Conveying Property into the Trust in Exchange for BIC’s – (Beneficial Interest Certificates)

When you (or another party) want to transfer property into the Trust Organization in exchange for BIC’s, you take on the role of “EXCHANGER”, who will do the following:

  1. The Exchanger will submit a written proposal to the Managing Director or to the Board of Trustee(s) regarding the property you would like to transfer into the U.B.O., (Unincorporated Business Organization), known as a Common Law Trust, in exchange for a specified number of Beneficial Interest Certificates.

  2. The Board of Trustee(s) then meet, evaluate your proposal and either accept it as submitted (agreeing to the requested number of shares, etc.) or the Board requests more information or may make a counter proposal, subject to certain conditions, etc. The Managing Director(s), if submitting such a proposal, shall always get the Board’s approval for final acceptance of the proposal.

  3. Upon agreement of the potential Exchanger and the Board of Trustee(s), the Exchanger transfers the property to the Trust Organization and receives Beneficial Interest Certificates.

    1. If PROPERTY is REAL ESTATE, a QUITCLAIM DEED, (valid in most states) and preferable, or a Grant or Warranty Deed, is applicable. The Exchanger deeds the property as follows:

      To: THE GROSSE POINTE TRUST”, that Trust created on June 4, 2010, with Jacqueline Marie Channer as the original Trustee.
    1. If PERSONAL PROPERTY, create a simple Exchange Agreement (a Bill of Sale) and vest the property in the name of the Trust (same as the real estate vesting above). A Transfer of a Sole Proprietorship is a transfer of personal property.

  4. When recording the Real Estate Grant Deed, or Quit Claim Deed in California, you will be asked to file a “Preliminary Change of Ownership Report” for the County Assessor’s use. You state that you have placed your property into Trust for your own benefit for estate planning purposes and you have retained Beneficial Interest (see sample). Therefore, the property will not be considered a sale and not subject to reappraisal by the county Assessor.

  5. All property exchanged or conveyed into the Trust must be entered on Schedule “A”: or on an Addendum to Schedule “A”.

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