Successful Management of Business Trust

The SUCCESSFUL MANAGEMENT online self-paced course is made available for educational purposes only.
It is not to be construed as the purchase of any business entity, the practice of law, the giving of legal advice or
opinions or a solicitation for any such purchase or service. The reader in need of legal advice is advised to seek
competent counsel from a person qualified to deal with legal questions in this field.

In carrying out its educational purpose, this course will address five main areas respecting the creation,
implementation and operation of that type of business structure commonly called a “Business Trust
Organization:”

1. The Nature of Business Trust Organizations

2. Bringing the Business Trust Organization to Life
3. Managing the Business Start-Up
4. Doing Business Through the Business Trust Organization
5. Skills Required for Successful Management

ONE TENDS TO RELY on one’s accountants, tax advisors or attorneys for technical guidance in their
respective fields of expertise. However, if one accepts their advice without careful evaluation of its
relationship to one’s situation, one defaults on his personal responsibility for future success, risking disaster.

Certainly, at times everyone needs the assistance of other people with different knowledge and skills. But we
caution: when you assign to your counselors the job of thinking for you, thus attempting to avoid the hard
work of creating and planning your own future, you are no longer in control of your destiny. Such counselors
may promise to look after your best interests with the same wisdom and dedication they apply to their own.
But in any conflict between their interests and yours, you can be sure that theirs will take precedence. In the
final analysis, you are more directly concerned with, and affected by, your own affairs than anyone else could
possibly be. There is room for outside help and advice, but not for outside control. To give such control is to
abrogate responsibility for your life.

SUCCESSFUL MANAGEMENT OF BUSINESS TRUST

In this course, you will learn how to take control of your estate and protect your assets from the
encroachment of predators who are looking to take your property. Each section of the course provides the
student with copies of the Successful Management private Ebook. Once completed you will be in possession
of one of the most powerful business trust manuals known for the management of the business trust.
 The Learning Process

THE LEARNING PROCESS may be viewed from many angles. For our purposes,
consider the illustration of a jigsaw puzzle:

When the box is first opened and the pieces are still in a jumbled heap, this heap is DATA,
the raw materials of learning.

As you spread them out, turn them face up, and sort them by color, they become
INFORMATION to be absorbed by the mind. Using the INFORMATION provided by
shape, size, and color, you then proceed to integrate the individual pieces together into
larger and larger portions of the whole. This is the KNOWLEDGE process. These portions
grow and merge until a viable end product, the whole picture, is reached. This is WISDOM.

Thus, it is with this course. You are about to receive DATA. As you read and understand the
individual concepts in the various sentences and paragraphs, you are absorbing
INFORMATION. By integrating these pieces of INFORMATION into what you already
know in a non-contradictory way, you are gaining KNOWLEDGE. When you then are able
to apply your KNOWLEDGE, gained over time from many sources, to the many
challenges you face on the road to a rich, rewarding, and happy life, you have reached the
level of WISDOM – the big picture.

THIS COURSE is made available for educational purposes only. It is not to be construed
as the purchase of any business entity, the practice of law, the giving of legal advice or
opinions or a solicitation for any such purchase or service. The student in need of legal
advice is advised to seek competent counsel from a person qualified to deal with legal
questions in this field.

In carrying out its educational purpose, this course will address five main areas respecting
the creation, implementation and operation of that type of business structure commonly
called a “Business Trust Organization:”

1. The Nature of Business Trust Organizations

2. Bringing the Business Trust Organization to Life
3. Managing the Business Start-Up
4. Doing Business Through the Business Trust Organization
5. Skills Required for Successful Management

ONE TENDS TO RELY on one’s accountants, tax advisors or attorneys for technical
guidance in their respective fields of expertise. However, if one accepts their advice without
careful evaluation of its relationship to one’s situation, one defaults on his personal
responsibility for future success, risking disaster.

Certainly, at times everyone needs the assistance of other people with different knowledge
and skills. But we caution: when you assign to your counselors the job of thinking for you,
thus attempting to avoid the hard work of creating and planning your own future, you are no
longer in control of your destiny. Such counselors may promise to look after your best
interests with the same wisdom and dedication they apply to their own. But in any conflict
between their interests and yours, you can be sure that theirs will take precedence. In the
final analysis, you are more directly concerned with, and affected by, your own affairs than
anyone else could possibly be. There is room for outside help and advice, but not for outside
control. To give such control is to abrogate responsibility for your life.

WE HAVE OUTLINED IN THIS MANUAL a systematic program for the proper

management and substantiation of business operations of the Business Trust Organization.
Through the use of specific examples, legal references, and operating guidelines, you will
be urged to develop the necessary habits of clear thinking, effective communication, and
careful substantiation. The results of your growing skills will clearly show, should anyone
have a need to look, that behind the carefully structured form there is the substance of a
valid Business Trust Organization. Such substantiation of activities is of the utmost
importance; it will be the last line of defense against adverse penetration, against attempts to
destroy your plans for financial independence.

Simplicity is the keynote. Learn to recognize and weed out unnecessary and meaningless.
Repeat, reassert and reaffirm the separate, independent legal status of the Business Trust
Organization. Accusations of self-dealing will not be supportable if the guidelines laid out
in this course are followed. The pathway indicated is not guess-work, but well-traveled and
carefully charted.

For the sake of uniformity, the instructors of this course have adopted the term “Business
Trust Organization” as the generic name for the type of entity being discussed. The same
type of entity has also been variously identified by the following names:

Common Law Trust

Contractual Company
Massachusetts Trust
Massachusetts Business Trust
Pure Trust
Unincorporated Business Organization (UBO)

A TRUST IS DEFINED AS a right of property, real or personal, held by one party for the
benefit of another. Real property refers, for example, to land, buildings, crops or mineral
rights. Personal property consists of movable articles such as furniture, jewelry, stocks or
bonds, i.e., everything that is not real property.

There are many types of trusts, but the Business Trust Organization remains eminent in
personal financial planning. A Business Trust Organization acts in many ways like an
individual: buying, owning, selling, spending and earning. It is considered a “person” in
contemplation of law. It is private. It can avoid death and inheritance taxes, and allow
capital gains and income tax savings. It works in this way: a company is formed through a
properly prepared contract. Assets are exchanged with the company. The company, under
the direction of a Trustee, owns those assets outright. As managers and beneficiaries pass
on, no death taxes or probate costs are incurred on the company’s assets. Instead, the next
generation succeeds to the management and benefits of the trust business. The contract is
written for a specified period and may be renewed for additional periods of time. The
Business Trust Organization is not a partnership or corporation. It is, in essence, a “pure
trust” and uses certain trust terminology. It only resembles a corporation in that its structure
consists of trustees acting much as a corporation’s board of directors acts through meetings,
minutes and appointment or election of officers who are empowered to act on behalf of the
entity.

The Pure Trust from which the present-day Business Trust Organization evolved is not new
to the world. It has been the preferred method of owning and managing property on the
European continent since the Middle Ages. When the American colonies adopted the
common law of England, English principles of equity were also adopted. In fact, the first
pure trust of record in America was recorded in 1765 for businessman Robert Morris of
Pennsylvania. Later, Morris would become one of the most prominent financiers of the
American Revolution and one of the draftsmen signatories of the United States
Constitution.
Support for the validity of the ‘entity is found in the important British high court decision of
1880 involving the case of Smith v. Anderson. While a complex suit, it basically involved a
group of investors who wanted to purchase shares in a telegraph company by investing in a
trust organization and then receiving a certain return for the investment.

It was stipulated as part of the agreement that the trustees would make all the decisions on
how funds were to be invested. The question of whether the trustees were also empowered
to reinvest proceeds at their discretion, in the manner of a “company”, became crucial. The
high court ultimately ruled that a business entity of investors could convey assets to
trustees, whereas prior to this decision, trustees could only manage the investment.

Definitions:
complex litigation.Litigation involving several parties who are separately represented, and
usu. involving multifarious factual and legal issues.

“What exactly is ‘complex litigation’? The problem is that no one really knows — or, more
accurately perhaps, various definitions don’t agree. Complex civil litigation has an ‘I-know-
it-when-I-see-it’ quality. Nearly everyone agrees that matters like the massive
asbestos litigation, the AT&T antitrust suit, or the remedial phase of a school desegregation
case are complex. But trying to find a common thread that both describes these cases and
distinguishes them from the run-of-the-mill car crash is difficult.” Jay Tidmarsh & Roger H.
Transgrud, Complex Litigation 1 (2002). Black’s Law Dictionary (8th ed. 2004) , Page
2732
 ENGLISH PURE TRUST HISTORY

The Pure Trust Organization is, in legal terms, an entity not new to the world or the United
States. Springing from equity procedures, the first Pure Trust Organizations were known in
the Roman Empire — going back as far as 800 AD or earlier. It became the preferred
method of establishing equity of ownership and management in the Middle Ages on the
European Continent. The States of the Union (United States) adopted the common law of
England as an entire system, including the principles of equity, then enforced by the courts
of chancery in England.

“The United States adopted the Common Laws of England with the Constitution.” Caldwell
v. Hill, 176 S.E. 383 (1934)

These early English trusts, mothered by necessity, were modeled after the ancient German
legal receiver called the “Salman.” The “Salman” was a person to whom land was
transferred in order that he might make the conveyance according to the former owner’s
wishes. Although this might seem a devious and inefficient way of transferring property, a
review of the conditions in medieval times should show the reasons for this procedure.

In England, many burdens and conditions fell upon the holder of legal title to real estate.
For example, the lord of the land was entitled to relief or money payments when the land
was passed to an heir of full age. The lord was entitled to wardship fees when the son of the
former owner was a minor. The lord was also entitled to aid or additional taxes to pay for
the marriage of the lord’s daughter or the knighting of the lord’s eldest son. In addition, the
owner of the land was often prohibited from selling the land or dividing the land among his
children or his grandchildren. Also, if the owner of the land was convicted of a crime, he
forfeited all he owned to the lord or king, thereby leaving his family impoverished. In
addition, landowners could never will or give the land to their daughters. These were the
major restrictions. In addition, there were nearly 100 other taxes and limitations placed on
the owners of lands.

To avoid these restrictions under the law, the trust organization was developed. It works as
follows: The owner contracted with two trustees to convey the property to a trust for the
beneficial use of another person (the beneficiary). This fourth person was generally the
owner’s son or the person to whom the owner wished to sell the land. The trustees were
literally trusted with the proper use of the property. In the twelfth and thirteenth centuries,
there were no legal methods to enforce the trust contract. If the trustees during these years
decided to use the property for themselves, there was nothing the former owner could do.
Eventually, however, the courts began to enforce these contracts. Because the contracts were
not sales, they also were not illegal transfers of land. Because the contracts were not wills,
they also were not improper transfers to children or grandchildren.

Further, they could be kept secret. The king did not have to know of the transfer, and the
laws, the taxes and other limitations on land sales could be ignored. Trust organizations had
other advantages. For example, if the transferor of property placed in a trust organization
was convicted of a crime, he would not forfeit the property since he no longer owned it. His
family as beneficiaries of the trust would continue to enjoy the property. Also, since
beneficiaries of a trust organization were not limited in number, a man might distribute the
benefit of the property to all of his children. (Under the law at the time, he could pass it by
will only to his eldest son.)

The king, having lost many of his former rights to the lands held in trust organizations,
publicly criticized them. There were probably many cases of abuse of the trust organization
which led to this criticism; for example, religious orders which had pledged themselves to
poverty often held hundreds of thousands of acres of land in trust organizations and enjoyed
their use, even though the priests themselves did not “own” a thing. However, since the
nobility was being severely pinched with respect to their traditional rights and powers, one
can identify with them more easily. So, kings generally resisted recognizing and sometimes
refused to discuss, pure trusts.

In 1535 the Statute of Uses was passed to prohibit the use of certain trust instruments, but
this statute did not address trust organizations. The law required that the beneficiary of
certain trusts would be considered the legal owner whenever such a trust was made and that
the trustees would be considered mere conduits or passive parties. The preamble of this law
set out the “evils” that had been possible through the “misuse” of the trust. Among these
“evils” were the privacy of transfer, legal avoidance of taxes and other regulations,
preservation of the estate of convicted criminals, and (most significantly), the loss of
revenue to the lords.

The common law judges of England who had sole jurisdiction over legal estates were faced
with the task of interpreting the Statute of Uses. They had to determine which trusts were
legal and which should be dissolved. The judges decided to restrict the application of the
Statute of Uses to limited circumstances. Only one trust out of five was found to be illegal
and the rest were enforced. Within five years, the Statute of Uses was all but out of use.
Suffice it to say that the Statute at the hands of the common law judges did not achieve what
the king and his nobles had hoped. A large number of trust organizations were left
unaffected by the Statute and were recognized and enforced by the Court of Chancery. It is
these interests and trust organizations, which were preserved in spite of the Statute of Uses,
which traveled to America with the English Colonies and which formed the very basis of
the trust organizations of today. The advantages of these ancient trust organizations are
obvious: The trust organization enabled a person to enjoy privacy under a system that
usually demanded disclosure. The trust organization enabled a person to avoid some of the
burdens of special taxes. The trust also enabled individuals to “sell” land and to pass it to
those they wished. Obviously, the same goals are desirable today. Our present tax system,
however, has imposed certain burdens and many restrictions on the citizens of our country
that are comparable to the burdens and restrictions that limited the citizens of ancient
England.

The trustees and beneficiaries in each of these trusts controlled the land, planted it, reaped
the harvest, sold or used the results for profit and by law, could ignore almost all other
restrictions on the use of the land. The trustees usually did not participate in this use but
allowed the beneficiaries to do as they wished, since the property would ultimately go to
them anyway. The beneficial or equitable interests in these trusts could be sold at will with
no change in the trustees and usually without taxation. Normal sales of property had to be
made public and were usually accomplished by elaborate procedures. Beneficial interests in
trust organizations could be created and transferred secretly. Early in the fifteenth century,
the king’s chancellor began to enforce such trusted contracts and agreements in the king’s
own court. The relief offered by the chancery court was usually in the form of an order to
keep the trustees from committing some act, such as evicting the beneficiary or laying waste
to the land. By the sixteenth century, the concept of the trust organization was well
developed.

In general, the definition of a “trust” is a right of property, real or personal, held by one
party for the benefit or another. From this broad definition, numerous types of trusts are
derived because a trust can be created for any purpose which is not illegal or against public
policy. One of these various types is an “express trust” created or declared in express terms,
usually in writing, as distinguished from one inferred by law. Another necessary
qualification that is placed on the express trust is that it must be “active,” where the trustee
has authority to manage the property of the estate and to pay the net income to legatees or
beneficiaries. Such express trusts were quite prevalent in England from the fifteenth century
to date, for the purpose of estate management and preservation. They were so widely used
that they became part of the common law, and Courts of Equity were set up to handle them.
Exactly at what time in history the term “common-law trust organization” was applied to
these express trusts is unknown, but the term was used in some of the earlier trust
organizations set up in the United States of America. Since we adopted the English common
law as the basis of our legal system, the term “common-law trust organization” was most
descriptive of this type of trust instrument.

During the eighteenth century, the term “pure trust organization” was used on occasion in
place of “common-law trust organization” to denote that it was simple and free from defects
or fault. Late in the eighteenth century, common-law trust organizations were used to vest a
business, real, or personal property in a group of trustees who managed it for the owners of
beneficial shares. This practice, although used occasionally in other states, all the way back
to about the seventeenth century, became predominantly accepted in the state of
Massachusetts. (This was true not so much because Massachusetts was the only state to
recognize these trusts as valid, but because of the large number of very wealthy
Massachusetts families that used these trusts to avoid taxes and maintain privacy.) Thus, the
term “Massachusetts trust” was used in place of common-law trust organization.

Still later (in the earlier part of the nineteenth century), when a greater number of businesses
were vested in a common-law or Massachusetts trust, the term, “business trust” was applied.
In the 1920’s “pure trust organizations” were legally defined by the Supreme Court of the
United States of America. One of the reasons for the legal definition was that some of the
common-law (or Massachusetts or business) trusts were being operated more like a
partnership than they were a trust-like relationship. The “Pure Trust Organization” then
became the more modern form connected with the old common-law trust organizations. The
partnership-like form of trust organization was not invalidated but recognized as another
form of common-law or business trust along with the Pure Trust Organization.
A partnership-like business trust is a special form of trust arrangement usually used when
investors are involved. Both forms have been used extensively throughout the United States
up to the present time for estate management and preservation of business, real estate, or
personal property. A business trust is a hybrid type of business organization. As Judge
Magruder has pointed out, “It is the offspring of a union between the unincorporated joint
stock company and the trust.”

The shield of trust is used to protect the shareholders from personal liabilities, similar to a
corporation. The trustees of a business trust really correspond to the board of directors of a
corporation. These trustees are acting for the shareholders and are designated by some
common name (the name of the trust), which is recognized as a separate business and also
as a legal entity. On the other hand, the trustees also hold some of the features of a
shareholder of a corporation, in that the trustees are absolute owners of the trust assets.
Although the shareholders of a corporation are not absolute owners of the assets of the
corporation, they are the legal owners of the entity, as are the trustees of a trust.

At the present time, there are many successful businesses structured and safely operating as
Business Trust Organizations in the United States and elsewhere. Many of these businesses
were organized in pure trust form generations ago. Since the business affairs of these
entities are private in nature, their form and existence are rarely disclosed to the public. The
writers cannot emphasize too strenuously the time-honored importance of keeping the
affairs of a Business Trust Organization well-documented but in utmost confidence. Many
jealous and powerful parties lurk in the shadows, ready to lunge at the first indication of
softening integrity.
 Understanding Case Citations

A BRIEF DIGRESSION, now, for the benefit of the layman: Legal and case citations are
used throughout this guide. Legal citations generally consist of three symbol groups
(numbers or abbreviations). Numbers refer to a specific Volume, Title, Section, Chapter,
Clause, Page, and the like.

Abbreviations refer to specific Names of people, places, or things, which can normally be
found in a legal dictionary. See Black’s Law Dictionary, 4th Ed., Abbreviations, page 1797,
et seq., for the following: U. S., U. S. C., Cal., C. C. P., Y. B., Bl. Com., ).

For example:

28 U. S. C. 1441(b); 3B1. Com. 295; Cal. C. C. P. 413.1; Y. B. 3 Hen. VI 36 are citations to

Title 28 of U. S. Code, Section 1441, Subsection b; Part Three of Black’s Commentaries,
page 295; California Code of Civil Procedures, Section 413, Subsection 1; the Third Year
Book of Henry the Sixth, page 36, respectively.

Case citations follow a similar scheme, except that the title of the case and the year it was
decided precede the citation. Thus, for example, Erie Railroad v. Thompkins, (1938) 304 U.
S. 64, was decided in 1938 and reported in Volume 304 of the United States Reports, at
Page 64.

A glossary is provided to assist the reader in the understanding of various terms used in the
course, terms which may be unfamiliar and, therefore, difficult; terms which may be
ambiguous and require an explanation of the specific meaning intended by the instructors.
In other words, its purpose is to maintain a path of communication between instructors and
the reader.

A citation is a reference to legal authority. It is essential that citations to legal materials

follow a standard format so that anyone using a law library may find the resources cited.
Citation formats exist for many different types of legal sources including cases, statutes and
secondary legal materials. Understanding the basic format for each of these different types
of sources will enable the researcher to more independently locate materials in the law
library.

Reading a Case Citation

Cases are published in reporters. A case citation is generally made up of the following parts:

1. the names of the parties involved in the lawsuit

2. the volume number of the reporter containing the full text of the case
3. the abbreviated name of that case reporter
4. the page number on which the case begins the year the case was decided; and
sometimes
5. the name of the court deciding the case.
Below is an example of a case citation:
Hebb v. Severson, 201 P.2d 156 (Wash. 1948).

In this example, Hebb and Severson are the parties in the case. The case can be found in
volume 201 of the Pacific Reporter, Second Series beginning on page 156. The case was
decided by the Washington State Supreme Court in 1948.

How To Find A Case By Citation

1. Once you have a citation, the first step in locating the case is to identify the
appropriate reporter. As in the example above, the abbreviated title of the reporter will
be found in the citation. Use the following list to convert the abbreviation in your cite
to a full reporter title.

Abbrev. Title
A. Atlantic Reporter
A.2d Atlantic Reporter, 2d Series
B.R. Bankruptcy Reporter
Cal. Rptr. California Reporter
Cal. Rptr. 2D California Reporter, 2d Series
Cal. Rptr. 3D California Reporter, 3d Series
F. Federal Reporter
F.2d Federal Reporter, 2d Series
F.3d Federal Reporter, 3d Series
F. Supp. Federal Supplement
F. Supp. 2D Federal Supplement, 2d Series
Fed. Cas. Federal Cases
Fed. Cl. Federal Claims Reporter
F.R.D. Federal Rules Decisions
L.Ed. U.S. Supreme Court Decisions, Lawyer’s Edition
L.Ed.2d U.S. Supreme Court Decisions, Lawyer’s Edition, 2d Series
N.E. Northeastern Reporter
N.E.2d. Northeastern Reporter, 2d Series
N.W. Northwestern Reporter
N.W.2d. Northwestern Reporter, 2d Series
N.Y.S. New York Supplement
N.Y.S.2d. New York Supplement, 2d Series
P. Pacific Reporter
P.2d. Pacific Reporter, 2d Series
P.3d Pacific Reporter, 3d Series
S. Ct. Supreme Court Reporter
S.E. Southeastern Reporter
S.E.2d. Southeastern Reporter, 2d Series
So. Southern Reporter
So. 2d. Southern Reporter, 2d Series

1. For a more extensive list of abbreviations, consult either the abbreviation table in The
Bluebook: A Uniform System of Citation, ALWD Citation Manual,
or Beiber’s Dictionary of Legal Abbreviations. Ask at the Reference Desk for
assistance in locating these sources.
2. After you have identified the complete name of the case reporter, you will want to
locate that reporter series in the law library. (A location table is available at the
Reference Desk to assist you.)
3. Now that you have found the reporter series, the next step is to identify the volume
where the case is located. In a citation, the volume number always precedes the
abbreviated reporter title.
4. Next, you need to determine the page on which the case begins. This page number
always follows the abbreviated reporter title in your citation.
5. Now that you have identified the appropriate volume and page number, pull the
volume from the shelf. (Volume numbers are located on the spine of each reporter.)
Turning to the appropriate page, you will find the full text of the opinion of the court.
Using the volume, reporter abbreviation, the page number is also the best way to find
a case electronically.
Reading a Statutory Citation

Unlike case law which is made by judges in specific court cases, statutory law is made by
the federal and state legislative branches of the government. Statutory law is published in
codes. The United States Code contains statutes that have been passed by Congress. In
addition, every state publishes its own statutory code. Citation format for statutes varies
widely across the state and federal systems, however, there are similarities.

A federal statutory citation generally contains the following elements:

the title or chapter number of the code

the abbreviated name of the code

the section or part number of the title or chapter; and

the year of the code

Below is an example of a United States Code citation:

42 U.S.C. § 1983 (2006).

In this citation 42 is the Title of the Code where this statute can be found. U.S.C. is the
abbreviation for the United States Code. § is the section symbol. 1983 is the section of title
42 of the code where the statute can be found. 2006 is the year of the code.

How to Find a Statute by Citation

1. Once you have a citation, the first step is to identify the appropriate code. If you are
researching a United States Code citation you may use any of the three federal
statutory codes. Abbreviations for the federal statutory codes are as follows:

Abbrev. Title
U.S.C. United States Code
U.S.C.A. United States Code Annotated
U.S.C.S. United States Code Service

1. The U.S.C. is the official code of the federal government. This set contains the actual
statutes as adopted by Congress.The U.S.C.A. and U.S.C.S. are annotated codes
published by commercial entities. In addition to the statutes, these codes contain other
information that may be valuable to your research. Perhaps most helpful are the case
annotations where courts have interpreted the statutory sections. Annotated codes also
provide cross-references to legal encyclopedias, legal periodicals, and federal
regulations. An additional advantage of annotated codes is that they are available on
the shelf long before the official U.S.C. which is published by the government.
2. After you have identified the appropriate code, the next step is to identify the correct
title. The United States Code is divided into 50 titles. Within all three versions of the
United States Code, the titles are arranged numerically. In your citation, the title
always precedes the code abbreviation.
3. Once you have identified the appropriate title, the next step is to determine the section
number. The section number follows the code abbreviation in your cite.
4. Now that you have identified the appropriate title and section number you are ready
to locate the code in the law library. Once you have found the code you will notice
that the titles are printed on the spine. Often one title will span several volumes.
Locate the volume containing your title and turn to the appropriate section number.
Here you will find the full text of your statutory section. The title, code abbreviation,
and section can also be used to find the code section electronically.
5. After you have found your section you will want to make sure that there have not
been any amendments or changes. To do this check the pocket part (in the back cover
of the volume) or the softbound supplement (shelved immediately after your
volume). Electronic code versions should be up to date, but you should always check
to see when the electronic version was last updated.
 THE COMMON LAW

Judge Bouvier’s famed Dictionary, adapted to the Constitution and Laws of the United States of America, and
of the Several States of the Union, gives the following definition of Common Law:

Common Law.

1. That system of law or form of the science of jurisprudence which has prevailed in England and in the United States
of America, in contradistinction to other great systems, such as the Roman or Civil Law. Those principles, usages,
and rules of action applicable to the government and security of persons and of property, which does not rest for
their authority upon any express and positive declaration of the will of the legislature. 1 Kent, Comm. 492. The
body of rules and remedies administered by courts of law, technically so called, in contradistinction to those of
equity and to the canon law. The law of any country, to denote that which is common to the whole country, in
contradistinction to laws and customs of local application.

2. The most prominent characteristic which marks this contrast, and perhaps the source of the distinction, lies in the
fact that in the common law neither the stiff rule of a long antiquity, on the one hand, nor, on the other, the sudden
changes of a present arbitrary power, are allowed ascendancy, but under the sanction of a constitutional
government, each of these is set off against the other; so that the will of the people, as it is gathered both from
long-established custom and from the expression of the legislative power, gradually forms a system, – just, because
it is the deliberate will of a free people, – stable, because it is the growth of centuries, – progressive, because it is
amenable to the constant revision of the people. A full idea of the genius of the common law cannot be gathered
without a survey of the philosophy of English and American history. Some of the elements will, however, appear in
considering the various narrower senses in which the phrase “common law” is used.

3. Perhaps the most important of these narrower senses is that which it has when used in contradistinction to statute
law, to designate unwritten as distinguished from written law*. It is that law which derives its force and authority
from the universal consent and immemorial practice of the people. It has never received the sanction of the
legislature by an express act, which is the criterion by which it is distinguished from the statute law. When it is
spoken of as the lex non scripta, it is meant that it is a law not written by authority of law. The statutes are the
expression of law in a written form, which form is essential to the statute. The decision of a court which establishes
or declares a rule of law may be reduced to writing and published in the reports, but this report is not the law; it is
but evidence of the law; it is but a written account of one application of a legal principle, which principle, in the
theory of the common law, is still unwritten. However artificial this distinction may appear, it is nevertheless of the
utmost importance and bears continually the most wholesome results. It is only by the legislative power that law
can be bound by phraseology and by forms of expression. The common law eludes such bondage: its principles are
not limited nor hampered by the mere forms in which they may have been expressed, and the reported
adjudications declaring such principles are but the instances in which they have been applied. The principles
themselves are still unwritten, and ready with all the adaptability of truth, to meet every new and unexpected
case. Hence it is said that the rules of the common law are flexible. 1 Gary, Mass. 263; 1 Swan, Tenn. 42; 5 Cow.
N.Y. 587, 628, 632.

... 6. In this country, the common law of England has been adopted as the basis of our jurisprudence in all the states
except Louisiana. Many of the most valued principles of the common law have been embodied in the Constitution of
the United States and the constitutions of the several states.

One of those “most valued principles of the common law,” referred to by Judge Bouvier, is a common law right
to contract, a right so fundamental to a free people that our founding fathers inserted an absolute prohibition
against state interference with contractual obligations in Article I, Section 10, of the United States
Constitution:

No State shall ... pass any ... law impairing the obligation of contract.

Since a Business Trust Organization is brought into existence and governed by contract, its foundational
bedrock within the law is a Common Law right to contract, protected from state impairment by the United
States Constitution.

This principle of law allowing trusts to be created is, for example, codified in the California Probate Code,
§15023:

A trust may be created for any purpose that is not illegal or against public policy.
As stated in Restatement of the Law of Trusts:
A trust can be created for any purpose which is not illegal.
An intended trust or a particular provision in the terms of the trust may fail for illegality where:

1. the performance of the intended trust or of the provision involves the commission of a criminal or tortious
act by the trustee;
2. the enforcement of the intended trust or provision would be ‘against public policy, even though its
performance does not involve the commission of a criminal or tortious act by the trustee;
3. the purpose of the settlor in creating the trust is to defraud creditors or other third persons;
4. the consideration for the creation of the trust is illegal. [See Restatement, Second, Trusts §§ 59, 60]
 PUBLIC POLICY

Public policy considerations. Although the trustee is not directed by the terms of the trust to perform any act
which is in itself criminal or tortious, the trust, or a provision in the terms of the trust, is invalid if the
enforcement of the trust or provision is against public policy. Such a trust or provision is against public policy
if:

Its enforcement tends to induce the commission of illegal acts;

Its enforcement tends to induce the commission of immoral acts;
Its enforcement tends to induce the commission of acts, not in themselves illegal or immoral, by creating
an improper motive for their commission, where it is against public policy to encourage the doing of such
acts from such a motive;
It involves a disposition of the trust property which it is against public policy to enforce;
Its enforcement would prevent a proper administration of the trust.

It is beyond the scope of this course to provide a complete treatise on the history, origin and evolution of
Common Law. Suffice to say that Common Law is the source of the principles and guidelines embodied in the
United States Constitution, a blueprint for the government of the first truly free people in the modern era.
The whole fabric of the American national charter was assembled from basic principles and institutions which
were preserved by the Anglo-Saxons, as an important part of their jealously guarded heritage of freedom. In a
nation of many thousands of law graduates, a thorough course of instruction on Common Law is exceedingly
hard to find in the United States.
 WHAT IS A CONTRACT?

A contract is an agreement to do or not to do a certain thing and is one source of

“obligation”. “Obligation” is defined as a legal duty by which a person is bound to do or not
to do a certain thing. The elements essential to the existence of a contract are:

(1) parties capable of contracting;

(2) mutual consent of those parties;
(3) a lawful object; and
(4) a sufficient cause or consideration.

A contract is either express or implied. An express contract is one in which the terms are
stated in words. The existences of the terms of an implied contract are manifest by conduct.
Although a great deal can be said concerning implied contracts, this discussion is limited to
express contracts, since we are primarily concerned with the proper drafting of written
agreements.

Contracts may be classified as either unilateral or bilateral. In a unilateral contract, the

promisor or offeror expects that the contract will be consummated by the performance, not
by the promise, of the other party. For example, A promises to pay B ten dollars if and when
B mows A’s lawn, but not simply if B promises to do the job. The contract is formed when
B mows A’s lawn. A bilateral contract is formed when one party’s promise is given for the
other party’s promise. For example, A promises to pay ten dollars to B if B will promise to
mow A’s lawn. The contract is formed by the exchange of promises.

There is no intrinsic benefit in labeling a contract as unilateral or bilateral. It is important in

drafting contracts to clearly state whether promises are to be exchanged, or whether one
party is to be bound by the performance of an act by the other party and not by a promise.

Contracts are also distinguished as executed or executory. An executed contract is one

which has been fully performed; nothing remains to be done by either party. Executed
contracts are not properly contracts at all since the parties are no longer bound by a
contractual tie. The term denotes rights to property which have been acquired by means of a
contract. All contracts in which some future act remains to be done are executory.

Since an obligation arises from the contract of the parties, it follows that each of the duties
or promises of a party to a contract is an obligation.

One of the essential elements to the existence of a contract that is misunderstood by many
Business Trust Organization managers is “consideration.” The term “consideration”
includes any act or return promise giving a benefit to the promisor or imposing a detriment
on the promisee. In order to be enforceable, a promise must be supported by consideration,
since a promise unsupported by consideration has no binding force at law. It is important to
note that the requirement of consideration applies only to executory contracts, i.e., contracts
whose object or terms have not been fully performed, since after contracts have been fully
executed on both sides, they become a closed incident and the question of consideration is
no longer material. For example, gifts and other voluntary transfers which are executed
contracts do not require consideration for their validity; however, a mere promise to make a
gift, like any other promise unsupported by consideration, is unenforceable.

Consideration may consist of either a benefit conferred or agreed to be conferred upon the
promisor or some other person or a detriment suffered or agreed to be suffered by the
promisee or some other person. It is important to note that it is not necessary that a benefit
actually be conferred on the promisor; it is sufficient that a detriment be suffered or agreed
to be suffered by the promisee; however, the benefit or detriment must be a part of a bargain
or agreed exchange. The mere fact that a promisee relies upon a promise to his injury or the
promisor gains some advantage does not establish consideration without the element of a
bargain or agreed exchange. The important inquiry is whether the consideration was
actually bargained for in exchange for the promise or other obligation, and the test for
determining the existence or nonexistence of such bargain is the manifest intention of the
parties.

Valid consideration may be present in many different forms, for example:

1. The foregoing of a legal right if the parties have so agreed. The legal right,
however, must be an enforceable one since the giving up of an unenforceable
right is not sufficient consideration for a new promise.
2. The forbearance to sue or to pursue some other legal remedy which takes place
pursuant to and in reliance on an agreement.
3. The compromise of a disputed claim.
4. Mutual promises are concurrent consideration in a bilateral contract.

Not only must the contract have a lawful object, but the consideration for the contract must
be lawful and therefore must not be contrary to an express provision of law, the policy of
express law, or good morals. If any part of a single consideration for one or more objects, or
of several considerations for a single object, is unlawful, the entire contract is void for
reasons that it is impossible to determine which of the considerations induced the promise.

It is not necessary, nor is it common practice, in drafting an agreement to repeat the

consideration for every promise or covenant – the mention of consideration once in the
agreement is sufficient. The conclusive presumption that facts recited in a written
instrument are true as between the parties thereto, or their successors in interest, does not
apply to the recital of consideration. Instead, the true consideration or lack of consideration
for a contract may always be shown.

Not only is it essential to the existence of a contract that there be parties capable of
contracting, but a key point is that these parties must represent the assent of at least two
separate independent minds. The two parties cannot be the same person or entity contracting
in two different capacities. The assent of two independent minds is essential.

A manager of a Business Trust Organization cannot make a contract between himself and
the Business Trust Organization because:

(1) two separate parties are required, and;

(2) one acting in a fiduciary capacity is not permitted to deal with himself in an individual
capacity.
 “ARM’S LENGTH” AND “SELF-DEALING”

According to Black’s Law Dictionary (Fifth Addition 1979), the term “self-dealing”

...relates to transactions wherein a trustee, acting for himself and also as trustee, a relating
which demands strict fidelity to others, seeks to consummate a deal wherein self-interest as
opposed to duty. Arm’s length is “The standard under which unrelated parties, each acting
in his or her own best interest, would carry out a transaction.”

To make certain that the Business Trust Organization maintains arm’s length in all of its
transactions, you must be sure that the fiduciary duty to the capital unitholders is not
overridden by self- interest, that the form and substance of transactions are mutually
supportive. If this is not done, you may open yourself to charges of self-dealing.

As an example of self-dealing, let’s assume you are employed by a small bank. Among
other duties, you hold the position of loan officer. Finding that you need a personal loan
immediately, you sign a loan check as a loan officer, with every good intention of
completing the paperwork later. However, later keeps getting easier to put off. The auditors
come while you are on vacation and you are accused of self-dealing, or embezzlement.
Regardless of your denial and explanation, you are in for a bad time.

Let’s play this scenario over with some minor changes. The circumstances remain the same
except that, this time, you complete a loan application, as the borrower. Then, you take the
application to another officer who is authorized to approve loans. That officer reads and
approves the application, determines the terms of the loan and the interest to be charged. He
signs the agreement as the loan officer and lender. You sign it as the borrower. Only then do
you cut a check for the amount of the loan. When an auditor reviews this loan record, he is
satisfied that all is in order, and brings no charges of self-dealing or embezzlement of bank
funds. Thus, arm’s length dealing is maintained.

The actions of the bank officer in the second scenario reveal intent and purpose more clearly
than any words. The loan officer in each scenario acted on his own behalf. However, it is
clear that the person^ in the second scenario acted as a conscientious agent of his employer
in performing his assigned duties.

The normal and natural consequence that flows from the acts of interested parties frequently
reveals their intent and purpose more clearly than their declarations. (Von’s Investment Co.,
Ltd., 39 B.TA. 114 (1939) Aff’d 111 F. 2d 440 (9th Cir., 1940)]; The court also need not
take the actor at his word, his actions speak louder than his words in many cases in the
judicial ascertainment of someone’s subjective interest. [Markham v. United States, 245 F.
Supp. 505 (1965)]

In effectively managing the Business Trust Organization, it is necessary that you show
outsiders that your position and authority lies not in yourself, but in the organization. For
example: When an agent for a closely held corporation was seeking a real estate loan with a
bank on behalf of the corporation, the bank loan officer kept trying to complete the loan
papers as if it was the personal loan of the agent. The first few times, the agent explained
that he was acting as an agent of a corporation, which is not the same thing as being a
corporation. The loan officer was unable to separate the agent and the corporation until the
agent made it clear by saying “I am no more the corporation than you are the bank that you
work for.”

The point is: In day-to-day affairs where you act as agent for a Business Trust Organization,
the path of least resistance may seem to lie in not challenging others when they attempt to
co-mingle you and the Business Trust Organization. It may appear easier to go along at the
time. However, should a time come when it is necessary to substantiate the form under
which the business was done, you may find that your actions (as evidenced by the Business
Trust Organization records, or lack of same) speak louder than your words of explanation?
Make certain that the records reflect that you act as agent for the Business Trust
Organization and that you personally are subordinate to something other than yourself.
Keep records as straight as and distinct as possible. There should be no co-mingling of
assets between the Business Trust Organization and its agents.
 DEALINGS BETWEEN RELATED PARTIES

All business ventures sooner or later participate in transactions with related parties. This is a very
normal situation and will create no problems as long as the transaction is properly structured and executed.
All such transactions should be completed and documented as nearly as possible to the way the same
transaction would have been concluded between unrelated parties.

If a transaction appears to provide an inordinate tax benefit to one or both of the parties, the Internal
Revenue Service may move to restructure it in a way that will nullify the tax benefit. §482 of the Internal
Revenue Code provides:

In any case of two or more organizations, trades, or business, (whether or not incorporated, whether or
not organized in the United States, and whether or not affiliated) owned or controlled directly or indirectly by
the same interests, the Secretary may distribute, apportion, or allocate gross income, deduction credits, or
allowances between or among such organizations, trades or businesses, if he determines that such
distribution, apportionment, or allocation is necessary in order to prevent evasion of taxes or clearly to reflect
the income of any such organizations, trades, or businesses.

Even though §482 may seem overly broad, the power to shift income does not trigger the statute.
Common control of separate entities is not prima facie (on its face) evidence of less than arm’s length dealing.
§482 was designed to prevent the shifting of income or deductions informally or between controlled
companies. [Central Cuba Sugar Company v. Commissioner, 198 E 2d 214 (2d Cir., 1952)] The IRS can rectify
abnormalities and distortions in income, of separate entities under common control and, if such entities under
common control deal with each other at less than arm’s length, the IRS can “unscramble” the situation. [Griffin
and Company, Inc., et al., v. United States, 389 F. 2d 802 (C.TC., 1968))

Sometimes, the IRS bases its attempt to reapportion income under §482 upon the fact that no
bargaining between affiliated companies has taken place. Apparently, the element of bargaining in doing
business among affiliates is not required as long as the transaction actually is carried out under terms that
would have been acceptable to unrelated parties. [U.S. Gypsum Company et al., v. United States, 304 F. Supp.
627 (D.C., N.D., 111 1969)] A contractual form of transaction, however, cannot control imposition of tax
liability where the form does not represent a bona fide and actual agreement. (Edwards v. C.I.R., 415 F. 2d 578
(1969)]
 KEEPING THE RECORDS

One of the most important tasks that the manager of a Business Trust Organization must carry out is
assuring that the accusation that the Business Trust Organization, the point and purpose of record-
keeping is radically changed. Let the importance and excitement of keeping records radically change
your former attitude. For certain, keeping detailed, accurate, and timely records is absolutely necessary
for the successful management of a Business Trust Organization. It should become a habit with you,
growing out of practice.
 PROPERLY MANAGED VS IMPROPERLY MANAGED TRUST

For tax purposes, the economic reality of a financial transaction is usually geared to the primary
business purpose of making a profit. It is important to emphasize both. A sound business purpose must not
only have existed in the taxable year, but the taxpayer must show that he knew about it and was motivated
by it. [General Guaranty Mortgage Co., Inc., v. Tomlinson, 335 F. 2d 518 (5th Cir., 1964)]

Minutes may furnish the proof that the presumption, but the facts can be determined only by what
was done. [Iron Mountain Oil Co., v. Alexander, 37 F. 2d 231 (10th Cir. 1930)]

A SEPARATE LEGAL ENTITY

The essential- the crucial – point being made is the foregoing discussion is the same point many
people fail to comprehend. What you must understand is that a Business Trust Organization is

NEITHER YOU NOR YOURS.

The Business Trust Organization is a SEPARATE, DISTINCT, LEGAL ENTITY APART FROM YOURSELF!
In order for YOU to have the proper understanding, the above simply MUST be understood. Read it
carefully again. Close your eyes and picture the Business Trust Organization as another person, the other
legal, artificial, separate and distinct personality that it actually is. Picture the Business Trust Organization
as your friend, designed to help those who participate in its functions and activities. When you understand
the separateness between

YOURSELF

And the

BUSINESS TRUST ORGANIZATION

You will begin to see and think in the proper perspective.

 MAINTAINING PRIVACY

Why the need for privacy? What people do not know a Business Trust Organization has, they cannot steal.
This axiom applies equally well to anyone’s wealth. Taxing authorities, creditors, live-in lovers, spouses, etc.,
may find one’s wealth to be easy pickings if they know of its existence and whereabouts. In the case of a
professional person, for example, how his wealth is owned might make the difference between a nuisance
malpractice suit and be left alone.

Business Trust Organizations provide a powerful tool for the protection of assets. Your responsibilities as a
Business Trust Organization manager are private affairs between you and the Trustee. Keep a low profile,
disclosing only such information as is absolutely necessary and only to those with a need to Know, and both
you and the Business Trust Organization should lead long productive and happy lives.

Is privacy possible? Is it really possible to be private in today’s Orwellian world of computerized data banks
and electronic eavesdropping? Before attempting to answer, let’s consider the following: All the snoopers on
earth are too thinly spread to meddle in everyone’s life. The happy fact is that the highly touted “omniscience”
of those charged with these duties is singularly lacking. We are surrounded by Paper Tigers, and all that is
usually required to avoid their bite is to maintain a low profile!

Therefore, we believe that the answer to the question, “Is privacy possible?” is a resounding “YES”. We’re not
saying that no precautions are necessary. To the contrary, one must at all times conduct his affairs in a manner
carefully calculated to invite the least amount of attention. Opportunists are constantly targeting high-profile
types to satisfy their insatiable greed. By making yourself and the Business Trust Organization as
inconspicuous as possible, you minimize your risk by allowing the various thieves and rip-off artists to
overlook you in favor of easier pickings.

Minimizing risk does not mean eliminating risk. Evaluation of the remaining risk is best accomplished through
cost/benefit analysis. This approach concedes and allows for the fact that all human activity (including
specifical inactivity) involves risks, dangers and negative aspects in various forms. While such risks cannot be
entirely eliminated, they can be analyzed and compared to the profits or gains anticipated to arise from the
activity involving the risk. When*the risk involved in a particular activity is judged to be low enough, or the
anticipated benefit is deemed to be great enough, relative to the other available alternatives, it is reasonable
to pursue that activity.

In economic endeavors, we find that the benefits of being able to earn and dispose of income as we see fit can
often mean the difference between bare survival and genuine comfort. Through privacy, we are able to
preserve and increase the fruits of our labors with minimal hindrance from economic predators, an invaluable
benefit. The risk of detection, attention, and loss are relatively slight. Even if a worse- case event happens, you
are seldom any worse off than you would have been without your secrecy precautions. Clearly, such
precautions do little harm and can be of great benefit. Thus, from cost/benefit point of view, the low profile
that we suggest is not only possible but profitable.

By its nature, the properly utilized Business Trust Organization is a very effective mechanism for maintaining
privacy in business and financial affairs. The specific details of how this type of entity works to guard privacy
and enable a low-profile strategy are covered in Section III under the heading, “Implementing the Right to
Privacy”.
 BUSINESS TRUST ORGANIZATIONS

Definitions and Terminology

ONE OF THE DISTINCTIVE DEVICES by means of which individuals may combine their resources to operate
a business for profit is the so-called business trust, or “Massachusetts trust’ which may be comprehensively
defined as an unincorporated business organization created by an instrument by ‘which property is to be held
and managed by trustees for the benefit and profit of such persons as may be or may become the holders of
transferable certificates evidencing the beneficial interests in the trust estate. Such an organization has been
frequently termed a “common-law trust,” but this phrase is not descriptive of any of the peculiar
characteristics of such organizations.

The basis for the terminology “common-law trust,” in this connection, is not that such organizations are the
creatures of the common law, as distinguished from equity, but, that they are created under the common law
of contracts and do not depend upon any statute. [Schumann-Heink v. Folsom, 328 111 321, 159 NE 250, 58
ALR 485.]

Business trusts are excluded from the coverage of the Restatement of the Law of Trusts, wherein it is pointed
out that the business trust is a special kind of business association and can best be dealt with in connection
with other business associations. Under the Uniform Commercial Code, the term ’organization,’ unless the
context other requires, is defined to include a business trust. [13 Am Jur 2d, page 375.]

As indicated by its name, a business trust is an estate adapted to business or commercial activities. Reduced
to its bare essentials, a business trust or Massachusetts trust, such as treated herein, consists of a
combination of capital vested in trustees with a view to profit for the holders of evidence of beneficial
interest.

The Supreme Court of the United States has thus defined the “Massachusetts Trust” as a form of business
organization, common in that state, consisting essentially of an arrangement whereby property is conveyed to
trustees, in accordance with the terms of an instrument of trust, to be held and managed for the benefit of
such persons as may from time to time by the holders of transferable certificates issued by the trustees
showing the shares into which the beneficial interest in the property is divided.”

A trust of this nature is created when several persons transfer the legal title in the property to trustees, with
power vested in the latter to manage and control the property and business and to pay the profits of the
enterprise to the creators of the trust or their successors in interest.

“A business or common-law trust, commonly known as a Massachusetts trust, is a form of business organization
consisting essentially of an arrangement whereby property is conveyed to trustees, in accordance with the terms of an
instrument of trust, to be held and managed for the benefit of such persons as may from time to time be holders of
transferable Certificates issued by the Trustees showing the shares into which the beneficial interest is divided, which
Certificates entitle the holders to share ratably in the income of the property, and on termination of the trust, in the
proceeds thereof.” – “Corpus Juris Secundum, 12 A 495.

In its typical and characteristic form, such a trust is brought into being by a declaration of trust, by the terms
of which persons desiring to invest capital agree to the creation of a governing group of trustees, vest the
latter with title to the property of the enterprise and with the control and management of its business, with
provisions for transferable certificates evidencing the interests of each beneficiary or member, for the
existence of the trust for a certain period, without dissolution or termination by the death, insanity, or
bankruptcy of a member, and, usually, for freedom of the members or shareholders from liability to third
persons. [156 ALR, 27.]
 HISTORICAL BACKGROUND

Basically, a Business Trust Organization is an adaptation of the ordinary business enterprise. It is governed
by the principles of contract."

This method of conducting a commercial enterprise is said to have originated in Massachusetts as a result
of an inability to secure corporate charters for acquiring and developing real Massachusetts trust."

It has been said that the type of organization commonly denominated "Massachusetts trusts" originated
because of the hostility of some states toward corporations and out of a desire to secure some of the
advantages of incorporation without incurring the burdens and restrictions thereto. Undoubtedly this
consideration was largely responsible for the great development of business trusts. It is no mere
coincidence that their widest use and popularity have been contemporaneous with the increase in the
regulation and taxation to which corporations have been subjected.

Although the business product of the modern industrial era, and the jurisprudence on the subject has
grown up largely during the last ninety years, the law reports contain several instances of the use of this
form of commercial enterprise more than a century ago...

The following concerns in this category are referred to in 15 Lawyer & Express Company (See Hoey v.
Coleman (1891; CC) 46 F 221; American R. Exp. Co. v. Asher (1927) 218 Ky 172, 291 SW 21; Reffon Realty
Corp. v. Adams Express Company; American Deposit & T. Co. (1930) 159 Md 81, 150 A 37. [156 ALR, 29.]
 NECESSARY ELEMENTS

Who can create a Trust? [See Corporations and Express Trusts as Business Organizations, Michigan Law
Review, Jan. 1915]

Every person who can hold and dispose of any legal or equitable estate or interest in property, may create a
trust in respect of such estate or interest. ...the state, a private corporation, married women, an infant at least
till he avoids, and aliens and non-residents. Still, further, it is the constitutional right under the Federal
constitution of a citizen of one state to constitute a citizen of another state a trustee of his property real or
personal, wherever the property is located.

Anyone capable of holding property may be a trustee: an infant, married women, corporation, or alien, or even
a person of unsound mind. And in the case of an infant or lunatic trustee, a court of equity can vest title in
some suitable person to carry out the trust. One of several beneficiaries may be a trustee if the settlor so
appoints.

A significant American contribution to the development of the idea of the trust has been the creation of
corporations specifically chartered to act as trustees. Corporate trustees are now also permitted under
British law and in most Anglo nations and asset havens.

Who Can Be a Beneficiary?

So too anyone can be a beneficiary...infants, married women, corporations, unincorporated bodies, residents
or non-residents, anyone capable of taking and holding any kind of property and no acceptance by the
beneficiary is necessary.

What Types of Assets May a Trust Own?

So too any kind of property may be held in trust; real, personal, legal, equitable, in possession or in action, (if
assignable), in remainder, reversion, or expectancy, domestic or foreign, can be the subject of a declaration of
trust.

The Elements of a Trust [See Restatement, Second, Trusts § 2]:

A trust involves three elements:

(1) a trustee who holds the trust property and is subject to equitable duties to deal with it for the benefit of
another; Calendar is loading...
(2) a beneficiary, to whom the trustee owes equitable duties to deal with the trust property for his benefit; 13 - Available
(3) trust property, which is held by the trustee for the beneficiary.

Although all three elements are present in complete trust, one or more of them may be temporarily absent
without destroying the trust or even without preventing the creation of the trust.

Necessity of a trustee. A trust can be created, or having been created can continue, although for the time being
there is no trustee. Last Name*:

Necessity of a beneficiary. A trust can be created, or having been created can continue, although for the time
being there is no beneficiary. A trust can be created although no beneficiary is in existence at the time of the
creation of the trust, if the beneficiary is definitely ascertainable within the period of the rule against
perpetuities.

Necessity of trust property. A trust cannot be created, however, unless there is trust property in existence and
ascertainable at the time of the creation of the trust. In the absence of such property there is at most an
agreement to create a trust, and whether such an agreement is binding as a contract depends upon whether
the requirements for the creation of a contract are satisfied. If a trust is created and subsequently the whole
of the trust property ceases to exist, the trustee no longer holds anything in trust; but in such a case the
trustee may remain in a fiduciary relation to the beneficiary and subject to fiduciary duties.
 LEGAL ASPECTS

It is unfortunate that this instrument is usually referred to as a business organization." The word "business
agreement merely holds grantor and trustees who take possession of the property in fee simple. There are
nine basic aspects of the Business Trust Organization, outlined below, necessary to understand how and
why it works legally.

1. It is formed by executing a contract between the parties, setting forth the purposes, terms, and
conditions of its existence.

2. It is a legal entity and an artificial individual with rights almost equal to a natural individual, able to
own property and conduct business like any person. It is irrevocable and no one has any reversionary
rights to its business activities managed by Trustees, who accept such responsibility as fiduciary on
behalf of the beneficiaries.

3. The beneficial interests are divided into Capital Units, evidenced by certificates, conveying to the
holder the limited rights to receive their pro-rata share of any distributions of income or Capital Units
are personal property which convey neither legal title to the property nor any voice in the
management of the business or the selection of Trustees, and which become void upon the death of
the holder.

4. It is subject to taxation on its net undistributed income. The beneficiaries are taxed only on what they
actually receive.

5. The Business Trust Organization are never subject to probate or artificial person, it never dies. It is
set up in contemplation of life, not of death, as is a will.

6. The Capital Units become void upon the death of the holder and, thus, have no value to be subject to
Business Trust Organization can be extended as deemed advisable or terminated at any time by the
Trustees in accordance with the indenture.

The mechanics of setting up a Business Trust Organization are fairly simple. The creator first has in his
possession a indenture and a number of certificates representing Capital Units. The creator approaches
the exchanger and offers, for consideration, to bring a Business Trust Organization into existence and to
appoint a suitable person, one who is under no obligation or prior arrangement, to serve as Trustee under
the terms of the indenture. If the exchanger accepts the creator then appoints the first Trustee, who offers
an equal exchange of Capital Units for property owned by the exchanger. The creator, having fulfilled his
purposes, then retreats from the contract.

Upon acceptance by the exchanger of the Trustee’s Capital Units for property, the exchange is
consummated and the Business Trust Organization is in business. The Trustees then proceed to carry out
the terms of the indenture, hiring employees, establishing business. As with all forms of business structure,
those responsible for conducting the business are entitled to reimbursement for all incidental and direct
expenses incurred by them in the conduct of business. They also have access to and use of the various
Business Trust Organization as necessary to carry out their
ARTICLE I, SECTION 10 OF THE UNITED States Constitution states in part that no State shall pass any law
impairing the obligation of contracts. Accordingly, since the trust indenture is a contract between the creator
and the trustees, the indenture controls the activities, authority, and responsibilities of those who administer
the trust. No one has the legal authority to violate or change its provisions except those so authorized by the
indenture.

Foremost among the advantages of trusteeship over the standard legal devices is its flexibility. The document
creating the trust is the law of the trust.” [Trusteeship in Modern Business, by Nathan Issacs, Harvard Law
Review, June 1929]

The following examples, excerpted from court decisions, illustrate how the validity of trusts as separate and
independent legal entities has been repeatedly upheld by the courts.
 CASE LAW

1.) A Pure Trust is a lawful, irrevocable, separate legal entity. In the case of Baker v. Stern, 58 A.L.R.
462, the Court stated, “It is established by legal precedent that pure trusts are lawful, valid business
organizations.” In the case of Burnett v. Smith, 240 S.W. 1007 (1922), the Court ruled that, “Trust or
trust estate is a legal entity for most all purposes as are common law trusts.” In Edwards v.
Commissioner, 415 F 2d 578, 582, 10th Cir. (1969), the Court stated, “Dignity of contract cannot be
set aside because a tax benefit results either by design or accident.” In Weeks v. Sibley, (D.C.) 269 F.
155, the Court stated: “A pure trust is not illegal if formed for the express purpose of avoiding taxation

2.) A Pure Trust is established by contract. Any law or procedure materially affecting contract rights
necessarily impairs the obligation of the contract upon which such right is founded and is, therefore,
violative of the United States Constitution. [Smith v. Morse, 2 CA 524]

3.) The creation of a Pure Trust is not subject to legislative control. The United States Supreme Court
holds that trust relationship comes under the realm of equity, based upon the common law, and is not
subject to legislative restrictions as are corporations and other organizations created by legislative
authority. [Eliot v. Freeman, 220 US 178]

4.) The creator of a Pure Trust may mold and give it any shape he chooses, and he or the trustees may
provide for the appointment of a successor or successors to the trustee or trustees, upon such terms
as he may choose to impose. [Shaw v. Paine, 12 Allen (Mass) 293; also, in Harwood v. Tracy, 118 Mo.
631, 24 SW 214]

5.) The Court will support the trustees in carrying out the terms of their Trust contract and agreement.
[Clews v. Jamison, 182 US 461, 21 S.Ct. 845]

6.) Trust property cannot be held under attachment nor sold upon execution, trustees’ personal debts.
[Mayo v. Moritz, 24 N.E. 1083 (1890)] Personal liability of a trustee cannot be enforced against the
trust property. If the trustee owned personally any amounts of beneficial interest, these U.B.I.’s can be
attached. [Hussey v. Arnold. 70 N.E. 87 (1904)]
In the case of the United States National Bank of Omaha v. Andrew Kaminski, civil action No. 77
Cv. 1830, District Court of Jefferson County, Colorado, June 16, 1980, the Bank alleged the: Kaminski
owed them $20,000. When he had no personal assets to seize after they obtained a judgment, they
tried to seize the assets of a pure trust that Mr. Kaminski had set up a few years before. The Bank’s
action failed and they were unable to penetrate the Trust.

7.) In one case, the IRS claimed that the trust was an association taxable as a The then Board of Tax
Appeals held that the trust was not an association, and, thus, not so taxable. It also held that income
earned by the trust in any given year, not distributed in the same year to the beneficiaries, cannot be
taxed a second time when it is distributed, as is the case with incorporated businesses. [Guitar Family
Trust v. Commissioner, 72 F 2d 544 (1934), 72 F 2d (1934)]

8.) Two recent cases demonstrate the use of irrevocable trusts as asset protection strategies. In
DeMaria v. Bank of California National Association 46 Cal. Rptr. 924 (1965), a widow with two grown
children executed an irrevocable trust agreement transferring most of her assets to the bank. The
trust provided for the distribution of the entire net income to the widow for life with s remainder upon
her death to her two children equally. The trustee was also given a limited discretionary power to
apply trust principal for the reasonable support, medical care and comfort of the widow. The court did
not allow the widow’s judgment creditor to attach the trust corpus. The reasoning of the court was
“...that a creditor of a beneficiary under a trust has no more rights and can secure no greater benefits
from a trust that the beneficiary can obtain for himself.” The court concluded that the trust was
established to free the widow from the constant demands of her children and not to avoid the claims of
creditors. Also, note that the court protected the vested remainders of the children by not allowing the
creditors to attach trust property which would have defeated their remainder interests.
In Estate of German, 85-1 USTC 13,610, 55 A.F.T.R. 2d 85-1577, trusts were created in which
the trustees would accumulate income and add that income to the principal at the end of each year.
After the trustor’s death, the trust property was to be held for the benefit of her sons and their
families. The trustees were given the discretion to apply for the grantor’s benefit all or in part of trust
income and principal. The written consent of the beneficiary who would be affected by such
distribution was required before the distribution could take place. The court held that the creditors
could not reach trust assets, that the trustor gave completed gifts when the trusts were created and
that the assets were not subject to estate tax. In not allowing the creditors to reach trust asset, the
court used the same reasoning as in DeMaria, supra. The trust was created to give vested remainder
interests to her family and not intended solely to shield assets from creditors. The courts gave great
weight in making their decision to the fact that the consent of the beneficiary was required before a
distribution could be made and that all undistributed income and principal would pass to the
beneficiary.

9.) There are some risks associated with the use of an irrevocable trust as an asset protection device. In
some cases, based on the particular facts of each case, courts have allowed judgment creditors to seize
assets in such trusts. In Re. Camm’s Estate, 172 R2d 547 (1946), the trustor created a trust with
income payable to the trustor for life. On the death of the trustor, the remainder plus accumulated
income was to pass to the trustor’s son. The court in allowing the creditor to reach the accumulated
income held “that equity would not permit the income to escape the reach of the creditor.” In another
case, McColgen v. Magee, 155 P. 995 (1916) which was decided on grounds of fraudulent conveyance,
the court stated: “One cannot, by any disposition of his own property, put the same or the income
thereof beyond the reach of his creditors, so long as he himself retains the right to receive and use it.”
These rulings underscore the need of a trustee to establish and administer the trust at “arm’s length.”

10.) A new trend is developing in the area of trusts as evidenced by California Law. Effective July 1,
1987, creditors can reach trust property to the extent that a trustor has retained the power to revoke
the Trust. The trust property subject to the power of revocation is liable for the claims of creditors.
[Cal. Prob. Code. §§18200, 18201] Also effective July 1, 1987: if a trustor is a beneficiary of a trust
created by the trustor and the trust instrument provides that the trustee shall pay income, principal or
both for the education or support of the beneficiary, or gives the trustee discretion to determine the
amount of income or principal or both to be paid to or for the benefit of the trustor, a creditor may
reach the maximum amount that the trustee could pay to or for the benefit of the trustor under the
trust instrument not exceeding the amount of the trustor’s proportionate contribution to the trust.
[Cal. Prob. Code 150304(b)]

11.) A Massecussets

12.) Annotation: 156 ALR 27. The Supreme Massachusetts trust as a form of
business organization, common in that state, consisting essentially of an arrangement whereby
property is conveyed to trustees, in accordance with the terms of an instrument of beneficial
interest in the property is divided. Hecht v Malley, 265 US 144, 68 L. ed. 949, 44 S Ct 462. A transfer
the legal title in property to trustees, with power vested in the latter to manage and control the
property and business and to pay the profits of the enterprise to the creators of the interest.
Goldwater v Oltman, 210 Cal 408, 292 P 6214, 71 ALR 871.

13.) See, for instance . Brown v Donald (Tex Civ App) 216 SW 2d 679; State ex rel. Calvin v. Paine.
137 Wash 566, 243 P 2; 247 P 476, 46 ALR 163.

14.) Willey v W. J. Hoggson Corp. 90 Fla 343, 106 So 408. The basis for the terminology “common-
law common law, as distinguished from common law of contracts and do not depend upon any
statute. Schumann-Heink v Folsom, 328 Ill 321, 159 NE 250, 58 ALR 485.

15.) Restatement, TRUSTS 2d § 1. Comment b. wherein it is further explained that although many
of the rules applicable to trusts are applied to business trusts, yet many of the rules are not applied,
and there are other rules which are applicable only to business trusts. It is appropriate to treat
business trusts on a somewhat different basis than private trusts. Swartz v Sher, 344 Mass 636, 184
NE2d 51, citing restatement.

16.) A business trust is a distinct form of organization,which for some purposes, must be differentiated
from both ordinary partnerships and corporations. State Street Trust Co. v. Hall, 311 Mass 299, 41
NE2d 30, 156 ALR 13.

17.) “Because a new use is being made of the trust does not mean new principles of law are to be
applied in determining the rights of the trustees, the cestuis que trust or persons dealing with the
trustees.” Schumann- Heink v. Folsom, 328 Ill 321, 159 NE 250, 58 ALR 485.

18.) A statute attributing to a business trust association the characteristics of a legal or corporate
entity does not involve any unconstitutional impairments of the obligation of contract. American R.
Exp. Co. v. Asher, 218 Ky 172, 291 SW 21. It has been suggested that a statute specifically authorizing
unincorporated associations, enacted subsequent to decisions holding business trusts not to be
corporations, recognizes the business trust as a legal entity. Edwards v. Belknap, 66 Idaho 639, 166
P2d 451.

19.) Manufacturers’ Finance Trust v. Collins. 227 Mo App 1120, 58 SW2d 1004 (right to prosecute
action in trust name); Gordon Campbell Petroleum Co. v. Gordon Campbell-Kevin Syndicate, 75 Mont
261, 242 P 540 (general statement in case involving power of trustees to contract on behalf of the
trust estate); Fisheries Co. v. Mc Coy (Tex Civ App) 202 SW 343. Annotation: 156 ALR 32. Business
trusts are not entities apart from the trustees. Swartz v. Sher, 344 Mass 636, 184 NE2d 51. Such a
trust has no legal existence, apart from its trustees, so far as concerns the right of contracting parties
to recover on a contract made in the name of the trust. Linn v. Houston, 123 Kan 409, 255 P 1105. And
see Fitch v. United Royalty Co. 143 Kan 486, 55 P2d 409. It is quite true that a business trust is not a
legal entity for the purpose of making a contract. Schwartz] v. Abbott Motors, Inc. 344 Mass 28, 181
NE2d 334, citing Peterson v. Hopson, 306 Mass 597, 29 NE2d 140, 132 ALR 1.

20.) See Spotswood v Morris, 12 Idaho 360, 85 P 1094; Hassack v Ottawa Development Assoc. 244 Ill
274, 91 NE 439. The chief advantages of this form of organization are their comparative freedom from
regulation and from corporation taxation, freedom of the members from the personal liability which is
imposed upon partners, and the fact that the trust does not dissolve, as does a partnership, upon the
transfer of a share or upon the death, insanity,or bankruptcy of a member. Goldwater v Oltman, 210
Cal 400, 292 P 624, 71 ALR 871.

21.) It has been held that public policy is not offended by permitting a business to be carried on by
trustees who limit their liability to the trust estate,Schumann-Heink v Folsom, 328 Ill 321, 159 NE 250,
58 ALR 485, nor, under the prevailing view, do statutes authorizing limited liability partnerships and
corporations by implication prohibit the creation of other types of organizations, such as business
trusts, enjoying similar immunity by virtue of the common law. Goldwater v Oltman, 210 Cal 408, 292
P 624, 71 ALR 871.

22. A business trust is not invalid because there was no compliance with statutes relating to
incorporation, Hodgkiss v Northland Consolidated, 104 Mont 328, 67 P2d 811, nor does such a trust
violate any policy evidenced by statutes of this kind. (State ex rel, Knox v Edward Hines Lumber Co.
150 Miss 1, 115 So 598)
 MOTIVES

The motive in forming such a trust is generally not considered by the courts in determining validity, and it has
been held that a business trust is not rendered illegal because of the fact that it was formed for the express
purpose of reducing or avoiding taxation. Weeks v Sibley (DC) 269 F 155; Phillips v Blatchford, 137 Mass 510.

“Anyone may arrange his affairs so that his taxes shall be as low as possible. He is not bound to choose that pattern
which best pays the Treasury. There is not even a patriotic duty to increase one’s taxes. Over and over again the courts
have said that there is nothing sinister in so arraigning affairs as to keep taxes as low as possible, everyone does it, rich
and poor alike and all do RIGHT, for nobody owes the public duty to pay more than the law demands.” Weeks v Sibley;
Edwards v. Commissioner; Helvering v. Gregory, and 60 Federal 2nd 809, Judge Learned Hand.

“A Pure Trust is a contractual relationship in trust form.” – Berry v. McCourt, 204 North Eastern Reporter 2d 235.

“It is established by legal precedent that business pure trusts are lawful, valid business organizations.” – Baker v. Stern,
58 American Law Reports, 462.

“A business trust is a common law entity formed by contract, and thus, is not subject to the same types of state
regulation as a corporation.” – Elliott v. Freeman, 220 US 178; and Crocker v. Malloy, 39 US 270.

“The business trust also called common-law trusts, are created under the common law of contracts and do not depend
upon any statute.” – Schuman-Heink v. Folsom, 159 NE 250.

“A pure trust is not subject to legislative control. The U.S. Supreme Court holds that the trust is created and its
relationship comes under the realm of equity based upon the common law and is not subject to legislative restrictions
as are corporations and other statutory entities or organizations created by legislative authority.” – Croker v. MacCloy,
649 US Supp 39; and Elliott v. Freeman, 220 US 178.

“One of the objectives of business trusts is to obtain for the trust associates, most of the advantages of corporations,
without the authority of any legislative act and with the freedom from the restrictions and regulations generally
imposed by law upon corporations.” – 13 Am Jur 2d, Page 379, Paragraph 51.

Such an organization will not be condemned as an attempt to take advantage of the corporate immunities
without assuming the burdens and obligations connected with corporations. Narragansett Mut. F. Ins. Co. v
Burnham, 51 RI 371, 154 A 909, wherein the court said; “It is not an evasion of legal responsibility to take
what advantages may accrue from the choice of any particular form of organization permitted by the law.

A trust is treated as a separate entity for tax purposes. All money earned by the trust is taxed to the trust
unless it is distributed to beneficiaries and then at their tax percentage. The tax deductions taken by the trust
can only benefit the trust, no one else. The single most important advantage of creating a separate entity for
tax purposes is to achieve income splitting. A trust is treated as a separate entity for liability purposes in most
states. When a trust enters into a contract with someone and the trust breaches the contract, only the trust,
not the officers, trustees (if this is included in the trust agreement) or beneficiaries can be held liable. The
only property or money the suing party can get is the property held in the name of the trust, this is called
“Limited Liability”. When the grantor places property in an irrevocable trust; the property is beyond the reach
of creditors.

Grantors May Be Treated as Owners of Trusts.

The grantor trust rules provide that if the owner of property transferred to a trust retains an economic
interest in, or control over, the trust, the owner is treated for income tax purposes as the owner of the trust
property, and all transactions by the trust are treated as transactions of the owner. Sections 671 – 677. In
addition, a U.S. person who directly or indirectly transfers property to a foreign trust is treated as the owner
of that property if there is a U.S. beneficiary of the trust. Section 679. This means that all expenses and
income of the trust would belong to and must be reported by the owner, and tax deductions and losses arising
from transactions between the owner and the trust would be ignored. Furthermore, there would be no
taxable “exchange” of property with the trust, and the tax basis of property transferred to the trust would not
be stepped- up for depreciation purposes. See Rev. Rul. 85-13, 1985-1 C.B. 184.

These are the only possibilities. The taxpayer must be either the trust itself, or the grantor, and not the
trustee (unless the trustee is also the grantor) or the beneficiaries.

(i) if the trust is an irrevocable trust where no other powers have been retained by the grantor (i.e., a non-
grantor trust), then the trust is the taxpayer doing the exchange; or

(ii) if the trust is a grantor trust (always the case for a revocable trust), then the grantor (the person who
formed the trust and contributed property to the trust) is the taxpayer doing the exchange.

A business trust may be organized to engage in any business in which individuals or corporations may lawfully
engage. As described in: Wagner Oil and Gas Co. v. Marlow, 278 Pacific Reporter 294, 137 Oklahoma 116;
Weber Engine Co. v. Alter, 245 Pacific Reporter 143, 120 Kansas 557; and 46 American Law Reports 158.
The Trust Identification Number, T.I.N. that can be issued for each separate pure business Trust shall not be
considered as a Tax Identification Number (TIN), or Employee Identification Number (EIN). As you can see,
from the above-cited authorities, that a pure business Trust, as a business, is not subject to any taxation of the
United States, including but not limited to any “State of” territory of District of Columbia. The following Court
rulings will also affirm this fact:

“A pure trust is not illegal if formed for the express purpose of avoiding taxation.” – Weeks v. Sibley, (D.C.) 269 F. 155.

“Dignity of contract cannot be set aside because a tax benefit results either by design or accident.” – Edwards v.
Commissioner (IRS), 415 F. 2d 578, 582, 10th Cir.

From The Department of the Treasury, IRS Handbook for Special Agents p. 412; Tax Avoidance
Distinguished from evasion, states:

“Avoidance of taxes is not a criminal offence. Any attempt to reduce, avoid, minimize, or alleviate taxes by legitimate
means is permissible.”

While the IRS legally recognizes, on the one hand, everyone’s protected right to arrange one’s affairs to
minimize tax liability, on the other hand, Agents of the IRS will do everything in their power (which is limited
by law) to dissuade anyone from actually asserting that right.

Regardless, it is quite clear, the courts and the IRS agree that all have the right to take whatever action one
desires to minimize creating a tax liability. Many more Court case cites are available for understanding the
legal and lawful position that a business Trust is at in regards to State and Federal jurisdiction. Business Trusts
are contractually created under the jurisdiction of American Common Law of united States of America.
Common law Business Trusts are foreign to “United States” and its “State of” territories, whereas “domestic”
U.S. corporations, etc., are created under specific (federal) State or Federal Statutes. Corporations may also
be created under one of the specific laws of the several 50 states and be considered foreign to other states as
well as the Federal Government.
 IRS

IRS- Trust still exists Trustees may die, resign, become incompetent, or be removed as trustee by the court for
cause (e.g., mismanagement). See Am. Jur. 2d “Trusts” § 254. If a trust loses its trustees, the court will appoint
others–a trust will not fail for lack of a trustee unless the settlor manifests a contrary intent. Restatement §
388, 397. Similarly, if a transfer of property to trust is ineffective only because no trustee is named in the
instrument of conveyance or the trustee is dead or incapable of taking title, a charitable trust is created.
Restatement § 353(2). If a trust loses all of its trustees during the application process, the determination
specialist should ordinarily wait until the new trustees are appointed before recognizing exemption, to ensure
that the trust will in fact continue. Also, as discussed below, the number and identity of the trustees could be a
material factor in determining whether the trust serves a private interest. How many trustees are required?
Single trustee may be permissible, A single trustee is all that is required of trusts under State law, although a
typical arrangement for a charitable trust is a governing board of several trustees that makes decisions by
majority rule. Restatement § 383. Rev. Rul. 66-219, 1966-2 C.B. 208, held that a 501(c)(3) organization is not
precluded from exemption merely because the creator of the organization (if a trust) is either the sole or
controlling trustee or merely because the organization is controlled by one individual. But not recommended
in the case of a single-trustee organization claiming public charity status, however, the lack of oversight
inherent in such situation is a very unfavorable fact (private foundations are subject to strict prohibitions
against self-dealing under IRC 4941). Sole corporate trustees are less objectionable (e.g., in the context of
testamentary trusts), except where the trustee plans to do business with itself or related entities with the
trust’s funds. Even three-member boards have been held to present a problem where there are other
unfavorable facts. See, e.g., Church of Ethereal Joy v. Commissioner, 83 T.C. 20 (1984) (three-member, the
self-perpetuating board provides an obvious opportunity for abuse of the claimed tax-exempt status). A large,
community-based board of trustees is a favorable fact in determining whether the trust is operated
exclusively for charitable purposes and is (or may reasonably be expected to be) publicly supported. See, e.g.,
Rev. Rul. 69-545, 1969-2 C.B. 117; Regs. 1.170A-9(e)(3)(v) and (5)(ii) and 1.509(a)-3(d)(3)(i).
 Can a trust exist without assets?

Assets required

By definition, a trust is a legal relationship with regard to property. Thus, the common-law rule is that a trust
does not exist without a res. Am. Jur. 2d “Trusts” § 47. The res may be of nominal value (e.g., $1). -A charitable
trust may be created by a transfer (inter vivos or by will) by the owner (or a person with a power of
appointment) of property to another person to hold the property upon a charitable trust. Restatement § 349.
-Alternatively, the owner may simply declare that he holds his property upon a charitable trust–no transfer of
title is necessary. Id. -A promise to transfer property to the trustee does not create a trust unless the promise
is enforceable as a contract. Id. -A trust that lists no assets in its Form 1023 balance sheet should be required
to cite the proper State law that it nonetheless exists as a valid trust under State law.

Does a trust have to be registered with the State? No State filing Unlike corporations, LLCs, or limited
partnerships, trusts generally do not file their governing instrument with the State to become legal. However,
a will that includes a testamentary trust is filed with the court as part of the will probate process. A few States
have adopted Article VII of the Uniform Probate Code, which requires the trustees of all trusts to register in
the court of the principal place of administration of the trust. The Uniform Probate Code imposes penalties
on the trustee for failure to register but does not invalidate the trust. The trust instrument usually indicates
the State law under which the trust is organized. If it doesn’t, the determination specialist should ascertain
the State law, and get a representation from the trust that it is properly organized under the State law,
particularly if there is doubt as to the validity of the trust. Like other nonprofit organizations, trusts must
keep orderly financial books and records, and minutes of meetings and decisions/resolutions by their
trustees. See IRC 6001; Rev. Rul. 59-95, 1959-1 C.B. 62710
 THE VALIDITY OF BUSINESS TRUST ORGANIZATIONS AS SEPARATE LEGAL ENTITIES FOR TAX
PURPOSES

TO ASSURE THAT THE NET INCOME of the Business Trust Organization is not taxable to the exchanger, the
two critical elements that must be included in the structure are irrevocability and adverse parties. These two
elements are simply two specific ways of saying “arm’s length”. It cannot be overemphasized, either in
structuring or operating a Business Trust Organization, that arm’s length must be maintained in all
transactions at all times.

The Power to Revoke:

(a) General rule. – The grantor shall be treated as the owner of any portion of a trust, whether or not he is
treated as such owner under any other provision of this part, where at any time the power to revest in the
grantor title to such portion is exercisable by the grantor or a non-adverse party, or both.” [Title 26 U.S.C.A.,
Section 676.]

Definitions and Rules:

(a) Adverse party. – For purposes of this subpart, the term “adverse party” means any person having a
substantial beneficial interest in the trust which would be adversely affected by the exercise or non-exercise
of the power which he possesses respecting the trust: A person having a general power of appointment over
the trust property shall be deemed to have a beneficial interest in the trust.

(b) Non-Adverse party. – For purposes of this subpart, the term “non-adverse party” means any person who is
not an adverse party. First Name*:

(c) Related or subordinate party. – For purposes of this subpart, the term “related or subordinate party” means
any non-adverse party who is: Last Name*:

(1) the grantor’s spouse if living with the grantor; Details*:

(2) any one of the following: The grantor’s father, mother, issue, brother or sister; The grantor’s father,
mother, issue, brother or sister; a corporation or any employee of a corporation in which the stock holdings of
the grantor and the trust are significant from the viewpoint of voting control; a subordinate employee of a
corporation in which the grantor is an executive.

For purposes of sections 674 and 675, a related or subordinate party shall be presumed to be subservient to
the grantor in respect of the exercise or nonexercised of the powers conferred on him unless such party is
shown not to be subservient by a preponderance of the evidence.

(d) The rule where power is subject to condition precedent. A person shall be considered to have a power
described in this subpart even though the exercise of the power is subject to a precedent giving of notice or
takes effect only on the expiration of a certain period after the exercise of the power. [Aug. 16, 1954, c. 736,
68A Stat. 226. Title 26 U.S.C.A., §672.]

The following examples illustrate the meaning of “substantial adverse interest” as used in the Internal
Revenue Code:

1. A person having a “substantial adverse interest,” within Revenue Acts of 1934 and 1936, §166, is a
person who has a vested right under the trust agreement to insist upon its performance and cannot be
compelled to surrender it. [C.I.R. v. Betts, C.C.A 1941, 123 F 2d 534.]

2. “Substantial adverse interest” means a direct legal or equitable interest in the trust property and not
merely a sentimental or parental interest in seeing the trust fulfilled for the advantage of other
beneficiaries. [C.I.R. v. Prouty, C.C.A 1940, 115 F 2d 331, 133 AL.R. 977. See also, Flood v. U.S., C.C.A.
Mass. 1943, 133 F 2d 173.]

3. “Substantial adverse interest” is a relative term, to be measured by facts of each case. [Morton v. C.I.R.,
C.C.A 1940, 109 F 2d 47.] *•

4. Where the sole duty of a commercial trustee was to invest and reinvest Trust corpus and pay large
income to beneficiaries, and the trustee received an annual fee of $600 and could revoke the trust at
any time, the trustee had no “substantial adverse interest” within Revenue Act of 1934, §166. [Morton
v. C.I.R., C.C.A. 1940, 109 f 2d 47.]

Thus, certain elements in the structure of a Business Trust Organization can result in the trust income being
taxed to the exchanger or settlor, rather than to the trust itself. This can occur when there is inadequate
“arm’s length” in the relationships of parties to a Business Trust Organization, thereby inviting an attack on
the grounds of “sham” and “self-dealing.” If the exchanger, settlor or another non-adverse party is beneficiary
or trustee of a Business Trust Organization, the risk of attack on these grounds is significantly increased.

Furthermore, any U.S. person transferring property to a foreign trust that has a U.S. beneficiary is treated as
owner of the portion of the trust attributable to the property transferred by the U.S. person, and is taxed on
the income of that portion of the trust in the same manner as m owner of a trust is taxed under the grantor
trust rules.

Transfers by U.S. persons are subject to the grantor trust provisions regardless of whether the transfers are
made without receipt of consideration from the trust or whether the transfers constitute a sale or exchange
(including a tax-free exchange) of the property to the trust. But the code provides an exception for transfers
of property to a foreign trust pursuant to a sale or exchange of property at its fair market value if, in the
transaction, the transferor realizes and recognizes all the gain at the time of the transfer or if the gain is taxed
to the transferor as provided in §453 -installment sales.

If the exception applies, the transferor is not treated as an owner of any portion of the trust by reason of that
transfer. But the transferor is treated as an owner of the trust if a gain is realized from the transaction and if
the transferor reports the gain as an open transaction or as a private annuity. Current User Progress

A US person transferring property to a foreign trust is treated as an owner of the trust only if the trust has a
U.S. beneficiary. The trust is treated as having a U.S. beneficiary if the trust instrument includes existing U.S.
persons as beneficiaries or if the trust instrument gives to any person authorized to distribute income or
corpus to unnamed persons generally or to any class of persons that includes U.S. persons. The fact that a
named foreign beneficiary could become a U.S. person by residency or citizenship does not cause the foreign
trust to be treated as a grantor trust before the event actually occurs.

Additionally, the trust is treated as having a U.S. beneficiary for any taxable year if, assuming the trust
terminated in that taxable year, any part of the remaining income or corpus of the trust could be paid to or for
the benefit of a U.S. person. The same rules that determine whether the trust has a U.S. beneficiary in any
year during its existence apply to this termination provision.

A year-by-year determination is made as to whether or not the trust has a U.S. beneficiary. If a foreign
beneficiary becomes a U.S. person and thus becomes a U.S. beneficiary, the grantor- trust provision applies to
the transferor beginning with the transferor’s first taxable year in which the foreign person becomes a U.S.
beneficiary.
 DISTINCTIONS BETWEEN ORDINARY TRUSTS AND BUSINESS TRUST ORGANIZATIONS FOR
FEDERAL TAX PURPOSES
Classification of Organizations for Tax Purposes:

(a.) Person. The term “person” includes an individual, a corporation, a partnership, a trust or estate, a joint-
stock company, an association, or a syndicate, group, pool, joint venture, or other unincorporated
organization or group. Such term also includes a guardian, committee, trustee, executor, administrator,
trustee in bankruptcy, receiver, assignee for the benefit of creditors, conservator, or any person acting in a
fiduciary capacity.

(b.) Standards. The Internal Revenue Code prescribes certain categories, or classes, into which various
organizations fall for purposes of taxation. These categories, or classes, include associations (which are
taxable as corporations), partnerships, and trusts. The tests, or standards, which are to be applied in
determining the classification in which an organization belongs (whether it is* an association, a
partnership, a trust, or other taxable entity) are determined under the Internal Revenue Code.
§§301.7701-2 to 301.7701-4 set forth these tests, or standards, which are to be applied in determining
whether an organization is (1) an association (see §301.7701-1), (2) a partnership (see §301.7701-3), or (3)
a trust (see §301.7701-4). [Internal Revenue Regulations 26 CFR Ch. 1 (4-1-88 Edition), §301.7701-1]
TRUST OR ASSOCIATION?
Association?

association (and taxable as a corporation) appear to have been based upon whether the business pure
trust" or "traditional consideration, embraces ‘business trusts 1 1 ." Last Name*:

In Commissioner v. City Nat. Bank & T Co. (1944; CCA 10th, 142 F2d 771) the Morrissey v. Commissioner
(1935; 296 US 344, 80 L.ed 263, 56 S.Ct. 289, 290). The difficulty, as always, comes when we apply
principles of law to a given state of facts... Decided cases are of small help in the solution of these
problems because, in the end, the answer turns upon facts, and these generally differ in each case." Details*:

The question of whether a association turns not merely upon technical differences between the
association. These are (1) an objective to carry on business for joint profit, and (2) the existence of
associates. These are essential characteristics of all organizations engaged in business for profit and no
organization can be classified as an association if either characteristic is absent. With that in mind, let’s see
what the courts have said with regard to each:
 Determining the Purpose of the Enterprise:

The proposition which defines that a association" taxable as a corporation was originally formulated in
Helvering v. Coleman – Gilbert Associates (1935; 296 US 369). This landmark case ruled that this
distinction should be determined solely from the agreement. This proposition has since found support in
many case decisions. Courts have consistently concluded that the powers conferred by the association’
within the sweep of the statute, not by the actual exercise of, but by the existence of powers under the
Commissioner v. Security-First Nat. Bank (1945; CCA 9th, 148 F2d 937) the business trustee to perform,
and not by what powers the trustee actually exercised."
 What Constitutes ‘Associates’?

The case of Crocker v. Malley (1919; 39 Sup. Ct. Rep. 270) was an association and were levied in respect to
dividends received from a corporation that itself was taxable upon its net income. The plaintiffs claimed
that they were not an association, but simply trustees and subject only to the property, were an
association, and ordered judgment for the defendant.

On appeal, the Supreme certificate holders...are in no way associated together nor is there any provision
in the (installment) for any meeting to be held by them... The sole property administered in their interest
by the trustees, who are the masters, to receive income while the Williams v. Milton, (215 Mass. 1, 10,
11, id. 8, 102 N.E. 355) The question is whether a different view is required by the terms of the present
act.

The association when they are admitted not to be partners in any sense, and when they have no joint
interest and no control over the fund. On the other hand, the trustees by themselves cannot be a joint-
stock association within the meaning of the act, unless all trustees with discretionary powers are such...
We perceive no ground for grouping the two beneficiaries and trustees – together, in order to turn them
into an association by uniting their contrasted functions and powers, although they are in no proper sense
associated. It seems to be an unnatural perversion of a well-known institution of the law."

The courts look to the scope of the legislative intent in making their decisions and the case of Crocker v.
Malley arose under the Income Tax Act of October 3, 1913. The Treasury Department assumed that the
degree of control exercised by the beneficiaries over the management of the association." It was this view
that distinguished an "association" from a "Hecht v. Malley (265 U.S. 144, May 1924). This case compared
the Corporation Tax Act of 1909 (“organized under the laws of the United States, or any State or
Territory”), the act of 1918 omitted this qualification. The business as associations at the common law."

Shorn of its previous restriction, the association", e.g., "A body of persons organized, for the prosecution of
some purpose, without a charter, but having the general form and mode of procedure of a corporation."

Nation’s first income tax.

The U.S. Supreme Eisner v. Macomber, 252 U.S. 189 (1920) that the word “income” may not be defined by
Congress, and that it can only be defined by the Constitution. It also ruled in the case of Bowers v.
Kerbaugh-Empire Co., 271 U.S. 170, 174, (1926) that:

“Income has been taken to mean the same thing as used in the Corporation Excise Tax Act of 1909 (36 Stat.
112) in the 16th Amendment, and in the various revenue acts subsequently passed.” [Bowers v. Kerbaugh-
Empire Co., 271 U.S. 170, 174, (1926)]

All income tax acts under Subtitle A of the Internal Revenue Code are based on the above, and are
classified by the Supreme Stanton v. Baltic Mining Co., 240 U.S. 103 (1916) as indirect [Stanton v. Baltic
Mining Co., 240 U.S. 103 (1916)]
 THE CONTROL TEST

The so-called “control test” resulting from Crocker v. Malley led to much litigation, and changes in the
regulations after the Hecht v. Malley decision caused increased uncertainty. In 1935, because of conflicting
court decisions which distinguished between an “association” and a “pure trust,” the Supreme Court
specifically addressed the question of: “What are the salient features of a trust – when created and
maintained as a medium for carrying on a business enterprise and sharing its gains — which may be regarded
as making it analogous to a corporate organization?” [Morrissey v. Commissioner, 296 US 344] The basic
principles developed by the Morrissey Court have since been relied upon in numerous cases and are reflected
in the current regulations. [26 CFR Ch.l (4-1-88 Edition), §301.7701-1 through -4]

Following are pertinent excerpts from those regulations:

301.7701-2 Associations.

(a) Characteristics of corporations.

1. (1) The term “association” refers to an organization whose characteristics require it to be classified for
purposes of taxation as a corporation rather than as another type of organization such as a partnership or
a trust. There are a number of major characteristics ordinarily found in a pure corporation which, taken
together, distinguish it from other organizations. These are: (i) Associates, (ii) an objective to carry on
business and divided (sic) the gains therefrom, (iii) continuity of life, (iv) centralization of management, (v)
liability from corporate debts limited to corporate property, and (vi) free transferability of interests.
Whether a particular organization is to be classified as an association must be determined by taking into
account the presence or absence of each of these corporate characteristics. The presence of these
characteristics will depend upon the facts in each individual case. In addition to the major characteristics
set forth in this sub-paragraph other factors may be found in some cases which may be significant in
classifying an organization as an association, a partnership, or a trust. An organization will be treated, as
association if the corporate characteristics are such that the organization more nearly resembles a
corporation than a partnership or trust. [See Morrissey et al. v. Commissioner (1935; 296 U.S. 344).]’
2. Since associates and an objective to carry on business for joint profit are essential characteristics of all
organizations engaged in business for profit (other than the so-called one-man corporation and the sole
proprietorship), the absence of either of these essential characteristics will cause an arrangement among
co-owners of property for the development of such property for the separate profit of each not to be
classified as an association. Some of the major characteristics of a corporation are common to trusts and
corporations, and others are common to partnerships and corporations. Characteristics common to trusts
and corporations are not material in attempting to distinguish between a trust and an association, and
characteristics common to partnerships and corporations are not material in attempting to distinguish
between an association and a partnership....
3. An unincorporated organization shall not be classified as an association unless such organization has more
corporate characteristics than non-corporate characteristics....

301.7701-3 Partnerships.

(a) In general. The term “partnership” is broader in scope than the common law meaning of partnership and
may include groups not commonly called partnerships. Thus, the term “partnership” includes a syndicate,
group, pool, joint venture, or other unincorporated organization through or by means of which any business,
financial operation, or venture is carried on, and which is not a corporation or a trust or estate within the
meaning of the Internal Revenue Code of 1954...
301.7701-Trusts.

(a) Ordinary trusts. In general, the term “trust” as used in the Internal Revenue Code refers to an arrangement
created either by a will or by an inter vivos declaration whereby trustees take title to property for the purpose
of protecting or conserving it for the beneficiaries under the ordinary rules applied in chancery or probate
courts. Usually the beneficiaries of such a trust do no more than accept the benefits thereof and are not the
voluntary planners or creators of the trust arrangement. However, the beneficiaries of such a trust may be
the persons who create it and it will be recognized as a trust under the Internal Revenue Code if it was
created for the purpose of protecting or conserving the trust property for beneficiaries who stand in the
same relation to the trust as they would if the trust had been created by others for them. Generally speaking,
an arrangement will be treated as a trust under the Internal Revenue Code if it can be shown that the purpose
of the arrangement is to vest in trustee’s responsibility for the protection and conservation of property for
beneficiaries who cannot share in the discharge of this responsibility and, therefore, are not associates in a
joint enterprise for the conduct of business for profit.

(b) Business trusts. There are other arrangements which are known as trusts because the legal title to
property is conveyed to trustees for the benefit of beneficiaries, but which are not classified as trusts for
purposes of the Internal Revenue Code because they are not simply arrangements to protect or conserve the
property for the beneficiaries. These trusts, which are often known as business or commercial trusts,
generally are created by the beneficiaries simply as a device to carry on a profit-making business which
normally would have been carried on through business organizations that are classified as corporations or
partnerships under the Internal Revenue Code. However, the fact that the corpus of the trust is not supplied
by the beneficiaries is not sufficient reason in itself for classifying the arrangement as an ordinary trust rather
than as an association or partnership. The fact that any organization is technically cast in the trust form, by
conveying title to property to trustees for the benefit of persons designated as beneficiaries, will not change
the real character of the organization if, applying the principles set forth in §§301.7701-2 and 301.7701-3,
the organization more nearly resembles an association or a partnership than a trust. [26 CFR Ch. 1 (4-1-88
Edition)]
 SUMMARY

In summary, Business Trust Organizations can enjoy income tax advantages very similar to ordinary trusts,
with income generally being distributed at least annually to the trust beneficiaries. However, there is a risk
that trust organization managers must understand state and federal revenue agencies may attempt to subject
such trusts to the same regulations and taxes as are imposed on corporations. This is due to the fact that the
definition of a corporation includes associations, and business trusts are frequently regarded as associations
pursuant to the Internal Revenue Code.

In determining whether a particular business trust will be regarded as an association, thus taxed as a
corporation, most courts will simply look to the facts and circumstances of the particular case. However, the
key determination is whether “corporate” advantages are a real motivation for the trust, i.e., whether the
business trust participants are attempting to simply avoid regulations and restrictions placed on corporations
while at the same time maintaining a quiet status as an unincorporated entity.

Limitation of liability in the beneficial interest holders alone does not control whether a business trust will be
taxed as an association. A single venture versus many ventures is generally important in determining the tax
status of the trust. Where the trust is established to hold and conserve property and not carry on a business
for profit, and where the trust is limited in continuity, such a trust will generally not be taxed as an association.

Courts simply evaluate all the facts and circumstances of each case to determine how the business trust is to
be taxed. The ruling factors are found in the substance of the trust arrangement, not in its form. It makes little
difference whether an entity is called a business trust unincorporated business organization (UBO), pure
trust, contractual company, or by any other formal title. How it will be treated under tax law is determined by
the application of the above criteria to the substance of the entity: the terms of the contract, how it came into
existence, how it has been managed, and what it has done.

The hazards in this crowded mine-field can generally be avoided by carefully structuring the~ trust
documents, with particular attention to the clauses setting forth the powers granted to the trustee, and
skillful management of the trust activities and enterprises.
 LEGAL STANDARDS FOR DETERMINING VALIDITY OF BUSINESS TRANSACTIONS FOR TAX
PURPOSES

FOR TAX PURPOSES, the following legal standards apply to all business transactions regardless of the type
of business entities involved in a particular transaction, or series of transactions. These standards encompass
and are intertwined with the principles of law governing “Arm’s Length,” “Self-Dealing” and “Dealings
Between Related Parties” as discussed in the Introduction.
 The “Substance Over Form” Doctrine

“Substance over form” is part of a well-established body of law addressing the sometimes-
elusive distinction between what are ultimately described as “tax avoidance” and “tax
evasion.” Typically, a “substance over form” case arises when one chooses to structure a
transaction so that it satisfies the formal requirements of a provision of the Internal Revenue
Code in order to minimize his tax liability. In so doing, he is exercising his right referred to
by Judge Learned Hand in the landmark case of Gregory v. Helvering: 

“Anyone may arrange his affairs that his taxes shall be as low as possible; he is not bound
to choose that pattern which will best pay the treasury; there is not even a patriotic duty to
increase one’s taxes.”

Exercising this right by means which the law permits is “tax avoidance” and legal. If, when
attempting to exercise this right, one goes beyond the meaning of this sometimes elusive
“line in the law,” 12 he commits the unlawful act of “tax evasion.” Clearly, the closer to this
nebulous line one structures his affairs, the greater are the risks of crossing it. A properly
structured and managed Common Law Trust system offers more “legal” tax avoidance
possibilities than any other business form or structure. Thus, for no other reason, it is
imperative that those involved in Business Trust Organizations be very knowledgeable in
the principles and standards of law discussed herein.

In applying the Internal Revenue Code to particular transactions, the courts frequently
distinguish between “tax avoidance” and “tax evasion” and between “form” and
“substance.” In so doing, the courts have asserted that transactions are to be taken at face
value for tax purposes only if they are imbued with a business purpose” or reflect economic
reality’ and integrate all steps in a prearranged plan rather than give effect to each step as
though it were a separate transaction. These presuppositions or criteria are so pervasive that,
in combination, they resemble a preamble to the Code, describing the framework within
which all statutory provisions are to function. ²

Section 482 of the Internal Revenue Code authorizes the Commissioner to allocate income
between “two or more organizations, trades, or business... owned or controlled... by the
same interests... if he determines that such... allocation is necessary in order to prevent
evasion of taxes or clearly to reflect the income of any such organizations, trades, or
businesses.” Congress enacted the predecessor of §482 to prevent the evasion of taxes
through such means as “shifting of profits, the making of fictitious sales and other methods
frequently adopted for the purpose of ‘milking’.” 

The provision is silent about what constitutes tax evasion or when reallocation is necessary
to reflect clearly the income of the entities in question. – However, in any transaction
between two or more entities owned or. controlled by the same interests, the relevant
inquiry under §482 is whether the proceeds must be allocated to the transferor “in order to
prevent evasion of taxes or clearly to reflect... income.”
To rebut such a determination by the Commissioner, one is required to establish that he did
not “cash in” on the gain. This rebuttal requirement stems from the judicially developed
“tax- benefit rule.” In applying this so-called rule, “[a] court must consider the facts and
circumstances of each case in the light of the purpose and function of the provisions
granting the deductions.” ² The Substance Over Form doctrine is the basis for this
judicially-developed rule.

There are a number of Substance Over Form cases holding that a transfer of assets between
related entities is to be denied legal effect when the transferee is a “mere conduit” between
the transferor and a third party. The leading case in this general area is Commissioner v.
Court Holding Co. In that case, Court Holding Co., a corporation, reached an oral
agreement to sell. Subsequently, upon advice of counsel, the corporation called off the sale
and declared a “liquidating dividend” in which the building was deeded to the controlling
shareholders, who then completed the sale. The Tax Court concluded that, despite the
transfer of legal title, the gain from the sale should be attributed to the corporation. The
Supreme Court affirmed and stated:

“The incidence of taxation depends upon the substance of a transaction. The tax
consequences which arise from gains from a sale of property are not finally to be
determined solely by the means employed to transfer title. Rather, the transaction must be
viewed as a whole, and each step, from the commencement of negotiations to the
consummation of the sale, is relevant. A sale by one person cannot be transformed for tax
purposes into a sale by another by using the latter as a conduit through which to pass title.
To permit the true nature of a transaction to be disguised by mere formalisms, which exist
solely to alter tax liabilities, would seriously impair the effective administration of the tax
policies of Congress.”
 “Business Purpose” Rule

The Business Purpose Rule has been used to determine the validity of the formation of a separate, taxable,
entity. If the purpose of the creation or formation is a business activity, such as an investment for profit, or if
the formation is followed by the conduct of business, then the entity is a separate taxable entity. For tax
purposes, the existence of a partnership is also determined by the Business Purpose Rule, as is the existence
of a common law trust.

The Business Purpose Rule may be applied to individual transactions. Following this rule, for example,
transferring assets in a corporate reorganization that has no business purpose have been deemed to be a
contrivance and, therefore, is disallowed for tax purposes.’
 “Economic Substance” Rule

The Economic Substance (or Economic Effect) rule focuses on transactions by a recognized entity. “Sham”
transactions, having no economic effect other than the creation of income tax losses, are not recognized for
tax purposes. The rule also applies to loans and transfers of assets.

Although the Economic Substance rule focuses on transactions by recognized entities, it has been used to
determine whether a trust is valid and whether a trust is a grantor trust for tax purposes. Thus, the Economic
Substance rule may be an element of business purpose. A finding that “no real change in the economic
relation” occurred between the parties established, for example, that no partnership existed for business
purposes.
 “Business Purpose” vs. “Economic Substance” Rules

There is no real difference between the rules of business purpose and economic substance. Both simply state
that the courts may look beyond the form of an action to discover its substance. The terminology of one rule
may appear in the context of the other because they share the same rationale. Both rules elevate the
substance of an action over its form. Although one may structure a transaction to satisfy the formal requirements
of the Internal Revenue Code, the Commissioner may deny legal effect to a transaction if its sole purpose is to
evade taxation.

Whether termed lacking in business purpose or lacking in economic substance, trusts so determined have
been held to be “shams” and, therefore, invalid by the courts.

Business Deductions for Ordinary and Necessary Expenses

212 of the Internal Revenue Code permits deductions of all ordinary and necessary expenses paid:

(1) for the production or collection of income;

(2) for management, conservation, or maintenance of property held for the production of income; or

(3) in connection with the determination, collection or refund of any tax.

The courts have held that §212 was not designed to allow tax deductions based on mere preservation of net
worth and that a mere rearrangement of title is not related to management or conservation under §212: 70
The courts have also held that the following reasons for establishing trusts do not meet the standards of
§212.

(1) To allow real property investments to continue after death.

(2) To limit personal liability.

(3) To avoid probate costs.

(4) To minimize taxes.

The standards of §212 are not met by simply restructuring the form in which one holds his property. In order
to meet these standards, a transfer into trust must aid in the production of income or alter management
activity of property held for the production of income. ⁷⁶

Legal Citations

•Beck v: Commissioner, 678 F. 2d 818, 821, (9th Cir. 1982).

•Bitther, Pervasive Legal Doctrines in the Construction of the Internal Revenue Code, 21 How. L.J. 693, 695
(1978).

•Commissioner is Court Holding Co., 324 U.S. 331, 334, 65 S. Cl 707 708, 89 LEd. 981 (1945).

•Commissioner u Tower, 327 U.S. 280, 286-87, 66 S.Cl 532, 535-36, 90 LEd. 670 (1946).

•Gregory u Helvering, 293 U.S. 465, 469, 55 Cl 266, 267, 79 LEd 596 (1935).

•Hanson v. Commissioner, 696 E 2d 1232, 1234 (9th 1983).

•HR Rep. No.2, 70th Cong., 1st Sess. 24 (1928). See Commissioner v. First Security Bank of Utah, 405 U.S.
394, 400,92 S. Cl 1085, 1089, LEd 2d 318 (1972).
•Markosian Commissioner, 73 T.C. 1235 (1980).

•Moline Properties, Inc. v. Commissioner, 319 U.S. 436, 438-39, 63 Cl 1132, 1133-34, 87 LEd 1499 (1943).

•Shultz v. Commissioner, 50 T.C. 688 (1968), affirmed per curiam, 420 F.2d 490 (3rd Cir. 1970).
•Stewan v. CIR, 714 F.2d at 987.

•Superior Oil Co. v. Mississippi, 280 U.S. 390, 395-396.

•Thompson v. Commissioner, 631, F.2d 642, 646 (9th Cir. 1980). Cen denied, 452 U.S. 961, 101 Cl 3110, 69
LEd 2d 972 (1981).

•Tower, 327 U.S. at 291, 66 Cl at 537.

•Woodward v. Commissioner, 410 F2d 313, 318 (8th ), affirmed, 397 U.S. 572, 90 S.Cl 1302, 25 LEd 2d
577 (1969).

•Zmuda C.I.R, 731 F.2d at 1421.

 Source of Income Rules.

The United States tax system divides income into foreign source income, and United States source income.
When dealing with offshore entities domiciled in tax haven jurisdictions, the distinction between U.S. source
income and foreign source income becomes very important. Foreign source income earned by a foreign entity
that does not have an office or permanent establishment within the U.S. is always free of U.S. income taxes.
U.S. source income earned by the same foreign entity, and which is not “effectively connected to a U.S. trade
or business” could subject the U.S. payor to a 30% flat tax unless reduced by treaty or exempted under other
sections of the Code. IRC 861 (a) (1) (a) and (c) exempts interest paid to nonresidents by U.S. banks or savings
and loans, or interest on monies held by a U.S. insurance company. Interest income received from certain
portfolio debt instruments issued after July 18, 1984 are also exempt.

If the foreign entity is engaged in a trade or business within the U.S., its income from such source is deemed to
be “effectively connected” and, therefore, it will be held taxable on all such income at the same rates that
would apply to a domestic entity.

U.S. Source Income Examples

•Distributions paid by a U.S. trust.

•Dividends paid by a U.S. corporation (or association taxable as a corporation).

•Royalties and rents received from the U.S.

•Capital gains on sales of U.S. stocks [capital gains are not subject to U.S. withholding or income tax unless
the gain is from the sale of a U.S. real property interest]. [IRC 897]

•Sales of personal property by a U.S. resident. [IRC 865]

•Compensation for labor or personal services performed within the U.S.

•All income from transportation that begins and ends in the U.S.

•50% of all income from transportation that begins or ends in the U.S.

•Income from sale of U.S. natural resources.

Foreign Source Income

Foreign source income includes foreign country dividends, interests, royalties, business profits and rents.
Such income can be received and accumulated by a “foreign entity” free of U.S. tax liability.

IRC 865 provides that if a nonresident sells personal property, the income is sourced outside the United
States. If a U.S. resident sells the personal property, the income is sourced within the United States. Thus, as a
general matter, the source of income from the sale of property depends directly on the residence of the seller.
It is immaterial where the product was manufactured, stored or transported from.

Royalties from the use of intangibles such as copyrights, patents and scientific know-how are sourced where
the intangibles are put into use. If the intangibles are used to produce income in a foreign country the income
is considered to be a foreign source income. Personal service income (advisory fees, management fees, lawyer
fees, commissions) for services performed solely outside the U.S. is foreign source income, regardless of
whether the U.S. payer of the fees resides within the U.S.
 Audit Guidelines for Tax Havens

Background

Since the inception of taxes, taxpayers have searched for ways to minimize their tax burden.
Creative tax planning in tax havens is one of those ways, and, as such, frequently straddles
the fine line between tax avoidance and illegal tax evasion. Following close behind,
Congress and the tax administration have been trying to close tax loopholes and to
discourage tax gimmicks, which violate the spirit of the law and sometimes the tax law
itself....

Primary Audit Tools

The primary audit tools are the ingenuity of the examiner and the anti-abuse sections
Of the Code.... The anti-abuse provisions include:

(a) IRC 482 which provides for the allocation of income and deductions among related
members of a controlled group.

(b) IRC 951 through 964 which tax currently the earnings and profits of a controlled foreign
corporation.

(c) IRC 162 which allows a deduction for ordinary and necessary expenses incurred in
carrying on a trade or business.

(d) IRC 269 which provides for the disallowance of a deduction, credit, or other allowance,
if the principal- purpose for the acquisition or control of a corporation or of property of
another corporation is the evasion or avoidance of income taxes.

(e) IRC 269A which provides for the allocation of income, deductions, etc., between a
personal service corporation and its employee-owners to clearly reflect the income of the
corporation and its employee-owners.

(f) IRC 367 which is used to prevent the use of the non-recognition provisions of the Code
to transfer appreciated assets or inventories from the U.S. prior to their sale.

(g) IRC 1491 which is used to prevent taxpayers from transferring appreciated property to
foreign entities in order to avoid income taxes in those cases where IRC 367 does not apply.

(h) IRC 1248 which taxes the gain recognized on the sale of stock in a CFC by a U.S.
shareholder as ordinary income to the ‘extent of the earnings and profits of the CFC
accumulated after December 31, 1962.

(i) IRC 1249 which treats as ordinary income of a U.S. person, the gain on the sale or
exchange of an intangible asset to a foreign corporation which is controlled by such person.

(j) IRC 551 through 558 Foreign Personal Holding Companies) which includes in gross
income of the U.S. shareholder: he undistributed foreign personal holding company income.

(k) IRC 679 which taxes a U.S. person on the income generated by the transfer of property
to a foreign trust which has = U.S. beneficiary

(I) IRC 897 which provides for taxing the gain recognized by non-resident foreign
individuals and foreign corporations of the dispositions of their United States Real Property
interest (USRPI)
(*) Under IRC 679 the U.S. transferor of property to a foreign trust whether directly or
indirectly, which has a U.S. beneficiary is treated as the owner of the trust =nb be is held
liable for U.S. taxes on the worldwide income of the foreign trust as it is earned. [See
Section I pages 9 and 9A]

There are four requirements that must be met before the adverse tax liability under IRC 679
can be imposed. If anyone requirement is absent, the section is not applicable. For IRC 679
to apply:

(1) The transferor to the foreign trust must be a U.S. person as defined under IRC 7701
(a)(30). For this definition a U.S. citizen or resident, a domestic partnership, corporation,
estate or trust (other than a foreign estate or trust within the meaning of IRC 7701 (a)(31)) is
considered to be a U.S. person.

(2) The transferor must make either a direct or indirect transfer to the trust.

(3) The trust must be a foreign trust.

(4) The trust must have a U.S. beneficiary.

 OTHER LEGAL CONSIDERATIONS

Exchange of Property

“Market value,” for purpose of internal revenue law, is the price at which a seller willing to sell at a fair price
and a buyer willing to buy at a fair price, both having a reasonable knowledge of the facts, will trade.
[American National Bank of St. Joseph v. U.S., 92 F Supp. 403 (1950}]
 Gift Tax Considerations

1. Organization of a Common-Law Trust was held lawful. Subscription to stock in a Common-Law Trust was
ruled as an investment, not a gift. [Palmer et. al. v. Taylor et. al., 269 S.W. 996 (1925)]

2. Gift tax applies only to transfers by gift with less than full and adequate consideration, “Tyson v.
Commissioner, 146 F 2d 50 (1944)]

3. Even bad bargains in a genuine transaction do not result in taxable gifts. Where the value of stock was in
excess of the consideration, the transfers were made in the ordinary course of business and were not
subject to gift tax. (Leon Jaworski argued this case against the IRS.) [Est. of Anderson, 8 TC. 706 (A) (1947)]

4. No gift tax applies when property transfers to a disconnected and isolated entity where consideration is
not lacking. [Scanlon v. Commissioner, 42 U.S. Board of Tax Appeals 997 (1940)]
 Estate Tax Considerations

1. Federal estate tax is an excise on transfer of interests in property that occurs as a result of death. (Interest
in property is transferred to Business Trust before death.) [Old Kent Bank & Trust Company v. U.S., 430
F 2d 392 (1970)]

2. Rationale of federal estate tax is not a levy on property of the estate but on its transfer at death. [Second
National Bank of New Haven v. U.S., 422 F 2d 49 (1970)]

3. Property interests terminating on or before death are not proper subjects of federal estate tax. [Babb v.
U.S., 349 F Supp. 792 (1972)]

4. Measure of estate tax is value at the time of decedent’s death of all property then owned by him and of
property transferred in contemplation of death. [Igleheart v. Commissioner, 77 F 2d 704 (1935)]

5. Transfer tax is determined by value of property or interest transferred at decedent’s death. [McCaughan v.
Fidelity Trust Company, 34 F 2d 443 (1929)]
 Taxation in General

1. Treasury Department regulations, construing laws relating to taxation, are not conclusive. Doubts in
taxation statutes are resolved in favor of the taxpayer. Also, courts will, if possible, avoid interpreting tax
statute to result in injustice. [Hellmich v. Heilman, 18 F 2d 239 (1927)]

2. Taxpayers are not required to continue that form of organization which results in the maximum tax.
[Raymond Pearson Motor Company v. Commissioner, 246 F 2d 509 (1957)]
 Rule Against Perpetuities

In general, a perpetuity is any limitation tending to take the subject of the perpetuity out of commerce for a
longer period than a life or lives in being and 21 years thereafter. The Rule Against Perpetuities applies to all
types of trusts wherein legal and equitable tables are split, i.e., legal title to trust property is held by the
trustee and equitable title to trust property is held by the beneficiary. Therefore, absolute ownership of the
property is suspended for the life of the trust.

Unlike ordinary trusts, title to property held in a Business Trust is not split. Both legal and equitable title is
held by the trustee in fee simple, and there is no suspension of absolute ownership. [Liberty National Bank &
Trust Company in New York v. New England Investors Shares, Inc., 25 F 2d 493 (1928).] Neither does the Rule
apply to trusts wherein the trust may be terminated at any time, as is the case with most Business Trusts.
[Baker v. Stern, 216 N.W. 147.]

Also, if the trust agreement expressly provides that the organization can be terminated by the will of any
member, the trust lacks the corporate characteristic of continuity of life. [26 CFR Ch. 1 (4-1-88 Edition)
§301.7701-2]
 LIABILITY OF TRUSTEE

The general rule is that the trustee is subject to personal liability to third persons from obligations incurred by
administering the trust the same as if the person administered the property free of trust. The rule is
applicable to liabilities upon contracts made by the trustee in the administration of the trust, to liabilities for
torts committed in the administration of the trust and to liabilities which are imposed upon the holder of the
title to the trust property. The rule is also applicable to other liabilities incurred in the administration of the
trust.

Contracts. The trustee is personally liable for contracts he makes related to the administration of the trust.
This is true whether or not he is properly performing his duties as trustee. The trustee also is personally liable
whether or not the existence of the trust and the names of the beneficiaries are known to the other party to
the contract. In short, the trustee has a broad range of personal contract liability unless specifically excused
by written agreement in the particular contract.

If the trustee and the other party to the contract agree that the trustee shall not be personally liable, and if
such an agreement is proven, the trustee can be relieved of contract liability. Remember, the mere fact that
the other party to the contract knows that the trustee is a trustee and is making the contract in the
administration of the trust is not enough to relieve the trustee of personal liability. The trustee may be
personally liable although he signs the contract in his name followed by the words “trustee,” or “as trustee,” or
“as trustee for” a designated beneficiary, or “as trustee under” a certain will or deed of trust.

In order for a provision in the trust instrument to relieve a trustee of personal liability, the other party must
have knowledge or reason to know of the provision. Even though the provision was known to the other party
to the contract, it does not necessarily follow that the trustee has contracted that he shall not be personally
liable on the contract. Therefore, it does not necessarily preclude the other party to the contract from holding
the trustee personally liable. Such a provision, however, may be considered with other facts in determining
whether it was the understanding of the parties to the contract that the trustee should not be personally
liable.
Torts. The trustee is subject to personal liability to third persons for torts committed while administering the
trust to the same extent as if he held the property free of trust. This rule is applicable whether the trustee
committed the tort intentionally, negligently or without fault, whether his conduct consisted in action or
failure to act, and whether or not he was violating his duties as trustee in acting or failing to act.

Holder of Title. As the holder of the title to trust property, a trustee is subject to personal liability, but only to
the extent to which the trust estate is sufficient to indemnify him.
 Liability of Beneficiary

As a general rule, the beneficiary is not personally subject to liabilities to third persons incurred during
administration of the trust. This rule extends to liabilities from contracts made by the trustee while
administering the trust, to; liabilities for torts committed by the trustee while administering the trust and to
liabilities imposed upon the holder of title to the trust property.

If a creditor is legally entitled to claim trust property but the trustee conveys the trust property to the
beneficiary before the claim has been paid, the creditor can by a proceeding in equity hold the beneficiary
personally liable for the claim. However, the beneficiary is liable only to the extent of the value of the trust
property so conveyed, unless the beneficiary is a bona fide purchaser or has so changed his position that it is
inequitable to hold him personally liable.
 In Conclusion

In the absence of statutory restrictions, there is nothing inherent in the Business Trust Organization to
prevent it from carrying on any kind of lawful business activities in which individuals, partnerships or
corporations might engage. This is evident from the wide variety of business pursuits for which such entities
have been organized:

Operating and management of apartment houses – [Helvering v. Coleman-Gilbert Assn., 296 US 369]; Oil well
development – [Helvering v. Cones, 296 US 375]; Real Estate Business – [Crocker v. Malley, 249 US 223
Schumann-Heink v. Folsom. 328 HI. 321]; Purchasing, improving, holding and selling land and buildings and
operating an office building with elevator service, janitor service, etc. – [Eliot v. Freeman, 220 US 178];
Liquidation of corporation – [White v. Hornblower, (Ca 1 Mass.), 27 F 2d 777]; Production of motion pictures
– [Goldwater v. Oltman, 210 Cal. 408]; Building and Equipping Racing Speedway – [Chas. Nelson Co. v.
Morton, 106 Cal. App. 144]

The principal advantages which Business Trust Organizations have over partnerships are their centralized
management, the introduction of large, numbers of participants, the possibility of transferring beneficial
interests without affecting the continuity of the enterprise, the fact that the death of a beneficiary does not
terminate the trust, and the immunity of beneficiaries from personal liability. [Morrisey v. C.I.R., 296 US 344;
Spotswood v. Morris, 12 Idaho 360, 85 P 1094; Hossack v. Ottaw Development Assn., 244 III. 274]

A full treatise of court decisions regarding the creation, implementation, and operation of Business Trust
Organizations can be found in two main references in your local law library. One is Volume 13, American
Jurisprudence 2nd Edition, under the title of “Business Trusts.” The other is Volume 156, American Law
Review 1st Edition, under the title of “Massachusetts or Business Trusts.”
 OTHER ORGANIZATIONS AND RELATIONSHIPS COMPARED WITH AND
DISTINGUISHED FROM BUSINESS TRUST ORGANIZATIONS

Statutory Trusts

Business Trust Organizations differ from ordinary trust agreements established under statutory law in that
the primary purpose of the Massachusetts or business trust is to conduct a business for profit* while the
object of the more common statutory trust agreement is to hold and conserve particular property until the
happening of some specific event.
 Partnerships

According to the prevailing modern view, the question of whether a trust instrument gives rise to a
partnership or to a true business trust depends upon such additional elements as an intention or agreement
of the parties to share losses and to become partners, and not merely or exclusively upon their right to
participate in profits.

The criterion most frequently applied in determining whether an organization in the form of a Massachusetts
or business trusts, in legal effect, a true trust or a partnership, and which is particularly applied in determining
whether or not shareholders are liable as partners for the debts of the entity, is the “control test.”

According to this doctrine, whether’ an organization in the form of a business trust is a true trust or a
partnership depends upon the manner in which the business is to be conducted and upon the repository of
the ultimate power of control over the affairs and property of the concern. If, under the trust instrument, the
trustees are vested with title to its property and with the exclusive right to manage its business and conduct
its affairs, free from the control of the beneficial interests, the organization is treated as a trust; but if the
trustees are subject to the control of the beneficial interests in these particulars and the beneficial interests
have the real mastery over the affairs of the concern, the organization is treated as a partnership and the
beneficial interests as partners.

Where, because of the power of control vested in the beneficial interests f a business trust is in legal
contemplation a partnership, its property has been held to be taxable according to the statute relating to the
taxation of the property of partnership. However, where the title to trust property and the exclusive
management of its business are vested in trustees, free from any control by the beneficial interests, and the
rights of beneficial interests are limited to receiving pro-rata shares of the profits during the continuation of
the trust, and of the corpus upon the termination of the trust, the organization is held to be a true trust, and
not to be taxable as a partnership under such a tax statute.
 Sole Proprietorship

The sole proprietorship is the simplest and least expensive of all the business forms. A company that is formed
as a sole proprietorship becomes the alter ego of the “sole proprietor.” It is easy to form, simply by obtaining
local licensing if such is required.

The sole proprietor or owner is personally liable for all debts and liabilities of the business and can sell its
assets without any formal requirements. In effect, the business is its owner and the owner is the business.

The biggest disadvantage of a sole proprietorship is that the owner is neve: shielded from the liabilities of the
business. That could have adverse effects on the owner’s other assets if the business fails.
 Corporations

A corporation, created by the state under statute law, must pay annual franchise fees and report its activities
to the state department of corporations. A corporation also must make available all books and records on
demand of any government agency. However, it allows people to pool resources to pursue a business
objective without exposing themselves to unlimited liability.

Ownership of the corporation is ‘divided into shares, ownership of which may be freely transferred in
compliance with state and federal regulations. For small corporations that cannot afford to seek the approval
of the regulators, the transfer of shares is restricted. Income and profits are taxed to the corporation, and
again to the shareholders when distributed to them as dividends. All payments by a corporation for “ordinary
and necessary” business expenses are deductible from gross income in arriving at taxable income, and income
or “franchise” taxes are paid on the remainder. Dividends paid to shareholders are taxed twice – once at the
corporation level and then again to the shareholders.

A corporation is restricted in the amount of profits it can retain and is penalized by heavy additional taxes for
keeping too much. A corporation can pursue any business permitted by law and its charter. The government
limits and controls the amounts of deductible compensation that can be paid to key officers. Corporations are
required to publicly report financial activities and results, while insiders and others with access to inside
information are restricted in trading shares based on such information.

Corporations do not have access to constitutional rights like an individual and are directly controlled by
government because they are creations of the government. They are generally taxed more heavily than
individuals that earn equivalent profits. Public attitude is that corporate profits are fair game for the tax
collector. Corporations can select their tax year upon formation and may change it with IRS permission.
 Business Trust Organizations

Business Trust Organizations are created by contract under the common law right of contract and do not owe
their existence to any statute. A Business Trust Organization can do any lawful thing that an individual or
group can do. It is as flexible as a contract. The only restriction on transfer of units is that imposed by the
contract (Indenture).

Business Trust Organizations are centrally managed by the trustees. The trustees, officers and Capital Unit
Holders can enjoy limited liability by contract. The transferability of their Capital Units and the life of the
entity must, therefore, be limited if they are to avoid being classified and treated as corporations. Privacy of
the Business Trust Organization is assured by clauses in the contract prohibiting the release of private
information relating to financial or business matters. Outside creditors must be given actual notice of the
contractual limitation of liability prior to any dealings with the Business Trust Organization.

Business Trust Organizations can do anything not specifically forbidden by law, which gives them a much
wider latitude than corporations enjoy. They are separate legal entities and can buy, sell, trade, borrow, loan
or conduct any other type of transaction with regard to any type of business or property, in their own names,
without the approval of any agency outside the Business Trust Organization.

Capital Unit Holders have no power to control or manage the Business Trust Organization and no ownership
rights to Business Trust Organization property; their only right is to receive their pro-rata share of any
distribution the trustees may decide to make. Capital Units can only be transferred or assigned on the books
of the Business Trust Organization with the approval of the Trustees. Upon the death of a Capital Unit Holder,
the units held by the deceased become null and void. They are then re-issued to a successor by the trustee
according to prior instructions.

Upon the death of a natural trustee, the remaining trustees may appoint a successor, unless such is provided
for in the indenture. Many Business Trust Organizations use corporate trustees to avoid succession problems.

A Business Trust Organization may select and change its domicile at will, and therefore, the laws under which
its contract is interpreted and construed.

Business Trust Organizations are taxed much like individuals, with important exceptions. For example,
individuals are allowed to deduct certain personal expenses such as medical expenses, personal taxes, and
interest paid, or, alternatively, a standard amount based on filing status. A Business Trust Organization is not.
Individuals are allowed a personal exemption in the amount of $2,000 (1989). The exemption for a Business
Trust Organization is $100.

Business Trust Organizations enjoy tax advantages over corporations. Specifically, there is no double taxation
on profits distributed to Capital Unit Holders because such distributions are deductible from gross income in
arriving at taxable income. Thus, if a Business Trust Organization distributes all of its profits to its Capital Unit
Holders it will pay no income tax, provided it is structured and managed such that it cannot be held to be an
association taxable as a corporation.

According to Volume 13 American Jurisprudence 2d, “ft is generally held so far as pure legal principle is
concerned and apart from any declaration to the contrary in a statute or constitution, that a Massachusetts or
business trust is not a corporation, inasmuch as there are obvious, important and fundamental differences
between the two types of organizations. But while a business trust is not a corporation, it has some of the
attributes of a corporation and is similar in its practical effect.

“Thus, the corpus of the trust corresponds to the capital of the incorporated company; the trustees, to the
board of directors; the beneficiaries, to the stockholders: the beneficial interests, to shares of stock; and the
declaration of trust, to the charter.” (Pp 383-386)
 FINANCIAL & ESTATE PLANNING CONSIDERATIONS IN SELECTING THE PROPER BUSINESS FORM

NOTES:

1. Corporations are taxed, on their net profit prior to distribution of dividends. Shareholders are then taxed
again on the dividends received.

2. Trusts are only taxed on the net profits which are not distributed to the beneficiaries. If all profits are
distributed, the trust has no tax liability and pays no tax.

3. Only the limited partner(s) can achieve limitation of liability. The general partner is fully liable.

4. Stockholders’ liability is limited to the amount of their investment.

5. Applies to corporation assets only. Stocks owned by a shareholder are subject to probate.
 REVIEW OF THE CONTRACT

Purpose of the Business Trust Organization

BEFORE A BUSINESS TRUST ORGANIZATION can be put into effective operation, its purpose and main
business activities must be established and well understood. The structure, mode of operations and domicile
will depend on what the parties to the contract want to accomplish.
 Parties to the Agreement

The Business Trust Organization comes into existence with the execution of the contract by and between the
Creator and the Exchanger. The Creator offers, for consideration, to form the entity and to appoint a qualified
person or persons to serve as the Beard of Trustees. Upon acceptance of this offer and payment of the agreed
consideration by Exchanger, the contract is executed and the Board of Trustees appointed. Acceptance of the
appointment by the Trustee in consideration of the offered trustee fees completes the Business Trust
Organization as an empty shell, owning no property except all of its own Capital Units.

The next step is the capitalization of the entity by the exchange of the Capital Units for the assets of the
Exchanger. Properly executed, this exchange results in no taxable event for either party, since the capital
Units have an indeterminable value. When value cannot be determined, no ‘ tax liability can be established.

The description of the property received, including any deeds, bills of sale or other title papers, is immediately
recorded in Schedule A. If there is real property involved, carefully review the section on “Real Estate and the
Business Trust Organization”, page 111-20. For personal property of significant value, the Exchanger executes
a Bill of Sale to the Business Trust Organization for each item, setting forth a complete description of the
item, including any legal identification, and the consideration exchanged.

When Capital Units are exchanged as consideration for property received, a small amount of cash ($10)
should accompany them, to avoid any interpretation that the consideration had zero value. Issuance of the
Capital Units is recorded in the Registry of Capital Units in the name of the new holder.
 Critical clauses in the contract.

In addition to the agreement clauses, there are several other clauses in the contract that are critical to
achieving the intended purpose of the Business Trust Organization.

The Domicile Clause specifies the domicile (legal home) of the Business Trust Organization, which determines
the legal jurisdiction under which the contract will be interpreted and construed. This is important because it
determines what type of business activities the Business Trust Organization can most effectively pursue.

It is imperative that the trust agreement complies with all relevant laws of the particular jurisdiction
selected for the trust domicile.

Another important clause sets the limited life (usually 20 to 25 years) of the Business Trust Organization, with
the trustee having the right to terminate the trust at any time. Terms of the trust instrument should
specifically preclude unlimited life, one of the four main characteristics of a corporation.

Specific contract liability denial on the part of the trustees, agents or unitholders for losses of the Business
Trust Organization is another important clause. For this clause to be effective, all parties with which the
Business Trust Organization does business must be put on notice of its liability limitations prior to the
commencement of the business relationship. The most effective way to meet this notification requirement is
by including the verbatim wording of this clause in any instrument binding any outside party to an agreement
with the Business Trust Organization.

From the case of Goldwater v. Oltman et al, decided by the California Supreme Court, “... if. in fact, a true trust
has been created, the shareholders are not personally liable on the obligations incurred by the trustees or the
managing agents appointed by the trustees.” Also, “If a trustee contracting for the benefit of the trust is himself (and
his agents) exempt from liability on the contract, he must stipulate that he is not to be personally responsible, but that
the other pam Is lock solely to the trust estate.” [Goldwater v. Oltman et al, 292, P. 624]

Another important group of clauses is those that establish the number of Capital Units into which the
beneficial interest of the Business Trust Organization is to be divided. They also authorize the trustee to issue
certificates representing the Capital Units to the persons entitled to * hold them and set forth the rights,
powers, and duties of the unitholders.
 The Business Name

The legal name of the Business Trust Organization is established by the contract. Since the Business Trust
Organization is a legal person in its own right, separate and distinct from all other legal persons, its name is
not a fictitious business name. It is the entity’s true legal name and should be used in all business transactions
except, of course, those cases in which the goals of the trust are best served by doing business under a
different name, such as a trade name. In such cases, the trustee will file a Fictitious Business Name
registration, registering the trade name to the trust in its true name.
 Domicile of the Business Trust Organization

The proper domicile of the Business Trust Organization is determined by the business activities the company
pursues. The active conduct of a profit-making enterprise in the U.S. usually calls for a domestic domicile,
officers skilled in the particular business to be pursued, adequate capitalization, local banking arrangements,
and all necessary government identification numbers, licenses and permits. To take advantage of the fact that
a non-resident alien is not subject to U.S. income tax on certain types of income earned from U.S. sources, a
Business Trust Organization must have a foreign domicile, a foreign trustee and no income from, or
effectively connected with, a U.S. trade or business. Channeling income from a U.S. business to a foreign
beneficiary company requires a special form of company having a foreign domicile, a foreign trustee, no other
business activities, and an agent officer having no connection with the U.S. income source.

Other business purposes may require special types or arrangements of entities. The requirement for great
care in the selection of the domicile cannot be over emphasized because the domicile controls to a large
degree:

1. The validity of the trust.

2. The interpretation of the trust’s provisions.
3. By which nation’s laws the trust will be administered.
4. The applicability of income tax and other tax laws.
 The Initial Exchange of Assets
The initial exchange of assets generally will not constitute a taxable event under the Internal
Revenue Code, because the Capital Units have an indeterminable value. This is because such
Capital Units represent only limited rights to receive future distributions if, in fact, any are
ever made. No tax can be levied on a transaction where value cannot be determined. The
courts have consistently held that the value of the Capital Units cannot be inferred from the
value of the property given in exchange for them.

The exchanger’s basis for the Capital Units received is the same as the basis of the property
given in exchange. The Business Trust Organization’s basis for the property received is the
same as it was in the hands of the exchanger.

As used above, the word “exchange” is to be given its ordinary meaning: giving one thing for
another, requiring the transfers to be in kind and excluding a monetary consideration as a
basis of measure. [Trenton Cotton Oil Co. v. Commissioner, 147 F 2d 33; and TR 118,
§39.112(a) -1, (e)] From Black’s Law Dictionary, 5th edition: “Exchange * contract by terms of
which specific property is given in consideration of the receipt of property other than money.
Capps v. Mines Services, 175 Or. 248, 152 P. 2d 414, 416.”

It is sometimes wrongly concluded that Capital Units have minimal or no value. Indeed, in
time it is reasonable to assume that the total amount of distributable income generated by
the business activities of the Business Trust Organization will far exceed the exchange value
of the assets initially exchanged. It is not unusual for property to exhibit the quality of “value”
without the immediate quantity of value being “measurable.”

Great care must be exercised to make sure that both present and future tax considerations
are well understood and provided for when structuring the initial transfer of property into a
Business Trust. If the property being transferred has substantially appreciated in value since it
was acquired by the transferor and the transferor does not recognize and pay the tax due on
such appreciation on his own tax return, later sale by the trust could result in the trust being
subject to tax on the amount of such appreciation at the transferor’s tax rate. [See Section III
pages 20 and 21] All such property should be appraised by an independent appraiser at the
time of the transfer, so that the amount of any appreciation is established.

One type of exchange that has proven particularly troublesome in the past involves the
exchange of a promissory note which was acquired by the holder in the sale of property
where the holder elected installment sale treatment on his own tax return at the time of the
original sale. If such a note is later assigned to a trust in exchange for the capital units, any
gain from the original property sale remaining unrecognized by the note holder must be
recognized when the note is assigned.

To understand why this is so, one must separate the two transactions involved: the original
property sale and the tax-deferred exchange of the note for the Capital Units. These two
transactions are entirely separate. The original sale caused the seller (holder) to realize the
gain on that sale. He then elected to defer recognition of that gain for tax purposes until the
benefits (the payments) were received. Any receipt of benefit (i.e., receiving payment,
pledging the note as security for a loan, or assignment of the note for consideration) triggers
the requirement to recognize part or all of the remaining unrecognized gain. Thus, even
though the transaction in which the note is exchanged for the capital units is a tax-deferred
transaction, it causes the remaining gain that was deferred by the installment sale election to
be recognized and taxed to the note holder in the exchange year. If this is not understood, it
can cause a nasty shock in la or years.

It is sometimes advisable to have the Business Trust Organization acquire property by

purchase rather than exchange. In this event, the initial exchange to capitalize the company
would involve only cash.’ The exchanger and trustee then negotiate the terms of the
purchase, at arm’s length and for fair market value. Here again, the use of the services of an
independent appraiser to provide documentation of the facts would be wise.

Generally, there are two ways to document the fact that ownership of property has been
transferred to the trust: the Schedule A, and conveyance document appropriate to the
specific items of property. To avoid any future question or challenge as to the true owner of
the property, it is wise to use both methods.

A proper Schedule A employs “words of ‘conveyance,” gives a complete legal description of

each separately identifiable item of property, and is executed by the person conveying the
property to the trust before a Notary Public. (See sample Schedule A in Appendix C.)

All items of property for which legal title is held of record (such as real estate and registered
vehicles) should be conveyed using documents and procedures that are normal and
customary for the specific type of property, in addition to the Schedule A. This may seem
expensive at the time, but will certainly be less so than having the conveyance overturned in
a later challenge.
 Fraudulent Conveyance Considerations

A study of protective asset planning and transferring assets to separate legal entities is incomplete without
consideration of the law on hindering, delaying or defrauding creditors. To implement plans without reflection
on that body of law is to risk sanctions ranging from voiding the property transfers to criminal “penalties.
Throughout the following discussion, remember that transferring an asset to utilize an exemption from
judgment creditor claims is not a fraudulent transfer. Nor is its sale, if the sale is made for adequate
consideration.

There are two tests by which a transfer of property or incurrence of an obligation may be deemed fraudulent.
They are actual fraud and constructive fraud.

Actual Fraud. Under the actual-fraud .test, it must be proven that the debtor actually intended to hinder,
delay or defraud creditors. That, of course, is impossible to prove objectively in the absence of a confession, so
the courts have identified certain factors indicating the necessary intent, characterized as “badges of fraud.”
[Uniform Fraudulent Transfers Act (UFTA)]

UFTA identifies certain specific badges of fraud for consideration in determining intent. The list includes:

1. Whether the transfer was to an insider.

2. Whether the debtor retained possession or control of the transferred
3. Whether the transfer was disclosed or concealed.
4. Whether the debtor was threatened with litigation before the transfer was consummated or obligation
incurred.
5. Whether the debtor absconded.
6. Whether the debtor removed or concealed assets.

The mere presence of one or more of these “badges of fraud” does not lead to a presumption of fraud, merely
an inference of fraudulent intent.

So long as the person to whom the property was transferred “did not collude with the debtor or otherwise
actively participate in the fraudulent scheme of the debtor” and received the property in good faith for
reasonably equivalent value, the transferee is provided a complete defense to a fraudulent transfer claim.
[California Civil Code, §3439.08] The term “reasonably equivalent value,” is not precisely defined. The burden
of proof rests with that transferee.

Constructive Fraud. To find a fraudulent transfer under the constructive fraud test does not require proof of
actual intent to defraud creditors. Instead, a court need only find that both the consideration given for the
transfer or obligation incurred was inadequate, and any one of three measures of financial condition was
unsatisfied. So, if either adequate consideration is found or all three financial condition requirements are
satisfied, the transfer is not fraudulent under the constructive fraud test. The three measures of financial
condition included in the constructive fraud test are unreasonably small assets in relation to liabilities
assumed, inability to repay debts and insolvency.

Under UFTA, the second financial condition measure (inability to repay debts) is determined by whether the
debtor intended to incur or believed or reasonably should have believed that he would incur debts beyond his
ability to pay. The new language holds the debtor to an objective standard regarding the likelihood of
satisfying his debts. Under UFTA, a debtor is deemed insolvent if the fair value of his liabilities exceed those of
his assets. Although the term “fair value” is not defined in UFTA, the term is construed by the courts as
somewhere between liquidation value and the best price obtainable in a perfect market with no time
constraints. Usually it will be something in excess of book value.

Criminal Sanctions: In addition to the summary of UFTA presented here, bear in mind that criminal penalties
apply to fraudulent transfers as well. In California, every person who is a party to a fraudulent conveyance
made with the intent to deceive and defraud others or to defeat, hinder or delay creditors or others of their
just debts, damages or demands, is guilty of a misdemeanor. [California Penal Code, §531]

Trusts cannot protect fraudulently conveyed property transferred to the trust. A fraudulent conveyance can
be set aside on the theory that the debtor had no good title to convey. The primary test to determine the issue
is: Was fair market value received in consideration of the conveyance of the property?

If assets are to be deployed to lower personal financial profiles at minimum risk, those assets should be
transferred before the actual need arises. If it is already too late so that a conveyance may be deemed
fraudulent, tools other than trusts can provide better legal solutions. For example, property transferred into a
limited partnership in return for a proportionate share of the partnership interests cannot be reached by a
creditor of the limited partner. Fair market value has been received in consideration for the property, the
value of the property exchanged (now in the form of a limited partnership interest) is still reachable via a
Charging Order by creditors and, therefore, there has been no fraudulent conveyance.

Although the creditor may obtain a Charging Order against the limited partner’s interest, a properly drafted
partnership agreement can give the General Partner authority to withhold distributions. Pursuant to
Revenue Ruling 77-137, the creditor with a’ Charging Order is considered, for tax purposes, to be a substitute
limited partner and, therefore is subject to his proportionate share of the tax liability whether distributions
are received or not. This Revenue Ruling is affirmed in Jackson v. Commissioner, 91 81, 594 P-H Memo TC
(1981), where the court held “if an assignee is determined to be a partner for federal income tax purposes, he
is liable for taxation as a new partner.” [Also see, A. Willis, J. Pennell, P. Postle waite, Partnership Taxation.
§2.03, pp. 2-11(12) 3d ed. (1981)]
 THE START-UP MINUTES

IN ADDITION TO THE CONTRACT ITSELF, a new Business Trust Organization requires the execution of a
number of specific minutes at its inception. These minutes declare the company to be in business, appoint its
agent managers, designate the Capital Units Holders, identify the lines of succession for the positions of
trustee, agents, and unitholders, and authorize the establishment of business with banks and other financial
institutions. See Appendix C for sample minutes illustrating suggested formats and wording.
 TRUSTEE’S DECLARATION OF FULL FORCE AND EFFECT

The first minute executed by the Trustee is the declaration that the contract creating the Business
Trust Organization is now in full force and effect, and it is fully ready to conduct business.
 APPOINTMENT OF OFFICERS

The appointment of the operating officers for the Business Trust Organization is accomplished by
minutes setting forth their names and referencing the contract executed between the officer and the Trustee.
The contract sets forth the specific terms of the officer’s appointment, including his title, duties,
responsibilities, authority, and compensation, and binds the officer to confidentiality. This minute should also
include clauses giving notice of the fact that such officers have no personal liability for claims against the
company, and providing for reimbursement for personal funds expended on behalf of the Company. A copy of
this minute is furnished to any person requiring proof of the officer’s authority to act on behalf of the
company.
 Bank Authorization

For the agents of the Business Trust Organization to conduct business with a commercial bank, the
Trustee must execute a minute authorizing the conduct of business with the particular banking institution,
and setting forth the type of business to be conducted, the persons authorized to sign on behalf of the
company, and the number of signatures required. A copy of this minute is required by the bank when opening
the account.
 Selection of Successors

It is very important that a minute is executed identifying those persons who are to succeed the
Trustee, the Agent Officers, and the Capital Unit Holders. These successors should be carefully selected to
assure that they are qualified and motivated to carry out the purposes for which the entity was formed.
 The Holders of the Capital Units

The holders of the Capital Units (which constitute the beneficial interests of the Business Trust
Organization) have no duties, authority or responsibility in the operation of the Business Trust Organization,
the ownership and control of its assets, or the selection of the trustees or officers. However, it is of great
importance to carefully consider who holds the Capital Units of the Business Trust Organization. The Capital
Unitholders have the right to receive any distributions from the Business Trust Organization that the trustee
may make, both regular distributions from operating profits and the distribution of assets upon dissolution.
Any tax liability associated with or derived from any such distribution also falls upon the Capital Unitholders.
 THE MINUTE BOOK

The Legal Basis for Business Trust Organization Activities.

ALTHOUGH THE SUCCESS OF a Business Trust Organization in the business world may well depend on the
skills and experience of a single individual, its successful legal existence depends on the strict separation of
the designated functions. The function of exchanger or settlor, trustee and beneficiary must be handled by
different persons to assure the continuity of existence and to provide for arm’s length transactions among
adverse parties.

It is important for a Business Trust Organization to have accurate minutes reflecting the major decisions of
the Trustee. Minutes detail the significant transactions and the legal authority of all officers and agents of the
company to consummate those transactions. This is necessary to enable successors coming into the company
to understand what has happened in the past and properly proceed from there.

Without careful minutes, the Internal Revenue Service has successfully denied the “business’ 1 status of many
trust entities and disallowed protection of assets from tax liability. Invariably, the most important
consideration in these attacks by the IRS is whether the entity acted at all times as a separate entity. If not, it
is subject to attack via allegations that, in reality, the entity is an alter-ego of the person in charge. Whether
dealing with a capital unitholder, an employee, an agent or with a third party, the Business Trust Organization
must act in its own self-interest. This point should be kept in mind at all times. Minutes can be used to
substantiate formality and show that arm’s length was in effect and, therefore, self-dealing is not an issue.

The Minute Book is the diary that records the decisions and acts of the trustees. All significant action taken by
the Business Trust Organization should be documented in a minute and entered into the Minute Book.
Policies and procedures regarding the routine affairs of business should be defined and authorized by the
trustees in the start-up minutes. These minutes subsequently can be modified or supplemented as the need
arises.

For study purposes, the sample minutes in Appendix C show a great deal about removing personal affairs and
activities from those of a business entity and proper arm’s length conduct of any business transaction. These
may suggest ideas to use in structuring minutes for a specific Business Trust Organization, even though they
may not have direct application to that particular business organization. The main value lies in showing a
mindset that is necessary for operating any business at arm’s length.

The Minute Book should constitute a formally organized and segregated set of documents which are in
harmony with a Business Plan. Otherwise, they may be construed to be nothing more than a personal diary.
 TRANSACTING BUSINESS WITH OTHER BUSINESSES AND GOVERNMENT

IN DOING BUSINESS WITH THE OUTSIDE WORLD, the skilled Business Trust Organization manager deals
with people at all levels of understanding, and with an almost infinite variety of unyielding policies. He must
be very knowledgeable in the technical aspects of Business Trust Organizations, and possess ample “people
skills.” He must know when to explain when to go up to the next management level, when to go around the
obstacle, and when to give up and move on to the next alternative.

One area of concern to every manager is, just how much information should be divulged and of which
documents should copies be furnished. Generally, the full indenture and the Trustee’s charter can be freely
disclosed with little risk to privacy, as can specific minutes have related to the business at hand. On the other
hand, the complete set of minutes, specific financial and asset data, or information on the
CapitaUnitholdersrs should be kept strictly private. Such information in the hands of people adverse to the
interests of the entity can be damaging.
 The Fictitious Business Name Statement

Since the Business Trust Organization does business under its own true, legal name, there is no legal
requirement that it file any type of “fictitious business name statement”. However, when dealing with the
clerks of the world, often discretion is the better part of valor. Thus, if you are unfortunate enough to come
across the Champion Guardian of Company Policy (CGCP), who just happens to know nothing about Business
Trust Organizations, and you need to execute a quick end run, a fictitious business name statement may be in
order. It is filed as “ABC Company” doing business as “ABC Company”. Do not file as “agent’s name” doing
business, as “ABC Company”, as such a filing would legally name the agent as the responsible, liable party for
that company.
 Business and Professional Licenses

The managing agent should have little trouble acquiring a regular business license for the Business Trust
Organization in any jurisdiction where such is required. Here again, however, the clever agent may find it
necessary to end-run the CGCP (above). The issuing agency may require the signature of the trustee, and, in
the case of an out of state corporate trustee, proof of its qualification to do business in your state. Don’t
overlook the possibility of temporarily appointing a local natural person as an additional trustee, and having
him apply for the license. This maneuver is often effective in a variety of other situations, as well.
Acquiring a professional license in the name of the Business Trust Organization is another matter. There are
few, if any, provisions in the statutes establishing licensing requirements in the respective professions that
recognize the Business Trust Organization form of doing business. Having the professional conduct his
business as a sole proprietor, while creatively surrounding him with Business Trust Organizations supplying
products or services to his business through arm’s length transactions can be very effective. In structuring
such an arrangement, most or all of the professional’s business and personal property is exchanged into one r
more Business Trust Organizations, thus providing both incomes splitting benefits and asset protection
through compartmentalization.
 Dealing with Banks and Other Financial Institutions

The experienced Business Trust Organization manager will tell you that there are as many different
responses to his application for a financial account as there are financial institutions. Some welcome Business
Trust Organization accounts, a few flatly reject it, while most are simply not familiar with this way of
conducting business.

It is generally preferable, although not mandatory, to have the Business Trust Organization bank account at a
different bank from that used by the managers for their personal banking. If your business is rejected at one
bank or brokerage house, try another. Sometimes, a little effort to educate the new accounts clerk about
Business Trust Organizations pays handsome dividends in the form of ease of doing business. But don’t
overdo it and waste a lot of time on someone who has no control over the policies of that particular financial
institution.

In preparation, go to the selected institution, get a corporation account application form and take it back to
the office with you. Complete it, paying close attention to the printed questions and terms, changing them as
necessary to clearly identify that the entity involved is a Business Trust Organization, not a corporation,
partnership or DBA of the officer signing the application. Make copies of the following documents from the
company Minute Book:

1. The signature page of the contract.

2. The minute appointing you as agent for the trustee.
3. The financial institution minute naming the institution.
4. Employer Identification Number, or application for same.
5. If a corporate trustee, the trustee’s charter and the minute authorizing it to conduct trust company
business.

Take the completed application, the above copies and a cashier’s check or cash for the amount needed to open
the account, usually $100 or more, to the new accounts clerk. Don’t leave until you either have an open
account or are sure that you won’t be able to get one. If your application is rejected, try to get a copy of the
institution’s policy upon which the rejection is based. Failing that, try to get the name of the person in the
legal department of the institution who is responsible for that policy. This information may be useful in the
event that you or the trustee decides to investigate the matter further. You occasionally may find it helpful to
provide, in addition to the above documents, a copy of the complete indenture, certified as to its authenticity
by the seal and signature of the trustee. But do not include copies of all the minutes. Only those minutes that
relate to the transaction at hand are necessary. Any more are unnecessary disclosures of private information.
 Dealing with Title Insurance Companies

Today, the American system establishing land ownership consists of three key requirements.

(1) The warranty deed or some other type of deed purporting to convey ownership of land,
(2) title abstracts to chronologically follow the development of these different types of deeds to a piece of
property, and
(3) title insurance to protect the ownership of that land.

These three ingredients must work together to ensure a systematic and orderly conveyance of property.

None of these three by itself can act to completely convey possession of the land from one person to another.
At least two of the three are always deemed necessary to adequately satisfy the legal system and real estate
agents that title to property has been placed in the hands of the purchaser. Often times, all three are
necessary to properly pass ownership of land to the purchaser.

When a Title Insurance Company issues a policy of title insurance in a real property transaction, it is
important to understand that they are actually agreeing to indemnify the parties to the transaction for any
losses incurred due to problems with legal title to the property. Thus, the Title Company must verify that the
person conveying title is who he claims to be, is in fact the legal owner of the property in question, and is able
and authorized to convey marketable title to the property. Few problems will be encountered with real
property transactions if a few basic rules are followed:

1. Make sure that the indenture and records of the Business Trust Organization are in good order and that
the trustee has legal standing in the jurisdiction where the property is located before title to real property
is conveyed to the Business Trust Organization.
2. Never convey real property to a Business Trust Organization using a Quit Claim Deed (or other off-record
instrument) without first getting the advice of a professional – competent in both Business Trust
Organizations and real property conveyances in the jurisdiction where the property is located.
3. Avoid conveying ownership of U.S. real property to a non-resident alien Business Trust Organization.
4. Be prepared to supply certified copies of all relevant company documents to the title company, escrow
holder or attorney handling the transaction.
5. Be patient with people who lack your advanced knowledge of Business Trust Organizations and how they
function. If you have difficulties with such people, don’t argue or-get mad. Bring in the trustee or a
competent professional consultant to support your position.

Here is an example of some rules and guidelines adhered to by Title Insurance Companies when insuring real
property conveyances by entities such as Business Trust Organizations:

1. Call for the by-laws or articles to determine the requirements pertaining to procedure, consent and
approval, before insuring any conveyance recorded less than 5 years. Require strict compliance therewith.
2. What to watch for:
3. Meetings of the board or of the members must be a regular meeting as provided for in the by-laws or if a
special meeting, it must be called and held as therein provided and the resolution should so indicate.
Last Name*:
4. A quorum or the requisite number of members must be present at the meeting and approve the
transaction and the resolution should so indicate.
Details*:
5. The transaction, as approved, should be described in some detail in the resolution.
6. If corporation is a member of a parent organization, comply with requirements of both parent and local
body.
7. Always secure certified copies of the resolutions to retain in the search notes.
8. If the by-laws and articles are silent with respect to approval or consent of anyone, in addition to the
directors, they alone may authorize the transaction.
9. Submit to management if there is any doubt regarding strict compliance.
 Filing for Tax ID Numbers

Any Business Trust Organization that so conducts its business as to be required to file U.S. income tax, payroll
tax or information returns, is required to apply for a Taxpayer Identification Number (TIN). This application is
made on a Treasury Form SS-4. Obtain a copy of this form either from a local IRS office or most any
accountant’s office. Complete and send to:
Internal Revenue Service
Philadelphia, Pa. 19255

Do not send this application to any other Internal Revenue Service office. You will receive notification of the
number assigned to the Business Trust Organization in four to six weeks. This number is to be used anytime
the Business Trust Organization enters a transaction where a TIN is required. Never use a manager’s or
employee’s social security number for any company transactions, regardless of how easy or innocent it may
seem at the moment.
 CHECKLIST FOR THE BUSINESS TRUST ORGANIZATION MANAGER

AS THE RESPONSIBLE REPRESENTATIVE OF THE TRUSTEE, the manager should be knowledgeable in all
areas pertaining to the organization of the Trust and its business conduct. If directed by the Trustee, the
manager should be able to answer any questions pertaining to these areas and, where appropriate, provide
copies of pertinent documents, including the Contract and Indenture, Minutes, books and records, and
contracts to substantiate the Trust’s position:
Make booking here. Due to
the excessive number of
new members requesting
consultations as soon as
they join, a consultation
will only be granted when a
member has completed one
of the courses on this site.
Please see the FAQ tab for
further information.

Creation:
_____What is the domicile of the Trust?
_____When did the Trust come into existence?
_____Who was the First Trustee?
_____What are the functions and powers of the Trustees?
_____How many capital units were issued?
_____To whom were the capital units issued?
_____What were the amounts of money and assets exchanged into the Trust?
_____Who were the original officers?
_____What are the duties and functions of the Trust officers?

Startup:
_____What is the business of the Trust?
_____Is there a business plan for the Trust?
_____If not, when will it be done?
_____Has an appropriate accounting system been chosen or designed for the Trust? g If not, when will it be
done?
_____Have all applicable registrations, licenses, and permits been obtained?
_____Has each officer executed a contract for services with the Trust?
_____What is the compensation paid to the trustees?
_____What is the compensation paid to the officers?

On-Going Business:
_____Have any additional trustees or officers been appointed?
____If so, who were they and when were they appointed?
_____Have any trustees or officers resigned?
____If so, who resigned and when?
____Who replaced them and when?
_____Are the Trust books and records, including the minutes, up to date and accurate?
_____Can the Trust account for all income received?
_____Does the Trust have substantiation for all expenses claimed?
_____Have all applicable tax returns been filed?
_____Does the Trust have records to substantiate the basis of all property on which depreciation has been
taken?
_____Does the Trust have any employees?
____If so, are all proper employment requirements being met?
____Does the Trust offer any fringe benefits to its employees?
____Sick pay?
____Medical, health or accident plans?
____Life Insurance or Death benefits?
____Meals or lodging? If so, what is the legitimate business purpose of the meals and/or lodging?

In addition to the areas specified above, it also is important that all contracts pertaining to the business of the
Business Trust Organization be documented and kept with the company papers. Concerning any oral
contracts that the Business Trust Organization may have entered into, it is important that those contracts be
reduced to writing. In reducing such contracts to writing, the date on which the contract was entered into as
well as the date on which the contract is reduced to writing should be specified.

If the Business Trust Organization is audited by tax authorities, the officer or accountant who prepared the
returns will be called upon to substantiate and explain all questioned items on the Business Trust
Organization returns for the period in question. The above listed areas should be given appropriate
consideration while bringing the Business Trust Organization to life, as well as during the on-going process of
conducting the business.
self (and
e, but that
 BEGINNING BUSINESS OPERATIONS

Having examined what a Business Trust organization is and how one comes into existence, we will now
explore the nuts and bolts details of daily operations. With the possibility of almost endless variations
between businesses, managers, and styles, we can only touch on the most important areas. To avoid pitfalls
due to local variations in those areas the Business Trust Organization manager is urged to avail himself of the
resources his local law library as well as others discussed here in.

The first task confronting the newly appointed agent/manager for a Business Trust Organization is to become
completely familiar with all of the company documents. Make sure that all documents are complete and
signed and that minutes and contracts enabling any special activities or relationships have been completed
and executed. As previously emphasized, these documents are the heart and soul of the company. Any failure
on the part of the managers to assure the completeness and accuracy of them jeopardizes the success of the
enterprise.
 The Business Plan

Ever successful business conducts its operations and makes it business decisions according to a business plan.
Not all of these plans are written. Many are simply the head “seat-of-the-pants” of the individual
entrepreneur. But for any business to grow much re; end the one-man-show stage, there must be a carefully
thought-out and written business plan.

A business plan has two main objectives:

1. To be a working guide to decision making by all trustees, managers and key employees.

2. To be a sales document in raising capital from outside sources.

Most plans ignore the first objective, becoming only shallow promotional material consisting largely of smoke
and mirrors. Such a plan provides no guidance for managers, and tends to drive away the type of solid sources
of capital that the successful venture needs.

One caution: Don’t copy someone else’s business plan. A proper business plan is such an integral part of a
particular business that it is almost impossible to adapt it to another. And, of course, well done, successful
plans are, by their very nature, among the most private, closely- guarded secrets of the successful enterprise.
Thus, the only type of plans available to be used as guides are the bad ones. Your plan should reflect your
goals, your capabilities and your creativity and should not be a copy of someone else’s mistakes.
 Building the Business Plan

Before any effective start can be made in writing a business plan, the necessary research must be underway.
The start-up team must be carefully selected. The long-range goals and intermediate objectives must be
clearly understood. The basic business philosophy to be followed must be agreed to by the start-up team.
Available resources must be identified. General products and markets must be identified.

As this information comes together, writing the plan can begin. First, the outline is prepared so that everyone
involved has a guide to follow. Each section of the outline is then written in broad, general terms. The
objective here is to create an easy-reading document that everyone involved can understand and agree to. As
this first draft develops, many of the major policy decisions will be confronted and resolved, leaving the team
free to proceed to the more detailed work to follow.

As the work proceeds, the individual team members will be assigned to the sections of the plan relating to
their special skills and responsibilities. Each member is responsible for the Appendix that defines the details
of his specialty. The completion of this second draft, where all of the specialties are integrated together,
signals the first time that the product is worthy of the title “Business Plan.”

Is it “finished”? The business plan of a successful enterprise is never “finished”. It is a dynamic document, at
once a blueprint for today’s decisions, a guidepost to the future, and a reflection of all of the changes in its
people, its products and its markets. To be effective, it must be continually reviewed, updated, revised,
rewritten and reviewed again.
 The Business Plan Outline

To ensure all important aspects are covered in the business plan, writing should begin with an outline. The
following outline has been used effectively by many businesses. It may need to be revised to fit any special
circumstances.

A. Table of Contents
B. Summary and overview
C. Business history, if any
D. Products or services
E. Manufacturing or service resources
F. Quality assurance
G. Markets to be addressed
H. Marketing Plans
I. Founders and key people
J. Financial plans and resources
K. Ownership of business
L. Incentive compensation plan
M. Appendices:

1. Product details
2. Manufacturing
3. Quality control
4. Marketing
5. Administration
6. Finance
7. Personnel
8. New product development
9. Management controls systems
10. Assumptions plan is based on
11. Business projections
12. Problem areas

The writing style should be easy to read and as professionally done as you can achieve. It should be lively and
enthusiastic, conveying the personality of the writer. Avoid overuse of superlatives such as “fantastic” and
“tremendous.” They can make your plan sound like a snow-job.
 IMPLEMENTING THE RIGHT TO PRIVACY

SINCE THE PRIMARY PURPOSE OF A Business Trust Organization is to make a profit for the benefit of the
Capital Units holders, it follows that its trustees, officers, and agents have a fiduciary duty to maintain privacy
in its business and financial affairs, in order to minimize risks to the attainment of its legitimate business
objectives.

The first step in implementing a policy of strict privacy in all of the affairs of the Business Trust Organization
is to bind the trustees, officers and agents to confidentiality by contract. This is usually accomplished by
clauses in the indenture or in the minutes, and backed up by clauses in the employment contracts executed
between the Business Trust Organization and its employees. The second step is the establishment of policy,
procedures and guidelines for the maintenance of privacy in the conduct of business affairs.

Effective implementation of the Business Trust Organization’s right to privacy involves three major areas:
communications, funding and benefit. Transactions in these critical areas must be accomplished in strictest
confidence if the Business Trust Organization is to remain secure in its property and affairs.
 Communications

Security of communications is an essential key to privacy. Without secure communications, privacy is

impossible. Compromise of sensitive communications between the principals of the Business Trust
Organization can be costly, if not fatal. Clearly, since no business can completely forego communications, it is
imperative that all reasonable effort be made to keep communications as confidential as possible.

In the Introduction to this Guide, we described a number of “paper tigers”. Foremost among these is the
concept of the all-invasive, all-pervasive surveillance technology. Certainly, given sufficient motivation on the
part of the snoopers, it is possible for communications between specific individuals to be filtered from billions
of other letters, telephone calls and wires, and their privacy compromised. However, the great amount of time
and resources required to accomplish this with any degree of reliability precludes its use against any but the
most minute fraction of possible targets. If you conduct your business quietly and take even the most
elementary precautions, your communications will be lost in anonymity in this veritable flood of information.

Your first line of defense, then, is in the overwhelming weight of numbers. If you are not otherwise singled out
for special attention, your communications will most likely pass quietly through the system unmolested. Even
if you suspect that you have been selected for special attention, a few simple security measures can greatly
increase the probability that you will be passed over in favor of easier, more lucrative targets. The numbers,
however, are only your first line of defense.

If you plan to maintain privacy in your management of the affairs of the Business Trust Organization, you
must adopt an attitude that can only be characterized as” enlightened paranoia.” This does not mean that you
believe that people are out to get you. It means that you concede the possibility and act accordingly. For
example, you may assess the probability that your cell phone is being tapped as very low, but it costs you very
little to act as if it were. The same principle applies to other modes of communication. Let’s examine a few
specific measures that can be taken that will allow your private communications to pass in relative security.
(Please investigate the NSA Carnivore and Echelon here).

Procedures for maintaining privacy in Business Trust Organization communications should be set forth in the
start-up minutes. This is the very best time to establish secure channels of communications and set the
ground rules for future activities. The trustee should provide the managers with direction as to what security
precautions will be taken to maintain business privacy. Appropriate security measures are determined by the
vulnerability to compromise of each particular communications medium and the degree of security necessary.

To compromise a communication by mail physical interception is required. Somewhere in transit, it is

necessary to identify the specific letter and remove it from the normal flow of processing. Its contents may
then be examined either by opening or by electronic scanning. Two simple precautions greatly increase the
security of mail communications: encoding the message, and the use of a remote mail forwarding service.

Elaborate cipher books or coding machines are unnecessary. For all intents and purposes, even the most
rudimentary code will effectively guard your privacy. A list of code words and phrases to represent all
important activities, individuals, commodities, currencies and the like, can be a part of the privacy procedures
established at start-up. Then, even in the unlikely event that your letter is intercepted, its innocuous wording
will mask its more significant actual content. To secure critically sensitive communications, more
sophisticated codes or ciphers may be used.

Remote mail forwarding is widely available from commercial services in even the smallest of towns, not to
mention sympathetic friends and relatives. If you avoid sending or receiving sensitive mail at your normal
mailing addresses, you will virtually eliminate any possibility that your mail will be intercepted and
compromised.

To further assure anonymity, remote mail services and post office boxes can be contracted under a
pseudonym, preferably one with a full-blown alternate identity behind it. In fact, establishing one or more
alternate identities is probably a good idea for any enlightened paranoid. The use of alternate identities is
perfectly legal as long as it is not done with intent and purpose of defrauding someone.

Telephone and Telex differ from’ the mail in that they are much more public. Since such communications are
handled electronically, interference and eavesdropping are both easier to accomplish and harder to detect.
Computers are finding wide use in both sending and monitoring this type of communication. A computer can
be programmed to recognize a list of keywords associated with a particular subject of interest to the
snoopers, recording any messages that include words on the list. Without belaboring the point, while bugs,
taps and computer surveillance could be used against anyone, it is beyond even the resources of the United
States government to use them against even a small fraction of the population, let alone everyone.

As with mail, the use of a phone other than your regular home or business phone will usually assure adequate
security. The use of public phones on a prearranged schedule will secure both ends of the communication.
Telex and telegrams can be sent and received using alternate identities, thereby improving security.

Here again, codes can be used to add that final bit of security to electronic communications. While telex
messages are subject to transmission errors that could scramble a cipher, code words and phrases at worst
would transmit with easily detectable errors. For maximum security, codes should be used in addition to the
other precautions. They are also recommended in emergencies where it is necessary to contact the recipient
of sensitive information at his usual location.
 Privacy of Financial Transfers

For the Business Trust Organization to accomplish its goals and objectives, it is necessary to transfer funds
and other assets to and from its various business locations and accounts without breaching the privacy of the
parties involved. Often, such transfers will mean moving money across national boundaries. Wherever
possible, efforts should be made to structure the situation such that funding transfers take place within a
single country. First, let’s look at ways of transferring funds between countries while maintaining as much
privacy as is reasonably possible.

Most countries either restrict or require reporting of any transfer of funds out of the country. In the United
States, movements of $10,000 or more in cash or bearer instruments in a single-transaction require a report
to the Treasury Department. No reporting requirements or restrictions apply to international transfers of
less than that amount. Multiple transfers of less than $10,000 each day spaced over several days are not only
legal, they are usually as effective as a single large shipment. The United States Exchange Control Law of
1980 provides, in addition to other penalties, for confiscation of unreported cash shipments. Sending or
receiving checks made payable to a specific person does not require reporting, regardless of amount. Funds
transferred by bank wire are also exempt from reporting by the parties involved, but must be reported by the
U.S. bank when over $10,000.

As serious economic problems caused by government interference in and mismanagement of the

marketplace continue to*compound, stricter U.S. exchange controls are a near certainty. The wise manager
finds that time spent in learning the relevant laws of his home country is time very well spent.

The most direct method of moving funds offshore is to physically carry it yourself. Many people find it
necessary to cross national borders frequently; others live near enough to a foreign country to make periodic
trips there practical. The main advantage of this method is that you need not rely upon channels of
communication or third parties that are beyond your practical control.

It is not necessary to hand carry funds directly to their ultimate destination. You only need move them beyond
prying eyes within your own country. Once outside, most ordinary means of funds transfer, such as wire or
mail, provide more than adequate security.

If personal delivery is not practical, several other means of offshore transfer of funds are available. The
fastest method is to wire funds to their foreign destination, through either a bank or telegraph company.
Today U.S. banks are being asked to report any “suspicious” transactions involving cash, regardless of the
amount, ostensibly to interdict money “laundering” by drug interest. This excuse, of course, is a cover for the
government’s extensive and growing drive to penetrate the private affairs of all citizens.

If an alternate identity is used to preserve privacy when transferring funds, the sender may experience
difficulty reclaiming the funds if for any reason the transfer is not completed. The risk here is slight and can be
virtually eliminated if the sender’s alternate identity is authenticated with appropriated documents.
Companies in this business are usually more than willing to provide information about their normal
procedures for handling wire transfers. Prudent use of branches where you are not known will further serve
to protect privacy.

Offshore transfers also may be sent by mail. As previously mentioned, to compromise a communication by
mail, physical interception is required. Inspection or mail covers are primarily used, if at all on incoming mail.
A maildrop service with an innocuous name and address can add greatly to security. Many businesses whose
success depends on maintaining the privacy of clients offer such service, often located in a third country. For
those who have not been specifically targeted for investigation, conventional mail is reasonably secure for
most purposes.
 Instruments for Mail Transfers

Banks, foreign exchange brokers, post offices and private money order firms issue a wide variety of
instruments available for mailing. The postal money order requires the least identification in the United
States. These are blank when issued and are completed by the purchaser. No identification is verified by the
postal clerk and the only records kept reflect the amount of money and the serial number of the money order.
However, they are issued in relatively limited amounts and may take considerable time to clear. Clearing time
can be expedited by using foreign money order but they are also issued in relatively limited amounts and
require a disclosure statement by the purchaser. In addition to government postal money orders, private
money orders are issued r money order firms, many banks and even some convenience store chains.

A universally recognized and insured financial instrument is the traveler’s check. Banks, travel agents and
foreign exchange brokers routinely sell traveler’s checks. Once purchased, they can be signed, restrictively
endorsed to the recipient and mailed. If they are lost in transit, they will be replaced by the issuing company.
They may be purchased denominated in a wide choice of major currencies.

Banks offer two additional instruments that are useful in transferring funds: cashier’s checks and foreign
drafts. Of the two, foreign drafts are more convenient for offshore transfer but may attract undesirable
attention. Cashier’s checks generally arouse less curiosity but take longer to clear. Adherence to a few simple
rules when using any of the above means of funds transfer will help you maximize privacy while minimizing
cost, effort and hassle:

1. Ask the issuing institution about procedures and identification requirements prior to doing business with
them.
2. Purchase the instruments through an institution out of your normal area of activity where you are not
known.
3. Preserve your anonymity through the use of a well-documented alternate identity.
4. Pay in cash.

When the offshore recipient has financial activities within the manager’s home country it may be possible to
avoid offshore transfers of funds. Many foreign businesses, while not actually engaged in trade or commerce
in the U.S., maintain information offices in major U.S. cities that can accept funds for transfer to the offshore
parent. For convenience, foreign Business Trust Organizations often maintain accounts in domestic banks,
brokerage houses, money market funds or similar institutions. It is possible to make deposits to any of these
types of accounts to the credit of the foreign owner, either in cash by courier or in the form of a cashier’s
check by mail.

This technique, however, can be the weak link in the chain of privacy. Here, the high degree of privacy implicit
in transactions conducted in tax haven jurisdictions is traded for the extra convenience but dubious
confidentiality surrounding transactions in most major countries. You run the additional risk of foreign
exchange controls and heavy domestic taxation of foreign holdings. Last, but not least, by being too intimately
associated with activities of a foreign entity, you run the obvious risk of someone drawing the conclusion that
self-dealing is involved.
 Realizing benefits

The primary purpose of a Business Trust Organization is to earn a profit from its business activities for the
financial benefit of the Capital Unitholders. Naturally, the trustees and management expect reasonable
rewards for their efforts and skills devoted to the activities of the Business Trust Organization. These benefits
need not all be in monetary form. In fact, non-monetary benefits, creatively utilized, can be the primary
source of enjoyment from Business Trust Organization activities. First, we will explore ways that the involved
parties realize and enjoy maximum monetary benefits.

When circumstances require the repatriation of funds from a foreign Business Trust Organization, the same
degree of privacy is required for on-shore transfers as offshore transfers. If anything, the privacy protection
of on-shore transfers may be more difficult. Positive identification is required by banks and telegraph
companies before wired funds are released or checks are cashed.

Here again, the benefits of a well-documented alternate identity cannot be overemphasized. Using an
alternate identity, normal business relationships can be established over time with the banks, telegraph
offices, private check cashing services, etc., where no previous relationship existed.

Private check cashing services, usually found in lower economic class neighborhoods, can be especially useful
in minimizing privacy risk. It may be possible, given the time, to establish a relationship, such that even
instruments drawn on foreign banks will be accepted for cashing. Many of these companies also sell money
orders and offer other services useful to astute business managers. Discreet inquiries should be made
regarding the latitude allowed in negotiating the various type of instruments.

It is quite normal practice for business enterprises to furnish officers and agents credit cards to defray
business expenses. In the case of a non-U.S. enterprise with U.S. agents, a credit (or debit!) card which draws
on a foreign bank can provide the agent with ready access to funds anywhere in the world. Cards such as
VISA, American Express, and Master Card are issued and accepted worldwide. Many cards may be used to
withdraw cash from U.S. Automatic Teller Machines (ATM’s).

Where specific expenditures require repatriation of foreign funds, it is much simpler to have me transfer
instrument drawn to the order of the ultimate payee, thus relieving the manager of any requirement to
negotiate it for cash.

A U.S. citizen may borrow from a foreign bank or other entity created specifically for that purpose and receive
the funds directly from the foreign source without incurring any tax liability on the transaction. A U.S. citizen
also may receive a gift of intangible personal property from a non-resident alien without any tax effect. A
promissory note, payable on demand, given by another non-resident alien as evidence of a bonafide debt, is
such an item of intangible personal property. Gifts are not taxable to the recipient. Under §2501 of the
Internal Revenue; Code, the foreign donor of such a gift is exempt from Gift Tax. When demand is made and
payment received by the U.S. citizen who received the note as a gift, such payment constitutes merely the
discharge of a debt, not taxable income.

One last method of receiving monetary benefit from a foreign Business Trust Organization does not involve
the repatriation of funds. Business travel by a manager on behalf of a foreign Business Trust Organization can
be fully paid for directly by the Business Trust Organization can be fully paid for directly by the Business Trust
Organization. Neither the costs of such a trip nor the activities of the manager while outside of his home
country are subject to verification by anyone except the trustee. Funds to cover the costs, authorized by
minutes signed by the trustee, are made available to the manager by prior arrangement at any selected
foreign destination.

Exploring the area of non-monetary benefits, the Business Trust Organization directly supplies re goods and
services needed and desired by valued managers and employees. These fall into two broad categories: fringe
benefits and business perquisites, and leasing arrangements.
The Business Trust Organization may provide and deduct as ordinary and necessary business e-menses
benefits such as coverage of family medical expenses, transportation expenses, education benefits, generous
expense accounts, and business travel vouchers. Where the nature of the Business Trust Organization
requires it, lodging, meals or both may be furnished to employees as a condition of employment. This list is
certainly not exhaustive. Creative trustees and managers easily can extend the list with tangible benefits for
both the company and the employees, while staying within the reasonable bounds of normal business
practice.

Where the Business Trust Organization is in the business of renting personal property, management
employees may rent items like cars, boats, airplanes, etc., that they otherwise may not be able to afford or
care to own. The Business Trust Organization profits from the business of renting the items, while the
manager has substantially reduced his assets available for seizure.
 PEOPLE WHO WORK FOR THE BUSINESS TRUST ORGANIZATION

SINCE THE BUSINESS TRUST ORGANIZATION IS A LEGAL FICTION, natural persons must perform all of
the functions necessary to its business purpose and continued life. The terms of the relationship between
those persons and the company, including their duties, powers, and compensation, must be carefully thought
out and documented. The major question to be answered in each case is:

Employee or Independent Contractor?

The following factors are to be considered when attempting to determine whether a particular relationship
constitutes employer-employee or independent contractor. In structuring independent contractor status,
these factors appear in general order of importance.

1. Right to Discharge. The right to discharge is an important factor indicating that the person possessing such
right is an employer. He exercises control through the ever-present threat of dismissal, causing the worker
to obey his instructions. An independent contractor, on the other hand, cannot be fired prior to contract
completion, provided he produces a result which measures up to his contract specifications.

Sometimes an employer’s right to discharge is restricted because of his contract with a labor union. Such a
restriction does not detract from the existence of an employment relationship.

2. Payment by Hour, Week, Month. An employee is usually paid by the hour, week, or month; whereas,
payment on a commission or job basis is customary where the worker is an independent contractor.
Payment by the job includes a lump sum which is computed by the number of hours required to do the job
at a fixed rate per hour. It may also include weekly or monthly payments if this method of payment is a
convenient way of paying a lump sum agreed upon as the cost of doing a job.

The guarantee of a minimum salary or the granting of a drawing account at stated intervals with no
requirement for repayment of the excess over earnings tends to indicate the existence of an employer-
employee relationship.

3. Making Service Available to General Public. The fact that a person makes his services available to the
general public is usually indicative of an independent contractual relationship. An individual may hold his
services out to the public in a number of ways. He may have his own office and assistants, he may hang out
a “shingle” in front of his home or office, he may hold business licenses, he may be listed in business
directories, or he may advertise in newspapers, trade journals, magazines, etc.

4. Working for More Than One Firm At a Time. If a person works for a number of firms at the same time, it
usually indicates an independent status because in such cases the worker is usually free from control by
any of the firms. It is possible, however, that a person may work for a number of people or firms and still be
an employee of one or all of them.

5. Set Hours of Work. If the worker must devote his full time to the business of the employer, the employer has
control over the amount of time the worker spends working and by implication, restricts him from doing
other gainful work. An independent contractor, on the other hand, is free to work when, and for whom, he
chooses.

Full time does not necessarily mean an eight-hour workday or a five- or six-day work week. Its meaning may
vary with the intent of the parties, the nature of the occupation, and customs in the locality. These conditions
should be considered in defining “full time.” Full-time services may be required even though not specified in
writing or orally. For example, a person may be required to produce a minimum volume of business which
compels him to devote all of his working time to that business, or he may not be permitted to work for anyone
else and to earn a living he necessarily must work full time.
6. Furnishing of Tools, Materials. The furnishing of tools, materials, etc., by the employer, is indicative of
control over the worker. Where the worker furnishes the tools, materials, etc., it indicates a lack of
employer control. Consideration must be given to the fact that in some occupational fields it is customary
for employees to use their own hand tools.

7. Payment of Business or Traveling Expense. Payment by the employer of the worker’s business or traveling
expenses is a factor indicating control over the worker. Conversely, a lack of control is indicated where the
worker is paid on a job basis and has to take care of all incidental expenses incurred in completing the job.

8. Significant Investment. A significant investment by a person in facilities used by him in performing services
for another tends to show an independent status. On the other hand, the furnishing of all necessary
facilities by the employer tends to indicate the absence of an independent status on the part of the worker.

Facilities include, generally, equipment or premises necessary for the work but not tools, instruments,
clothing, etc., that are provided by employees as a common practice in their particular trade.

9. Doing Work on Employer’s Premises. Doing the work on the employer’s premises is not control in itself;
however, it does imply that the employer has significant, control especially where the work is of such a
nature that it could be done elsewhere. A person working in the employer’s place of business is physically
within the employer’s direction and supervision. The use of desk space and of telephone and stenographic
services provided by an employer places the worker within the employer’s direction and supervision
unless the worker has the option as to whether or not he uses these facilities.

The fact that work is done off the premises does indicate some freedom from control. However, it does not by
itself mean that the worker is not an employee. In some occupations, the services are necessarily performed
away from the premises of the employer. This is true, for example, of employees of construction contractors.

10. Services Rendered Personally. If the services must be rendered personally it indicates that the employer is
interested in the methods as well as the results. He is interested not only in getting the desired result but
also in who does the job. Lack of control may be indicated when an individual has the right to hire a
substitute without the employer’s approval.

11. Hiring, Supervising, and Payment of Assistants. Hiring, supervising, and payment of assistants by the
employer generally shows control over all the men on the job. Sometimes one worker may hire, supervise
and pay the other workers. He may do so as the result of a contract in which he agrees to provide materials
and labor and under which he is responsible only for the attainment of a result, in which case he is an inde-
pendent contractor. On the other hand, if he does so at the direction of the employer, he may be an
employee acting as an agent of the employer.

12. Continuing Relationship. The existence of a continuing relationship between an individual and the person
for whom he performs services is a factor tending to indicate the existence of an employer-employee
relationship. Continuing services may include work performed at frequently recurring though somewhat
irregular intervals either on call of the employer or whenever the work is available. If the arrangement
contemplates continuing or recurring work, the relationship is considered permanent, even if the services
are rendered on a part-time basis, they are seasonal in nature, or the person actually works only a short
time.

13. Realization of Profit or Loss. A person who is in a position to realize a profit or suffer a loss as a result of his
services is generally an independent contractor, while the individual who is an employee is not in such a
position. Opportunity for profit or loss may be established by one or more of a variety of circumstances,
e.g.:

•The individual hires direct and pays assistants.

•He has his own office, equipment, materials or other facilities for doing the work.

•He has continuing and recurring liabilities or obligations and his success or failure depend on the
relation of his receipts to his expenditures.

•He agrees to perform specific jobs for prices agreed upon in advance and pays expenses incurred in
connection with the work.

14. Right to Terminate. An employee has the right to end his relationship with his employer at any time he
wishes without incurring liability. An independent contractor usually agrees to complete a specific job and
he is responsible for its satisfactory completion or is legally obligated to make good for failure to complete
the job.

15. Instructions. A person who is required to comply with instructions about when, where, and how he is to
work is ordinarily an employee. Some employees may work without receiving instructions because they
are highly proficient in their line of work and can be trusted to work to the best of their abilities; however,
the control factor is present if the employer has the right to instruct. The instructions may be oral or may
be in the form of manuals or written procedures which show how the desired result is to be accomplished.

16. Training. The training of a person by an experienced employee working with him, by correspondence, by
required attendance at meetings or by other methods is a factor of control because it is an indication that
the employer wants the services performed in a particular method or manner. This is especially true if the
training is given periodically or at frequent intervals. An independent contractor ordinarily uses his own
methods and receives no training from the purchaser of his services.

17. Integration. Integration of the person’s services into the business operations generally shows that he is
subject to direction and control applying the integration test, first determine the scope and function of the
business and then whether the services of the individual are merged — into it. When the success or
continuation of a business depends to an appreciable degree upon the performance of certain services, the
people who perform those services must necessarily be subject to a certain amount of control by the
owner of the business.

18. Order or Sequence Set. If a person must perform services in the order or sequence set for him by the
employer, it shows that the worker may be subject to control as he is not free to follow his own pattern of
work, but must follow the established routines and schedules of the employer.
Often, because of the nature of an occupation, the employer does not set the order of the services or sets
them infrequently. It is sufficient to show control, however, if he retains the right to do so.

19. Oral or Written Reports. If regular oral or written reports must be submitted to the employer, it
indicates control, in that the worker is compelled to account for his actions.
 SOME CALIFORNIA INTERPRETATIONS

THE LEADING CALIFORNIA CASE setting forth criteria for determining whether an employment
relationship exists is Empire Star Mines Co., Ltd. v. California Employment Commission (1946), 28 Cal. 2d 33,
168 P. 2d 686. The Supreme Court said therein:

In determining whether one who performs services for another is an employee or an independent contractor, the
most important factor is the right to control the manner and means of accomplishing the result desired. If the
employer has the authority to exercise complete control, whether or not that right is exercised with respect to all
details, an employer- employee relationship exists. Strong evidence in support of an employment relationship is
the right to discharge at will, without cause. (Citations omitted)

Other factors to be taken into consideration are:

1. Whether or not the one performing services is engaged in a distinct occupation or business;
2. The kind of occupation, with reference to whether, in the locality, the work is usually done under the
direction of the principal or by a specialist without supervision;
3. The skill required in the particular occupation;
4. Whether the principal or the workman supplies the instrumentalities, tools and the place of work for the
person doing the work;
5. The length of time for which the services are to be performed;
6. The method of payment, whether by the time or by the job;
7. Whether or not the work is a part of the regular business of the principal;
8. Whether or not the parties believe they are creating the relationship of employer-employee. [Rest.,
Agency, 220: Cal. Ann. Section 220.]

Section 220 of the American Law Institute’s Restatement of Agency, from which the above-enumerated
factors were taken, also provides:

The factors stated are all considered in determining the question and it is for the triers of fact to determine
whether or not there is sufficient group of favorable factors to establish the relationship.

The next to last paragraph of 2750.5 of the California Labor Code states, in addition, the foregoing
requirements, the person performing any service for which a contractor’s license is required “shall hold a
valid license as a condition of having independent contractor status.” [Travelers Insurance Company v
W.C.A.B., 3 Civil 22334 (Oct. 12, 1983)]

The California Employment Development Department is not bound by written contractor agreements: User ID*:

EDD auditors frequently encounter situations where workers are being classified as independent contract
due to the existence of a written contract between the employer and the workers. Enrolled Course*:

Employers are cautioned that such agreements do not definitively determine the true relationship between
the parties nor is EDD bound by these private agreements. The courts have long held that the true
relationship is determined by the actual conduct rather than the intent of the parties.

Since written contracts merely set forth the intent of the parties, they are not controlling in themselves. If you
have any questions, please contact your nearest Employment Tax District Office.

FROM: California Employer, News, and Notes for Employers

Employment Development Department (March 1986)

 THE BUSINESS TRUST ORGANIZATION AS CONTRACT SERVICES

CCASIONALLY, A BUSINESS TRUST ORGANIZATION will engage in business as a labor contractor,

contracting the services of people with particular skills to other businesses needing those skills. This
arrangement can be very efficient and cost-effective for both the worker and the third-party employer, not to
mention profitable for the Business Trust Organization.

Contracts are executed between the Business Trust Organization and various businesses needing skilled
workers in their particular field of endeavor. The Business Trust Organization then locates, screens, and even
trains suitable workers, and provides them to the respective businesses in satisfaction of the contractual
terms. The workers are employees of the Business Trust Organization, which complies with all employment,
tax and insurance requirements.

A question arises that perhaps the conveyance of services via the Business Trust Organization results in a
mere assignment of income to the trust from the person performing the services. The United States Supreme
Court in Lucas v. Earl, 281 US 111 (1930), held that a mere anticipatory assignment of income from personal
services cannot shift tax responsibility.

Here, however, the Business Trust Organization engages the services of the workers for the purpose of
fulfilling the terms of its contract with the third-party employers. The Business Trust Organization acts as a
labor contractor with the privity of contract with the third-party employer. This is the same situation that
existed in Charles Laughton, 40 BTA 101 (1939), and Fontaine Fox, 37 BTA 271 (1938). In these cases,
corporations were formed for the purpose of vending acting and cartoon drawing services to various film
studios. The IRS argued that income paid to the corporations should be taxed to the individuals (Laughton and
Fox) who performed the services, alleging that there was a mere assignment of income, and that the
corporations were mere alter-egos of the individuals. The Court rejected the arguments, stating that privity
of contract existed between the corporations and the third-party employers, precluding application of Lucas
v. Earl. The business purposes for the use of a corporation, such as centralized management, limited liability
and division of ownership, were present, which proved that the arrangement was not a sham created solely
for tax purposes.

The argument of the Court applies here equally well. Privity of contract exists between the Business Trust
Organization and the third- party employer. The fact that many non-tax benefits accrue to the parties in the
Business Trust Organization, such as limited liability, centralized management, division of beneficial interests
and estate and probate benefits, bring this situation under Laughton and Fontaine Fox.
 EMPLOYMENT CONTRACTS FOR MANAGERS AND AGENTS

Employment Contracts for Managers and Agents

Sound business practice directs that a Business Trust Organization execute employment contracts with all
agents and employees who perform services for the organization, setting forth each individual’s duties,
responsibilities, liabilities and compensation. These contracts should clearly bind the parties to strict
confidentiality regarding disclosure of any information about company structure, personnel, or business
affairs without written approval of the Trustee.

Such a contract may be as simple or as complex as the particular situation demands. For most purposes, one
or two pages setting forth the important points should suffice. See Appendix B for examples of employment
contracts.

It is very important that the employment contract spell out the policy of the Business Trust Organization in
the following areas:

1. reimbursement for expenses incurred by the agent on behalf of the company in the course of conducting
company business;
2. the use of company property and assets by the agent;
3. the limits on the authority of the agent to act on behalf of the company without requiring prior trustee
approval;
4. any programs or payments established for the benefit of employees for which the agent will qualify; and

any other terms, conditions or agreements relating to the relationship between the agent and the company
 REAL ESTATE AND THE BUSINESS TRUST ORGANIZATION

ONE OF THE EASIEST AREAS for a manager to make expensive and time-consuming mistakes is in handling
real estate transactions on behalf of the Business Trust Organization. Because this area of law is so complex
and so few real estate or tax professionals understand Business Trust Organizations, extreme caution is
prudent. Wide variations in real estate law among the states is another complicating factor.

With these thoughts in mind, we will attempt to outline some general guidelines which, if followed, should
help you avoid most of the worst pitfalls. There can be no substitute, however, for good advice from
professionals knowledgeable both in local real estate law and practice, and Business Trust Organizations.

1. Do not convey title to real estate to a foreign-domiciled Business Trust Organization unless you
thoroughly understand all of the pros and cons. Many states have laws restricting foreign ownership of
real estate. Title insurance can be more difficult and expensive to obtain where foreign ownership is
involved. There are special federal tax rules regarding the withholding of a part of the proceeds of a real
estate transaction that involves a sale by a foreign owner.

2. Avoid using “Quit-claim Deeds” wherever possible. Such deeds convey very limited title to property and
may result in a clouded title requiring expensive legal proceedings to clear. Make every effort to use the
method of title conveyance that is customary in your locality. It may cost a little less to use short-cut
methods now but almost always will cost more in. the future.

3. Conveyance of real estate to a Business Trust Organization will trigger the acceleration (due-on-sale)
clause in most mortgages and trust deeds and will trigger reappraisal for property tax purposes in many
states. This is true regardless of the type of conveyance used. A conveyance as limited as a three-year
lease can trigger due-on- sale under current federal law. Either of these can be a nasty surprise after an ill-
advised conveyance has gone too far to be reversed.

4. Conveyance of “substantially appreciated property” to a Trust must be done with great care. If such
property is sold by the Trust within two years, IRC §644 imposes a tax on the trust, including any minimum
tax, that would have been paid had the sale been included in the income of the exchanger in the tax year of
the sale.

When appreciated property is conveyed to the Business Trust Organization in exchange for beneficial
interests, the-Business Trust Organization’s basis in the property is the transferor’s plus any gain recognized
by the transferor as a result of the transfer. For example, if the exchanger transfers property worth $200,000,
in which his basis is $50,000, in exchange for capital units and treats the transfer as a tax-deferred exchange
in which he recognizes no gain on his personal tax return, §644 will apply if the trust sells the property within
two years. The determination of such tax on the gain (called “includable gain”) is based on the transferor’s tax
rate. If such conveyance is made to a foreign-domiciled trust, the two-year period does not apply. The tax will
be imposed whenever the property is sold, regardless of how far in the future the sale takes place.

1. In addition to the IRC §644 problem, IRC §1491 may impose a 35% excise tax on the amount of
appreciation when appreciated property, either real or personal, is conveyed by a U.S. person to a non-U.S.
person. This occurs when the U.S. person, is not recognize taxable gain on such appreciation on his own tax
return at the time of conveyance. This excise tax is immediately due and payable upon conveyance of the
appreciated property, without the necessity of normal assessment procedures.

Thus, sound management practices dictate that any conveyance of real property to a Business Trust
Organization be done with great care and that such property is professionally appraised a: the time of
conveyance.
 ACCOUNTING FOR THE BUSINESS TRUST ORGANIZATION

LIKE ANY OTHER FORM of business structure, the Business Trust Organization must have a soundly
based accounting system to keep track of the results of its business activities. Without the information
provided by an accounting system, management has no basis for decisions regarding allocation of resources
or which business activities to pursue.
 Choosing the Appropriate Accounting System.

All business enterprises should maintain financial records of sufficient completeness to provide the
necessary management and tax information. Depending on the nature and scope of the business being
conducted, this could require anything from a simple single- entry bookkeeping system such as is marketed in
stationary and variety stores under the brand name “Dome Books“, to a complete accrual-based double-entry
system including cost accounting, payroll, accounts receivable, accounts payable, and departmentalization.

Keeping the necessary records and books of account is the responsibility of the Trustee, but is usually
delegated to the managing officers of the Business Trust Organization. The officers may keep the records
themselves, provided they have the requisite training and experience, or they may employ persons having
those skills from outside the company.

For a Business Trust Organization that conducts twenty or fewer individual transactions (income items
and checks) per month, the single-entry approach is probably adequate. The Dome brand books are widely
available for a few dollars and come with instructions and completed sample pages. They come in different
versions designed to fit various types of businesses, making record keeping even simpler for the person with
no formal training in bookkeeping.

Since this type of system is oriented toward keeping track of income and expenses, care must be taken
to assure that assets and liabilities are properly accounted for. Most commercially available books have the
necessary forms for this task in the back.

When, due to the volume of transactions, complexity or other reasons, single-entry accounting is
inadequate, double-entry must be used. Such accounting is considerably more complex, and discussion of the
theories and rules are beyond the scope of this book. If the Business Trust Organization manager is unfamiliar
with double-entry accounting, he should seek out a knowledgeable professional who is familiar with Business
Trust Organizations. For those managers interested in gaining new skills in this interesting area of their
responsibility, public libraries and community colleges offer easily available resources.
 Requirements of the Accounting System
As its raw material, an accounting system uses information about each transaction, taken from the
original source documents such as checks, invoices, notes, statements, deposit slips and the like. This
information is classified and accumulated according to a conventional set of well-defined rules. It is then
compiled and presented in a standardized series of reports, from which the performance of the business can
be evaluated.

Basis for Management Decisions

Any business, regardless of its size, depends for its success on a constant stream of sound business
decisions on the part of the managers guiding its destiny. A steady stream of high quality feedback, from prior
decisions and business activities, is essential to any manager in order for him to effectively guide his
enterprise by making timely course corrections to assure a long-term, successful, business voyage. This
feedback takes many forms, the most important of which is financial information fed to him by the accounting
system. Is this product line profitable? Is that service cost- effective? Can we afford to hire more people in
that department? Is there sufficient capital available to embark on that new venture? These are the types of
critically important questions that managers must answer. The accounting system is the source of the
information that the manager must have to answer them.

Tax Accounting

Unfortunately, the bulk of the accounting effort that is expended in today’s businesses is wasted on a
totally non-productive task – tax accounting. In addition to the unconscionable tax burden imposed on the
productive sector of our society, anywhere from 20 to 50 percent of the managerial and administrative costs
borne by the average business is devoted to tax problems.

While an arrangement of Business Trust Organizations can greatly ease this burden, it usually cannot
be entirely eliminated. In addition to income taxes, an operating business must consider and account for
payroll taxes, sales taxes, property taxes, license taxes, and a whole slew of various kinds of excise taxes. The
manager must know which of these many impositions apply to his particular type and location of business and
make certain that all those that cannot be avoided are reported and paid accurately and timely, so as to
minimize the cost. The type and extent of accounting records required depend on the specific tax impositions
that must be responded to.

Financial Statements for Banking Purposes

It is almost impossible to conduct an effective business in our economic system without the use of
banking services. The Business Trust Organization manager should acquaint himself with the availability and
cost of such services in his business locale, then work to establish a business relationship with the- most cost-
effective provider of the needed services.

Whenever the services sought extend beyond deposit accounts and funds handling into the credit
realm, the manager will be asked to provide financial information regarding the business. This usually takes
the form of income and expense statements, financial condition statements and copies of tax returns for past
years, but may extend to personal information on the principals in the business. When a business has an
established, on-going relationship with a bank, the bank will often ask to be provided with copies of all current
financial statements as they become available.

Quite often when a Business Trust Organization is seeking to borrow from a financial institution,
especially if it has no assets suitable to be pledged as security, the bank will require that one or more
principals of sound financial means co-sign on the note. This usually presents a problem, since a Business
Trust Organization really has no principals in the sense that a corporation does. Unless the manager is able to
resolve this problem in a manner comfortable to both himself and the Trustee, it may preclude the Business
Trust Organization from accessing institutional sources of funding and limit it to meeting its credit needs
through private lenders. In fact, private lenders may be the preferred source of borrowed funds for many
Business Trust Organizations, if such are available, because of the inherent privacy in that marketplace.
Incidentally, a source that should not be overlooked is other Business Trust Organizations that the Manager
may be acquainted with.

When sensitive financial information about a company is provided to a banking institution, the
Manager should consider having the institution sign a non-disclosure agreement. Most bankers will think
twice before providing information protected by such an agreement to outside parties.

Maintaining Privacy

In most cases, a Business Trust Organization Manager will engage outside accounting professionals to
assist in the record keeping and tax return preparation tasks. This is as it should be. For the sake of privacy,
however, company information should not be left in the accountant’s office any longer than necessary. Unlike
an attorney, an accountant has no umbrella of “client’s privileged information” to invoke to prevent records
left with him from falling into hostile hands.

Copies of the work produced by the accountant such as working papers, tax returns, financial
statements, etc. can also compromise privacy. While most accountants prefer to keep copies of all work done,
most will release the work to the client if requested to do so. If a professional insists on keeping information
considered to be private, ask him to sign a non-disclosure contract in keeping with the terms of the Business
Trust Organization indenture. Such an agreement properly executed should provide him all necessary
grounds for refusing to release private information, should he ever under pressure to do so.

Documenting Loan Transactions

All loan transactions, most especially those involving loans to or from related parties, must be carefully
documented in the company records.

First, there must be a minute reflecting the Trustee’s authorization for the transaction to take place,
setting forth all pertinent information, such as lender, borrower, amount, terms and security.

Then, as the transaction proceeds to completion, copies of the various loan documents are added to
the records. The loan application, any verification of title to the securing property, the promissory note and

Where the transaction is between related parties, such as, for example, a loan from a Business Trust
Organization to one of its officers, the terms must be equivalent to current market terms. They must be
clearly documented in the records, and strictly adhered to. Any required payments should be made on time in
the correct amount. If the situation changes such that original terms cannot be met, a modification agreement
should be executed between the parties and included in the records.

A note of caution: A legally binding contract requires the assent of two independent minds. A Manager
cannot sign for both the Business Trust Organization and himself as an individual. In this situation, the loan
documents should be executed on behalf of the Business Trust Organization by the Trustee. Review the
section on contracts for further information.

Recording Major Transactions in the Minutes

Even though most officer’s contracts empower the officers to conduct all of the day-to-day business
affairs of the Business Trust Organization, including the execution of contracts, all major transactions should
be referred to the Trustee and documented in the minutes. By this recording, the intent and purpose of the
transaction is established, should the transaction ever be questioned. THE REAL TRUTH ABOUT THE IRS’S

Major transactions, for this purpose, include all contracts executed on behalf of *he Company,
purchases of major assets, distributions of property other than cash, and any transaction involving a large
sum of money. When in doubt about a particular transaction, record it in the minutes
 OPERATING A U.S. BUSINESS

ONCE THE BUSINESS TRUST ORGANIZATION is established, the agent officers and key employees
are all on contract, the banking arrangements are in place and all start-up activities have been completed, you
are ready to get down to the serious business of business. Most Business Trust Organizations will be
conducting established businesses that have been conveyed to them through either purchase or exchange for
Capital Units. For those that are starting new business ventures, you will find much helpful information in
your local library in the section on entrepreneurship. One very well written book dealing with all of the
aspects of starting a new venture is The Entrepreneur’s Manual, by Richard M. White, Jr., published 1977 by
Chilton Book Company.

When a going business is transferred to a Business Trust Organization, there are several important
considerations that require attention. Some of these involve the regulatory and taxing authorities of
government, while others concern relationships with customers, suppliers, employees and bankers.

The most common problem to be faced when dealing with government regulatory agencies is that
most government employees have never heard of the Business Trust Organization. Their forms have no
spaces labeled Business Trust Organization, and their policy manuals are no help. There are certain types of
businesses, especially those requiring licensing based on individual competence, that are so tightly controlled
by statute law that it is not possible for a Business Trust Organization to engage in them. For these, the
creative agent manager will guide the Business Trust Organization in a staff, or support role behind the
licensed professional.

For example, the regulatory statutes make no provision for a physician to conduct his practice through
a Business Trust Organization. In this case, the Business Trust Organization can supply, for a fee, support
services such as office management, equipment leasing, personnel leasing, factoring of accounts receivable,
office leasing and the like.

When dealing with suppliers and bankers, their major concern is security in their transactions with the
Business Trust Organization. Comfortable, long-established business relationships can be jeopardized if the
transition is handled poorly. The Business Trust Organization, having no track record, can have difficulty
producing a financial base adequate to support the normal borrowing needs of an active business. This leads
to the need for either a co-signer or other sources of working capital.

Problems with customers and employees are generally minor and can be easily handled, especially if
there is visible continuity of management, location, business name and the like. Often, it is wise for the
Business Trust Organization to take the old business name as a trade name by filing a Fictitious Business
Name statement. After it has been abandoned by the prior ownership, of course.
 A Business Being Conducted by a Corporation

When a business venture that is being conducted by a corporation is to be undertaken by, or become
involved with, a Business Trust Organization, special care must be exercised. It is usually best to avoid any
form of direct transfer of business or assets from the corporation to the Business Trust Organization, with the
possible exception of outright sale for full consideration. This is because of the statutory nature of the
corporation and the resulting control over it by the state.

There are several reasons why it is sometimes advantageous to conduct business through a
corporation. First, the corporation is a familiar entity that seldom raises questions requiring complex
explanations. Properly and skillfully used, a corporation can provide a liability and privacy shield almost as
effective as that provided by a Business Trust Organization. There are certain types of businesses that cannot
be conducted through a Business Trust Organization because-of statutory restrictions or licensing
requirements. If the corporation has been in business for some time and has established a successful track
record, continuing in that mode so as to preserve the customer goodwill and credit rating deserves careful
consideration. In summary, the decision regarding whether or not to include the corporate form of business
organization in a financial plan that also includes Business Trust Organizations should be based on a careful
analysis of the circumstances, resources, goals and capabilities of the persons for whom the plan is being
formulated.

If the decision is made to integrate one or more corporations into a financial plan that includes
Business Trust Organizations, every effort should be made to maintain a jurisdictional barrier between the
two types of entity, to prevent statutory contamination of the Business Trust Organization(s). All transactions
should be conducted between the two according to the terms and conditions of written contracts. See the
section on contracts, especially as regards maintaining arm’s length between the executing parties. A single
individual cannot sign for both parties to a valid contract. A Business Trust Organization can hold shares in a
corporation without serious problems, but a corporation should not become the holder of the capital units of
a Business Trust Organization. A mismatch of domiciles between the two types of entity can also lead to
problems, especially with regard to the statutory requirements for filing tax returns.

It is often cleaner, although somewhat more complex, to dissolve the corporation in compliance with
the applicable statutes, distributing its assets and liabilities to the shareholders. The shareholders may then
exchange some or all of the assets with the Business Trust Organization for the capital units. To avoid any
question of self-dealing or lack of arm’s length in the transition, intangible assets such as the business name,
customer lists, good will, etc., should be sold to the Business Trust Organization by the corporation at fair
market value and for full consideration.

The tax aspects of dissolving a corporation can be significant for both the corporation and the
shareholders and should be thoroughly and carefully explored. The services of a knowledgeable professional
should be retained and should prove very cost effective.
 Who Must File Tax Returns?

Any person, whether natural or legal, engaged in business in the United States is held by the Internal
Revenue Service to be required to keep adequate records, to report the results of their business activities and
to pay any tax due. This requirement, of course, includes Business Trust Organizations. In addition, any
foreign person receiving income from a United States source not effectively connected with a U. S. business
will be subject to a thirty percent flat tax on the gross amount of such income under Internal Revenue Code
Sectin871, unless such income qualifies under one of the various exemptions provided in the code.

Income Taxes

A Business Trust Organization domiciled in the U.S. complies with the requirement with regard to
income taxes by completing and filing, by the due date plus any extensions, a Form 1041, Fiduciary Tax
Return. The Business Trust Organization computes its net income by reducing the amount of its gross income
by the sum of all of its “ordinary and necessary” business expenses. It then arrives at its taxable income by
deducting from net income any amounts of income distributed to its beneficiaries.

Generally, the taxable income of a domestic Business Trust Organization will be zero. This is because
the trustee usually is required by the terms of the indenture to distribute as much of its net income to
beneficiaries as necessary to prevent the Business Trust Organization from owing any tax.

A word of caution: The taxing agencies, especially the IRS, will make every effort to classify a Business
Trust Organization as an “Association taxable as a corporation.” It is not unusual for the trustee to receive
continuing correspondence from them, asking why they have not received the corporate tax return, while
ignoring responses directing them to the proper return which was filed. If such correspondence persists, it
may be necessary to hire a tax professional knowledgeable in this area. (See Section I, pages 11 through 12D,
for criteria used to decide whether a given entity is a trust or an association.)
Of course, foreign-domiciled Business Trust Organizations that are neither engaged in trade or
commerce in the U.S., nor receiving income from a U.S. source, are not subject to. United States jurisdiction
and have no obligation to report on their activities or pay any U.S. tax.

Payroll Taxes

Any Business Trust Organization that hires U.S. persons as employees to conduct its business must
comply w i th all applicable federal, state and local employment laws. These include withholding for social
security, income taxes and various state taxes, and mandatory Worker’s Compensation insurance. Applicable
statutes also determine whether or not a particular relationship between the Business Trust Organization
and a person performing services for it falls into the category of employer/employee. (See the heading
“People Who Work for the Business Trust Organization” in Section III.)
In most states, to facilitate the reporting and payment of employment taxes and withholding, the
Business Trust Organization will require a state employer identification number, usually obtained from the
state agency that administers employment tax laws.

Information Returns

The requirements imposed upon American businesses to prepare and file various information returns
become more onerous with each new revision of the statutes. The penalties for non- compliance have
reached levels more than sufficient to bankrupt the average business. It therefore behooves every business,
manager, despite the resultant waste of time and money, to understand just what information returns he is
expected to file, when they are due and who must receive copies.
Generally, any payments totaling $600 or more in a calendar year to a non-corporate recipient for
services rendered to a business must be reported on Form 1099, with copies to the recipient and to the state.
However, there are special requirements relating to certain types of payments for other purposes. Make sure
you understand the specific requirements in your area of business. Few businesses can easily afford the
financial burden imposed for failure to comply.
 A U.S. BUSINESS FROM A FOREIGN DOMICILE

SOMETIMES ADVANTAGES MAY BE ENJOYED by conducting a U.S. business through a Business

Trust Organization domiciled in a foreign tax haven jurisdiction. While such an arrangement would place the
Business Trust Organization in a position where it would be required to file a U.S. tax return and pay taxes on
any retained net income, it would not be subject to many of the burdens imposed by the U.S. on its own
citizens. For example, a foreign entity can conduct banking and any other lawful business anywhere in the
world without reporting requirements or other restrictions. It is exempt under current law from withholding
on interest earned by funds on deposit with a U.S. bank.
 Types of Business that Work Well from a Foreign Domicile

Certain types of business work particularly well from a foreign domicile. Importing and exporting, for
example, gain great flexibility by being domiciled in a jurisdiction that does not tax or otherwise restrict the
movement of goods across its borders. Such business also benefits where there are no exchange or currency
controls. Capital- intensive businesses, such as personal property leasing, work well where banking, capital
accumulation and capital movement are unhampered by governmental regulation. Almost all types of
business ventures benefit where privacy is respected and protected.
 Tax Filing Requirements

For U.S. income tax purposes, A Business Trust Organization domiciled outside of the U.S. is treated as a
nonresident alien individual. Gross income of a nonresident alien consists of income that’s effectively
connected with the conduct of a U.S. business, and of other income from U.S. sources [IRC Sect 872(a)]. All of
this sounds simple enough, but, as with most tax laws and regulations, the simplicity is deceptive.

The income of a nonresident alien falls into one of three broad categories relative to U.S. taxes:

Generally, . . .nonresident alien individuals that are “engaged in a trade or business in the U.S.” are taxed at U.S.
graduated rates on income that is “effectively connected”, with the conduct of that U.S. trade or business. Foreign
persons, whether or not they are engaged in a U.S. trade or business, are taxed at a 30% flat rate on income that is: (1)
not effectively connected with the conduct of a trade or business in the U.S.; (2) U.S.-source income; and (3) described
in Sect 871(a) (i.e., interest, dividends, wages, and other fixed or determinable annual or periodical gains, profits, or
income). Thus, the rate of tax depends on whether the income involved is effectively connected” income: a foreign
person that is engaged in a trade or business in the U.S. is taxed at U.S. rates on all effectively connected income, and
at the 30% rate on all non-effectively connected income that is described in §871(a). The 30% rate may be lower if a
tax treaty is in effect. – Federal Tax Guide, Prentice-Hall, 1/6/87, pp 30,001.

Foreign source income-including certain U.S. source income set forth in IRC §871(g,h,i) that is not effectively
connected with a U.S. trade or businesses not subject to U.S taxes.

A foreign domiciled Business Trust Organization engaged in trade or commerce in the U.S. or receiving
income which is effectively connected with a U.S. trade or business, is required to report and pay taxes by
filing a special modified form of a Non-Resident Individual Tax Return, Form 1040NR. However, like a
domestic Business Trust Organization, its taxable income is computed by reducing its net income by the
amount of income distributed to its beneficiaries. If it distributes essentially all of its net income, it will pay no
tax.

The 30% flat rate (or another statutory rate) is imposed at the source. The payer is required by statute to
withhold the specified amount from the payment due the foreign person. Note that this withheld amount is
not in the sense of a credit against the amount of tax to be determined on a tax return to be filed in the future.
It is the amount of tax due. There is no requirement on the recipient’s part to report this income on any
return, and no refund of any part of this tax is available.

One area that can be particularly troublesome and expensive for the unwary manager is the sale of U.S. real
estate interests by non-resident aliens:

...gain from the disposition of “U.S. real property interests” is specially treated by the tax law as effectively connected
income. Thus, foreign persons are taxed on such income as if they were domestic persons. -Federal Tax Guide,
Prentice-Hall, 1/6/87, pp 30,001.

This means that a non-resident alien who disposes of U.S. real property must file and be subject to taxation
according to graduated rates, including the minimum tax at a 21% rate. At the time of the transaction, the
person acquiring the property (or his agent) is required to withhold the lesser of 10% of the amount realized
or the foreign seller’s maximum tax liability as determined by the IRS. The Internal Revenue Code contains
many “ifs, ands, and buts” with regard to this type of transaction, so make certain you know exactly what the
results will be before you proceed. No move of this nature should be made without the advice of qualified
professionals. (See the heading “§306. Real Estate and the Business Trust Organization”, in Section III.)
 Payroll Taxes and Information Returns

Regarding payroll taxes and information returns, the foreign-domiciled Business Trust Organization must
comply with the same laws and regulations as a domestic company, to the extent of its U.S. activities.
Payments to U.S. persons definitely fall into this category. Sometimes payments to foreign persons only
remotely involved in the U.S. business activities can be construed in such a way as to require compliance. This
type of gray area should be avoided whenever possible.
 Record Keeping Requirements

To the extent of its U.S. business involvement, a foreign Business Trust Organization faces the same
recordkeeping requirements as any domestic business. Where such an entity is conducting both U.S. and
foreign business activities, detailed, well-kept records are much more important, to avoid entanglements with
overly complex rules and attack by the IRS. Every effort should be made to avoid combining U.S. and foreign
business activities in the same Business Trust Organization, especially in circumstances where record keeping
is an unwanted chore that is likely to be neglected.
 THE JURISDICTIONAL BARRIER

IF A FOREIGN DOMICILED BUSINESS TRUST ORGANIZATION is established to avoid reporting,

regulation or taxation under U.S. law, it must arrange its affairs so that none of its activities or personnel come
under U.S. jurisdiction. In addition to being domiciled outside the U.S., its trustees, creator and exchanger
must be foreign persons. Having a U.S. person as a beneficiary can result in some U.S. jurisdiction and
taxation. Also, it cannot engage in trade or business in the U.S. or, with a few exceptions, have U.S. source
income. Those exceptions, having their source, in statute law, are subject to change overnight at the whim of
the government.
 Foreign Entity Holding Capital Units of a Domestic Business Trust Organization

A key area of interest in the creative use of Business Trust Organizations is the status of income distributed
by a domestic Business Trust Organization to a foreign beneficiary(s). ‘When a domestic trust distributes
earnings to a beneficiary, it also distributes any tax liability attached to those earnings. Under these
circumstances:

A non-resident alien individual ...which is a beneficiary of a ...trust which is engaged in any trade or business within
the United States shall be treated as being engaged in such trade or business within the United States. – Internal
Revenue Code of 1986, §875(2)

Thus, since it is treated as being engaged in U.S. business, a foreign Business Trust Organization holding
capital units of a domestic as beneficiary must report any taxable income distributions received by filing a
special modified form (Non-Resident Individual Tax Return, Form 1040NR). However, like a domestic
Business Trust Organization, its taxable income is computed by reducing its net income by the amount of
income distributed to its beneficiaries. Provided that it distributes essentially all of its net income, it will pay
no tax.

To avoid jurisdictional problems, a foreign Business Trust Organization holding units of a domestic should
engage in no other business activities, foreign or domestic. Its sole function is to serve as a communications
link through the jurisdictional barrier, terminating the U.S. source character of the income. It may hold a small
interest-bearing account, but no other assets. All distributions received should be immediately distributed to
its own beneficiaries.

Trustees and Officers

The management team for this type of Business Trust Organization must be selected with great care. Both
the trustees and officers must be unrelated to, and independent of, the domestic company of which this
company holds units, the foreign that holds units of this company, and any other individuals that stand in close
business relationship to any of these organizations. Usually, since it conducts no other business, it has little or
no need for agent/officers to conduct its day-to-day affairs. It should have a Secretary to serve in the capacity
of Protector of the Capital Unit Holders, and that officer can carry out what few business activities are
necessary.

Capital Unit Holders

The Capital Units Holders of this type of entity should always be non-resident aliens having no U.S. source
income and no requirement to file U.S. tax returns. The Critical “Arm’s Length” Separation Nowhere in the use
of the Business Trust Organization as a financial planning and asset management tool is the requirement to
maintain “arm’s length” more critical to success than at the jurisdictional barrier. Here, where the assets pass
beyond the grasp of the IRS, everything done must be in strict compliance with the law to the point of
“squeaky clean.” If errors are made that open the entity to attack, it may be penetrated.

The primary responsibility, of course, lies with the trustee. He must make sure that all defenses are in place,
that nothing is left to chance. But he also must depend on others who prepare the transactions and keep the
records. Here again, the judicious use of outside professionals can assure the security of the barn while the
horse is still inside.
 NETWORKING BUSINESS TRUST ORGANIZATIONS

GREAT FLEXIBILITY IS ONE OF THE PRIMARY BENEFITS of Business Trust Organizations in a wealth-
building program. As creatures of contract, they can do any lawful thing. Most of their few limitations can be
overcome by networking them among themselves and with other types of business and financial structures.

There are two primary ways in which a Business Trust Organization can relate to other trust organizations:
(1) as beneficiary, by holding capital units, or (2) by entering into a contract to provide or receive goods or
services for compensation. Similarly, a Business Trust Organization can own shares in corporations, hold
partnership interests in either general or limited partnerships, and, of course, contract with these entities and
with individuals either as employees or independent contractors.

Here are a few examples (out of the almost unlimited possibilities) how the creative strategist can tap the
power of simple network arrangements:

1. Substantial assets can be well protected by conveying ownership of individual assets among several
Business Trust Organizations, thus isolating each asset from all the others. Any liability incurred in any one
entity risks only the .assets owned by that entity. The rest are safe.
2. Another network that offers some unique capabilities involves a domestic corporation and two or more
Business Trust Organizations. The high visibility business is conducted through the corporation, managed
by people skilled in that business. One Business Trust Organization owns all of the shares of the
corporation and conducts no other business. The remaining Business Trust Organizations supply goods or
services to the corporation in contractual relationships. By fine-tuning these relationships, the earnings
from the business activity can be closely controlled to minimize taxes.
3. Where a professional person is operating under a statutory license, a network of Business Trust
Organizations can be established to own and rent business property, to act as a labor and administrative
support contractor and to factor receivables. Ownership of the professional’s personnel and investment
assets can then be held by other appropriate entities such as Business Trust Organizations, family trusts or
family limited partnerships. While the professional in this scenario is still fully exposed to liability of the
business because he is operating as a sole proprietor, all significant assets are safely held behind the
barriers of the various entities in the network.
 Selection of Capital Unit Holders.

One of the most potent network arrangements involves the use of three or more Business Trust
Organizations to penetrate the jurisdictional barrier. One or more domestics conduct business activities and
generate income. The capital units of the domestic(s) are held by a foreign entity, to which all distributable net
income is distributed. The units of that foreign entity are held by another unrelated foreign entity, to which
the first foreign entity distributes all of its net income.

The second foreign entity, being outside U.S. jurisdiction and having no liability to file or pay U.S. taxes, simply
accumulates the income and prudently invests it. The security of this type of network can be improved by an
additional foreign entity to handle investing, borrowing accumulated income from the accumulation company
on mutually agreeable terms.

Where such an arrangement involves a domestic Business Trust Organization actively conducting business
rather than simply holding assets, there is some risk of challenge by the IRS on the grounds that it is an
“association taxable as a corporation.” Given proper implementation and management, the success of such a
challenge is unlikely. Should such a challenge be successful, however, the domestic Business Trust
Organization would be taxed on the distributions to the first foreign entity as though they were dividends.
Since dividends paid by a U.S. corporation to foreign shareholders are subject to the 30% flat tax imposed at
IRC §871 (a), the domestic Business Trust Organization would likely be hit by this tax also. Add to that the
possible penalties and interest that likely would be imposed, and the potential cost exceeds the amount of the
distribution.

Such damage can be minimized by having the Capital Units of the Business Trust Organization conducting the
active business held by another domestic Business Trust Organization, whose Capital Units in turn are held by
the first foreign entity. This second domestic Business Trust Organization acts in the passive investor role
more common to trusts, eliminating any risk of being taxed as a corporation, and thus exposing distribution to
its foreign beneficiary to the 30% flat tax.
 When the Trustee MUST Distribute

A Business Trust Organization in which the trustee is bound by the indenture to distribute all of the net
income to the capital unit holders each year functions similarly as a simple trust. A simple trust is defined by
the Internal Revenue Code as a trust that

(1) is required to distribute all of its income currently,

(2) is not authorized to make deductible contributions to charity during the year, and

(3) does not distribute corpus during the year. Since the distributions are deductible in
taxable income, such an entity pays no tax.

The decision regarding whether or not mandatory distribution of income will be imposed upon the trustee is
made at the formation of the entity based on the goals and objectives of the creator. It usually is applied to
entities that are likely to generate significant amounts of income that would otherwise be taxed to the
Business Trust Organization.
 When the Trustee MAY Distribute

A Business Trust Organization whose purpose is to accumulate and invest assets usually
allows the trustee to decide when and how much of the earnings are to be distributed to the
capital unitholders. This structure should be used with caution where the Business Trust
Organization would have income subject to tax, either because of its domicile or the source of
its income.
 Gifts of Intangible Personal Property

Under §2501 (a)(2) of the Internal Revenue Code, a gift of intangible personal property by a non-resident
alien is not subject to gift tax. Also, gifts received by U.S. persons are not taxable income. Thus, a gift of
intangible personal property given to a U.S. person by a non-resident alien is not subject to tax on either the
donor or the donee.

But what is “intangible personal property”? According to Black’s Law Dictionary, 5th edition, it is property
with “...no intrinsic or marketable value, but merely the representative or evidence of value, such as
certificates of stock, bonds, promissory notes and franchises.”

Take, for example, a promissory note payable on demand, executed by a foreign Business Trust Organization
in the normal course of business. If the holder of this note is a foreign person not subject to U.S. jurisdiction,
such person may give the note to a U.S. person without either person having any tax imposed. The U.S. person,
at his option, may demand repayment of the maker of the note. Repayment of a promissory note does not
constitute taxable income.

There should be no relationship or transactions between the U.S. person and the non-resident alien that
would allow such a gift to be misconstrued as compensation for services or consideration for an agreement or
conveyance of property. The transfer of the note must be a gift, with no strings attached.
 THE FOREIGN ACCUMULATION COMPANY

A BUSINESS TRUST ORGANIZATION DOMICILED in a tax haven jurisdiction may accumulate earnings
without shrinkage for taxes.
 The Wealth-building Power of Time.

It has been said that however small your starting capital might be, the only thing necessary to become a
-millionaire is time. Given enough time, anyone can become independently wealthy.

To illustrate the point, consider the “Rule of 72.” This rule tells you how long it will take for a sum of money to
double if it is invested at a given rate of interest and all earnings are allowed to remain in the investment to
compound.

To find the doubling time, simply divide 72 by the rate of interest in percent. For example, $1,000 invested at
1% per annum will grow to $2,000 in 72 years. At 12%, it will double in six years. At 72% it will double every
year.

Let’s expand our example to include a family that pays $6,000 per year in taxes on income earned from a
small, self-run business. They rearrange their affairs so that the business is operated by a domestic Business
Trust, Organization that is networked with some foreign Business Trust Organizations as discussed in the
section on “Selection of Capital Unit Holders.” Instead of $6,000 in annual taxes, they now pay only $2,000 in
taxes on salary earned from the Business Trust Organization and reported on a W-2 form. Let’s further
assume that they would like to continue their business activities for 20 years, then spend their time traveling.

Basing our projections on an average rate of return of 12% per year, how much would the $4,000 per year tax
savings grow to at the end of 20 years if it was left to compound for that period? The fund would accumulate
to a total of $288,210-probably sufficient to support their desire to see the world. Without using the
principal, 12% earnings would yield an income of $34,585 per year.

Of course, one should view these numbers with caution. It takes little talent to realize a 12% average annual
rate of return in a steadily depreciating Federal Reserve paper. A 12% return over time, measured in real
purchasing power is another matter, requiring considerably greater investment management skills.

But, even at a 3% annual rate of return, the usual return on investments denominated in sound money, the
growth is impressive. Four Thousand dollars per year compounded at 3% will grow to $107,482 in 20 years
and will produce a $3,224 per year income. Not as impressive as the first example, but, considering that we’re
dealing with real purchasing power and not phony paper notes, not all that bad.
 Foreign Exchange Controls and the Movement of Funds

The use of foreign entities in financial planning lends a new and often unfamiliar element – foreign exchange
controls. Whenever wealth moves across national boundaries the governments on both sides of the line want
to interfere or at least know about it.

When managing the affairs of Business Trust Organizations that involve an international movement of money,
one must be fully informed about the laws and regulations of each country where company business is
conducted. While restrictions on the movement of money come in many forms, most of them impact the
outflow from a country much more than the inflow. In other words, few countries restrict the inflow of capital.
It’s when you want to repatriate it that the problems begin.

Currently, the United States has relatively benign controls on the movement of money. It places no limits on
the amount that can be moved, and only requires reporting of amounts of $10,000 or more in cash or bearer
instruments per person in a single transaction. (See “Privacy of Financial Transfers,” page III—6). Banks are
required to keep detailed records of transactions of $1,000 or more. As a practical matter, most banks keep
microfilm records of all transactions.

If it is considered necessary for the sake of privacy to avoid the reporting requirements and the risks
associated with violating them, there are several effective ways around them.

First, the reporting requirements related to cash or bearer instruments, such as blank traveler’s checks, not to
other forms in which wealth can be held. The reporting requirements do not apply to instruments payable to a
particular payee. Thus, substantial wealth can be moved across the U. S. border in legal form, then converted
to cash at the destination.

Often, it is possible to buy investment assets, such as coins, within the U. S. for delivery at the desired
destination. Here, the actual movement of the funds is handled by the vendor in his usual line of business,
which raises no eyebrows and leaves no trail in the company name.

Another method that can sometimes be used is the interbank transfer or bank wire, between a domestic and
a foreign bank. If the two banks are carefully selected, the funds can be retrieved at the destination bank and
placed as desired. (See page III- 7.)

For relatively small transfers, the most effective way is a series of daily purchases of cashier’s checks from a
number of banks outside of your normal operating area for cash. Each one should be made payable to the
purchasing company in an amount less than $5,000, say $4,900 or less.

Each check is then restrictively endorsed and mailed to a bank at the foreign destination where the company
has an account. Given enough time, even large amounts of money can be moved in this way, with very little
risk to privacy.
 THE FOREIGN INVESTMENT COMPANY

ACCORDING TO THE I.R.S. AGENT’S HANDBOOK, a tax haven is a country with low or no tax on
certain types of income. As contradictory as it may sound to United States citizens, the United States qualifies
as one of the better tax havens in the world. This is no accident. Our tax laws have been carefully structured
to attract investment in this country by non-resident aliens, while extracting the, maximum possible taxes
from citizens and residents. This, of course, allows the pork barrel Congress to continue its wild spending
ways without having to accept responsibility for the ultimate collapse of the American economy.
 Passive Investments in the United States

Non-resident Alien Requirements

To structure a foreign Business Trust Organization so as to take advantage of the tax breaks available
to non-resident aliens, several factors must be considered.

First, the Business Trust Organization must have no ties to U. S. persons that would enable authorities
to construe it to come under U.S. jurisdiction. (See §403 The Jurisdictional Barrier, page IV-8.)

It must then select its U. S. investments carefully. Internal Revenue Code Section 861 defines income
from sources within the United States. Section 871(a) imposes a 30 percent tax on non-resident alien
individuals receiving certain U. S. source income, while Section 871(b) imposes the regular graduated tax on
non-resident alien individuals receiving income that is effectively connected with a U.S. trade or business.
Section 1441 directs withholding of a 30 percent tax imposed by 871(a) at the source of payments. This is one
place where qualified professional advice, obtained before investment funds are committed, is extremely
important.

Income from U.S. Banks

Internal Revenue Code Section 871 (i) provides that no tax shall be imposed on. interest paid to non-
resident alien individuals on “deposits with persons carrying on the banking business.” This exception also
applies to Savings and Loan type institutions and insurance companies. A foreign Business Trust Organization
must file an IRS form W-8 with the depository institution, certifying foreign status and claiming exemption
from the reporting of income and the withholding of the 30% tax.

Income from U.S. Brokerage Accounts

Under the above code sections, almost all types of income earned by anon-resident alien individual
through a U. S. securities brokerage account will be subject to the 30% tax, which will be withheld by the
broker and paid to the IRS. There are a few exceptions dealing with such income as dividends from foreign
corporations, Original Issue Discounts and portfolio debt. Here again, advice from a qualified professional will
pay for itself many times over.

Other Passive Investments

Rents and Royalties received by non-United States persons from U. S. real estate are also subject to
the 30% tax to be withheld at the source. Gains from disposition of U. S. real property interests are subject to
U. S. taxes, and fall under special rules in IRC Section 897. IRC Section 1445 sets forth the rules relating to the
withholding of taxes by the Transferee on dispositions of U. S. real property interests.
 Investments Outside the United States

This is such a broad subject, involving many types of investments, relative risks, currency exchange
considerations, which investment brokers to use, and where to invest, that we can barely scratch the surface
here. Many countries are very hospitable to foreign investors by subjecting investment earnings to little or no
tax, protecting them against fraud, providing high-quality investor services, and protecting privacy. Others
are less so, and many should be avoided.

The Swiss Bank

One of the best investor intermediaries in the world is the Swiss bank. They are really much more than banks.
They are complete financial institutions, providing a very broad range of financial services to their customers.
For an American to avail himself of the same range of services, he would have to go to a bank, a stockbroker,
an insurance broker, a commodities broker, and several others. In fact, many standard Swiss bank services are
simply not available anywhere in the U. S. For example, a Swiss bank account may be denominated in any one
of a number of major world currencies of the investors choosing. Try opening an account with Bank of
America dominated in German Marks, for example. The new accounts clerk would probably ask, “What’s a
Mark?”

World Wide Investment Opportunities

Good, safe, high yielding investment opportunities abound throughout the world. A foreign Business Trust
Organization is just about the ideal vehicle through which to take advantage of them.

One of the most effective ways of lowering investment risk is diversification – not putting all of your eggs in
one basket. The wealthy investor diversifies his portfolio by choosing several classes of investments and
several investment vehicles from each class. An investor with more modest capital can achieve the same
result through the use of mutual funds.

A mutual fund is a company through which large numbers of small investors pool their capital, placing it in the
hands of professional managers. This pool of capital is invested in a diversified portfolio of investments of the
class, type and risk level that it was formed to take advantage of. Earnings are passed through to the investor
in proportion to their investment in the fund.

There are mutual funds for just about every conceivable type of investment. Corporate stock funds, bond
funds and money market funds are among the more common types. Even real estate investments are
available through mutual funds, as in Real Estate Investment Trusts and Ginny Mae Funds.

Incidentally, many American mutual funds are organized as Massachusetts Business Trusts, our old friend, the
Business Trust Organization.

As with domestic investments, one needs access to sources of sound information and quality professional
advice. Careless investing is a quick road to the poor house anywhere in the world, including especially the
over-regulated U. S. investment market.
 DEVELOPING MANAGING SKILLS

No Business Venture Can Ever Be Truly Successful without skilled managers guiding its activities. As a
successful business develops and grows, the skills of its managers must, at the very least, keep pace. To
assure that a business venture is able to grow, achieve its business objectives and enrich its principals from
the wealth created through its business activities, the management team must pursue an aggressive skills
development program. Business progress stops when managers reach their “level of incompetence.” That
is to say, when the business grows, either in size, complexity or both, beyond the ability of the managers to
continue its profitability and progress.
 Sources of Information

There are many sources of information and training available to enable anyone embark on and continue a
lifelong program of developing and enhancing the many skills involved in successfully managing a business
enterprise. Aside from the formal courses of study offered by colleges and universities, there are many
opportunities for anyone to develop his own personal program and follow it at his own pace.

One of the most widely available and powerful tools in the independent business manager’s educational
arsenal is the audio cassette player. Numerous companies are producing and marketing a steady stream of
high-quality digital audio programs, covering virtually every subject of interest and concern to managers. One
of the companies with the largest selection of such programs is the Nightingale Conant Corporation in
Chicago.

Combine these excellent programs with a cassette player in your car, and you can convert your otherwise
wasted traveling or commuting hours into valuable study time. If you spend as little as one-half hour per day
behind the wheel, the cassette can convert that into the equivalent of a 3 unit college level course every three
to four months. An hour a day of commute time can translate into the equivalent of an undergraduate degree
in just a few years. In addition to time spent in your car, a portable cassette player can turn your daily exercise
of walking, running or cycling into a doubly valuable educational and fitness session.

One of the primary reasons that the authors so strongly emphasize the audio cassette program in the
development of management skills is the availability of repetition. When any educational material is
presented for the first time, little is retained beyond a few hours or days. Each time the material is repeated,
more of it is retained. It will generally take four to six re-listening’s to an audio cassette program for a person
to fully internalize the material – to make it his, so to speak.

Another valuable source of information for the development of management skills is books. There is virtually
no management subject not exhaustively addressed in the literally thousands of books available in the field.
Those books that directly address matters of continuing interest to you should be purchased so that they are
available for reference and re-reading. Those that are of more transitory concern can usually be found in a
public or college library. If minimizing cost is your concern, the libraries are probably your source of choice.

Incidentally, many if not most libraries have audio (and video) programs available. For those who can’t afford
the $30 to $100 per program to purchase your own, try your local library. As your skills grow, your earning
power will grow also. This increase should cover its cost many times over. In fact, one of the best and highest
return investments anyone can make is to invest in his own skill and knowledge; and the non-monetary return
on this investment is not subject to diminution by the tax man.

One additional source, mentioned elsewhere in this work, that should not be overlooked is the local law
library. Few but the smallest communities are without one. It is usually found either in or in close proximity to
the court house. Some law libraries try to restrict themselves to the legal fraternity, but since they are
provided by public funds, a little persistence will usually gain access.

The techniques for effective use of a law library are beyond the scope of this book. If the librarian is unwilling
to assist you, search your acquaintances for an attorney or para-legal who can get you started. As a last
resort, try to locate a how-to book on the subject. The Common Law, a correspondence course offered by the
Universal Life University School of Law, covers this subject extensively.
 Training to use the Business Trust Organization Concept

While managing a business venture structured as a Business Trust Organization, for the most part, is similar
to managing the same type of business using any of the other types of structures, it does have some
peculiarities of its own. The Association of Independent Business Managers
(AIBM) was formed by Business Trust Organization managers, advisors and trustees in order to broaden
knowledge on this uniquely advantageous business discipline. AIBM is an educational and professional
society operated by and for managers and related professionals who work with Business Trust Organizations.
Its main purpose is to provide a clearinghouse for the development and dissemination of educational
materials, books, tapes, workshops and seminars covering subjects of interest to such individuals. To assure
that its members and associates exhibit the highest of professional skills and conduct, AIBM has established a
series of standard levels of achievement. A graduated series of multi-media education programs are available
covering such subjects as successful business management, trusteeship, financial strategy development,
investment management, and related subjects.

Successful candidates are awarded AIBM certification, which provides notice to all concerned that he or she
has demonstrated the respective level of knowledge and skill in the field of managing Business Trust
Organizations.

For information regarding membership, available courses of study, or other educational materials or activities
of AIBM, contact a local AIBM member or

Association of Independent Business Managers

681 Main Street, Suite 216
Placerville, CA 95667
 THE MANAGEMENT TEAM

AS WITH MOST SUCCESSFUL BUSINESS VENTURES, managing a Business Trust Organization is a

team affair. The actual number of people, titles and skills involved in any specific Business Trust Organization
is a function of, and peculiar to, its specific business, resources and goals.

Business Trust Organizations characteristically have a Board of Trustees. This board consists of one or
more trustees and functions in much the same relationship to the Business Trust Organization that the Board
of Directors bears to the corporate form. In addition, the trustees usually appoint one or more operating
officers to oversee the day-to-day operations of the business. Middle level managers are designated to
complete the management team to the extent required by the size and scope of the business. As previously
mentioned, it is the level of skill and commitment to the success of the enterprise exhibited by this team that
determines the outcome of the business venture.
 Development of Successors

One of the most important tasks to be undertaken by the managers of a Business Trust Organization is
developing skilled successors. The Business Trust Organization by nature is a long term endeavor. Its life in
many cases will be measured in generations rather than in years. Many successful Business Trust
Organizations have long outlived their founding managers. Some are being managed by fourth and fifth
generation management. Thus, each generation of managers must shoulder the responsibility to assist and
encourage the younger generation to develop the requisite skills and knowledge in preparation for the day
when they must take over the management.

The Important Secretary Position

Few Business Trust Organizations attempt to operate without a person occupying the important
Secretary position. This office is usually responsible for seeing that the necessary administrative functions of
the Business Trust Organization are carried out. The Secretary is literally the paper-pusher, making sure that
all company paperwork is complete and accurate, especially the all-important minute book. Additionally, the
Secretary is often designated the Protector of the Interests of the Capital Unit Holders-a “safety valve” in the
event that the Board of Trustees should become unable or unwilling to properly perform its function.

The Protector

The duty of the Protector of a trust is to ensure that the Trustee acts in the best interests of the Beneficiary.
He may act as counsel to the Trustee and often has the power to replace the Trustee at will. The powers of the
Protector, along with the procedures to be followed in the exercise of those powers, are specified in the Trust
Indenture. If the indenture provides that the Protector may replace the Trustee at will, the Protector and his
successors should be persons having no other involvement, duties and responsibilities with regard to the
trust. Power to replace at will equates to ultimate control of the Trustee and, therefore, a non-adverse
Protector could defeat requirements for adverse trusteeship.

Accepting Full Responsibility

When anyone accepts a management position with a Business Trust Organization, whether that of Trustee,
General Manager, Secretary or any other position, that person has a fiduciary responsibility to the Capital
Unit Holders. This responsibility is either direct, as in the case of a Trustee, or derivative, as in the case of any
officer, since the officers’ function as agents of the Board of Trustees.

These responsibilities extend beyond the level normally associated with officers or employees. in other forms
of business enterprise and one should consider carefully before accepting appointment to such a position.
Understand the level of commitment involved. If you decide to accept, do so in full understanding of your
responsibility both to the business enterprise and to your own development.
 Selecting a Professional Who Understands

It is common for the management of a Business Trust Organization to use services and resources beyond the
organization when the need for specialized skills or knowledge arises. It is important that the Manager
recognize such a need and know how to locate and select a person to meet it. This is best accomplished by
being constantly alert to the availability of knowledgeable persons in the local community. Often, when such a
need arises, the time required for an extensive search is not available.
 The Business and Financial Strategist

One excellent source of special knowledge and skills is the AIBM-certified Business and Financial Strategist.
By virtue of his training in the Business Trust Organization concept and his contacts with other professionals,
he can be a valuable resource and is usually readily available. If he cannot directly provide the necessary help,
he can usually locate someone who can, either through his contacts or through AIBM.
 The Board of Trustees

The Board of Trustees, having the legal responsibility for the protection and success of the Business Trust
Organization, is the primary source of expertise available to the managers. Trustees should be immediately
notified whenever a potentially serious problem surfaces, especially when legal or other important
considerations are involved. Any inquiry either from a government agency or a private attorney regarding the
company or its business affairs is the responsibility of the Trustee and should be immediately brought to his
attention. The Trustee should be qualified to handle most of these problems. When a problem is beyond the
Trustee’s competence, he will arrange for the assistance of an appropriate professional.
 INTRODUCTION

The information contained in this Appendix was obtained from California Legal Forms Transaction Guide by
Matthew Bender. It provides a good explanation of the principles of law behind the formation of contracts,
enforceable at law, and standard forms utilized in California to assist in the proper drafting of contracts.
These forms are designed for use in almost any aspect of a transaction involving an offer and acceptance and
are, primarily, for illustrative purposes. Because of the vast number of situations in which the need for an
offer and acceptance may arise, there can be no standard forms of offer and acceptance.

Business transaction guides similar to Bender’s should be readily available at your local law library, regardless
of the state in which you live. These guides provide information on applicable local and state law, with
approved forms, relating to nearly any contractual arrangement one can imagine. If you want to do some
research on a particular area, but aren’t familiar with how to use a law library – first ask the librarian to assist
you. With a little help from the librarian, you should not have any trouble in locating just what you need.
 FORMATION OF CONTRACTS

Requirement of Mutual Assent

The consent of parties capable of contracting is an essential element to the existence of a contract. To be
effective, the consent must be free, mutual, and communicated by each party to the other. Except for certain
express statutory exceptions, the requirement of mutuality of consent is satisfied only if the parties all agree
upon the same thing in the same sense. In other words, there must be a meeting of the minds [Carlson, Collins,
Gordon & Bold v. Banducci (1967) 257 Cal. App. 2d 212, 64 Cal. Rptr. 915]. The usual manner of achieving a
meeting of the minds of the parties is by the communication of an offer to an offeree followed by the
communication of acceptance by the offeree to the offeror [see Amer. Aero. Corp. v. Grand Cen. Aircraft Co.
(1957) 155 Cal. App. 2d 69, 317 P.2d 694]. Thus a basic understanding of the principles of offer and
acceptance is essential to the one who is involved in the formation or drafting stages of an agreement.
 Elements of an Offer or Proposal

In order to serve as the basis for a binding agreement, an offer must contemplate the creation of a legal
relationship. For example, an offer made in jest or for purely social reasons cannot, if accepted, give rise to a
binding agreement [see Fowler v. Security-First Nat. Bank (1956) 146 Cal. App. 2d 37, 47, 303 P.2d 565]. Also
where one of the parties should reasonably understand from the circumstances surrounding the making of
the offer that the other party had no .intention to contract, an enforceable contract cannot be created by
acceptance [Scott v. Lee (1962) 208 Cal. App. 2d 12, 24 Cal. Rptr. 824]. If parties intend to create a merely
moral, rather than a legal, obligation, an acceptance of the offer will not create an enforceable contract
[County of San Diego v. Viloria (1969) 276 Cal. App. 2d —, 80 Cal. Rptr. 869]. Offers must be distinguished
from similar communications such as price quotations or advertisements which are generally solicitations of
offers or mere invitations to make offers [Lonergan v. Scolnich (1954)129 Cal. App. 2d 179, 276 P.2d 8]. Also
distinguishable are offers made as part of preliminary negotiations or those made with the express
understanding that no contract shall exist until the execution of a formal document embodying the terms of
the agreement [Franken- heimer v. Frankenheimer (1964) 231 Cal. App. 2d 101, 41 Cal. Rptr. 636]. In order
for an acceptance to result in the creation of a contract, the offer must be definite; i.e., it must be sufficiently
clear and complete so that the court can determine the legal obligation assumed [Apablasa v. Merritt & Co.
(1959) 176 Cal.-App. 2d 719, 1 Cal. Rptr. 500]. Where any of the essential terms are left for future agreement,
no binding contract can be formed until after such agreement has taken place [Smissaert v. Chiodo (1958) 163
Cal. App. 2d 827, 330 P.2d 98]. An offer must also be communicated to the offeree before a right of
acceptance arises, for an uncommunicated offer cannot be the basis of binding contract [Gulart V.
Azevedo(1923) 62 Cal. App. 108, 216 P. 405]. The offer must not have been obtained by threats or duress
since an offer obtained in such a manner is not a result of a meeting of the minds [Balling v. Finch (1962) 203
Cal. App. 2d 413, 21 Cal. Rptr. 490].
 Options

An option is merely a contract to keep an offer open for a specified period during which it may
be accepted [see Henry v. Lake Mill Lbr. Co. (1956) 139 Cal. App. 2d 620, 293 P.2d 909]. It is
thus a continuing offer which is irrevocable during the specified period, or if none is specified,
for a reasonable period [Dawson v. Goff (1954) 43 Cal. 2d 310, 273 P.2d 1]. Since an option
involves a promise by the optionor to perform the contract to which the option relates and the
optionee can exercise the option or not exercise it entirely at his discretion, the option is in
essence a unilateral promise by the optionor to perform the underlying obligations covered by
the option [Keller v. Pacific Turf Club (1961) 192 Cal. App. 2d 189, 13 Cal. Rptr. 346]. If the
optionee exercises the option in accordance with its terms, a binding contract is formed
without any further promise or action by the optionor [Adams v. Williams Resorts, Inc. (1962)
210 Cal. App. 2d 456, 26 Cal. Rptr. 656]. The optionee’s right against the optionor for
performance of the contract to which the option relates cannot be defeated by the optionor’s
purported repudiation of the option [Caras v. Parker (1957) 149 Cal. App. 2d 621, 309 P.2d
104]. It is important that the option be supported by consideration, because an option, i.e., an
offer, without consideration is not binding upon either party unless and until it is actually
exercised or accepted [Torlai v. Lee (1969) 270 Cal. App. 2d 854, 76 Cal. Rptr. 239]; An option
given without consideration may be withdrawn at any time prior to acceptance despite a
promise to keep it open [Davis v. Langin (1962) 203 Cal. App. 2d 579, 21 Cal. Rptr. 682]. No
particular amount of consideration is required to make an option enforceable and irrevocable
for the option period. If given for a valuable consideration, no matter how small, the option is
irrevocable during the period specified and cannot be terminated without the consent of the
optionee [Wheat v. Morse (1961) 197 Cal. App. 2d 203, 17 Cal. Rptr. 226]. An option may be
exercised at any time, prior to its expiration by giving notice in the manner prescribed in the
option, or if none is prescribed, by using any accepted means of communication [Cicinelli v.
Iwasaki (1959) 170 Cal. App. 2d 58, 338 P.2d 1005]. If the exercise of an option occurs prior to
the earliest time set in the option, such acceptance of the underlying offer will be treated as a
continuing acceptance which will become effective at the time set for the exercise of the
option [Kaneko v. Okuda (1961) 195 Cal. App. 2d 217, 15 Cal. Rptr. 792].
 Revocation or Withdrawal of an Offer

An offer or proposal may be revoked at any time before its acceptance is communicated to the offeror or
proposer, but not afterwards. One method of revoking an offer, therefore, is by giving notice of revocation to
the offeree before he has placed his acceptance in the course of transmission to the offeror. Revocation may
also occur by the lapse of the time prescribed for acceptance or of a reasonable time if none is prescribed, by
the failure of the offeree to fulfill a condition precedent to acceptance, or by the death or insanity of the
offeror. Since a revocable offer is personal to the offeree and may not be assigned by him nor accepted by
anyone other than the offeree [Ott v. Home Savings & Loan Assoc. (9th Cir. [Calif.] 1958) 265 F.2d 643], the
offer is also revoked upon the death of the offeree. The effect of a revocation prior to acceptance is to cut off
the right of the offeree to create a contract by a accepting the offer, and no valid acceptance may thereafter
occur [Podlasky v. Price (1948) 87 Cal. App. 2d 151, 196 P.2d 608].
 Acceptance

Ordinarily, in order to create a contract, it is necessary that the acceptance of an offer be communicated to
the offeror [Coml. Cas. Ins. Co. v. Ind. Acc. Comm. (1953) 116 Cal. App. 2d 901, 254, P.2d 954]. An effective
acceptance can be communicated only by some act or omission of the party contracting by which he intends
to communicate it, or which necessarily tends to such communication. A valid acceptance may be commun-
icated by conduct [Standard Iron Works v. Globe Jewelry 8c Loan, Inc. (1958) 164 Cal. App. 2d 108, 330 P.2d
271] or by any reasonable and usual mode of communication. But if an offer prescribes any conditions
concerning the communication of its acceptance, the offeror is not bound unless the conditions are complied
with. For example, if the prescribed mode of acceptance of an offer to sell property requires the payment of a
sum of money, the offer is not accepted unless the money is paid or tendered [Smith v. Holmwood (1965) 231
Cal. App. 2d 549, 41 Cal. Rptr. 907]. However, a distinction must be drawn between an offer which makes a
positive requirement or imposes an absolute condition of a specified manner of acceptance and one which
merely suggests a permitted manner of acceptance. In the latter case, methods of acceptance other than that
suggested are permissible [Estate of Crossman (1964) 231 Cal. App. 2d 370, 41 Cal. Rptr. 800]. If the
acceptance conforms to the conditions contained in the offer, consent is deemed to be fully consummated
between the parties – and therefore a binding contract is formed – as soon as the party accepting the
proposal has put his acceptance in the course of transmission to the offeror. Thus, if the contract is
consummated by the exchange of letters or telegrams, it is held to have been made at the place where the
letter is mailed, or telegram filed, containing an unconditional acceptance by one party of the offer of the
other [Sam Finman, Inc. v. Rokuz Holding Corp. (1955) 130 Cal. App. 2d 758, 279 P.2d 982]. It is important to
note that a provision in an offer requiring that an acceptance must be “delivered’’ to the offeror will not be
construed as requiring actual receipt by the offeror before the acceptance is effective – delivery occurs for
purposes of acceptance at the time acceptance is delivered to the post office or other agents of
communication chosen by the offeror [Morello v. Growers Grape Prod. Assn. (1947) 82 Cal. App. 2d 365, 186
P.2d 163].* It appears, therefore, that unless an offer clearly specifies that acceptance will not be effective
until actual receipt of the acceptance by the offeror, the normal rule that acceptance is effective upon
dispatch is applicable.
 Distinction Between Unilateral and Bilateral Contracts

A unilateral contract is one in which no promisor receives a promise as consideration for his promise. A
bilateral contract is one in which there are mutual promises between two parties to the contract; each party
being both a promisor and a promisee (Smith v. Hermann (1962) 199 Cal. App. 2d 748, 18 Cal. Rptr. 833). A
unilateral contract is accepted only by actual performance (Richardson v. Rose (1961) 197 Cal. App. 2d 318,
17 Cal. Rptr. 81). The distinction between bilateral and unilateral contracts can be illustrated by the following
examples. An offer to sell which is accepted is clearly a bilateral contract, while an offer of a reward is a clear-
cut offer of a unilateral contract which cannot be accepted by a promise to perform, but only by performance
(Davis v. Jacoby (1934) 1 Cal. 2d 370, 34 P.2d 1026). In the case of a unilateral contract no notice of
acceptance need be given to the offeror (Davis v. Jacoby (1934) 1 Cal. 2d 370, 34 P.2d 1026). Under Section
1584 of the Civil Code performance is acceptance. While the California cases have never expressly held that a
presumption in favor of bilateral contracts exists, the cases clearly indicate a tendency to treat offers as offers
of bilateral rather than of unilateral contracts (Coleman v. Mora (1968) 263 Cal. App. 2d 137, 69 Cal. Rptr.
166). The draftsman should, however be careful to determine, prior to drafting an acceptance, whether the
offer is for a bilateral or a unilateral contract. If a unilateral contract is involved, a written acceptance is
neither necessary nor permissible since only actual performance will suffice.
 Silence as Acceptance

Ordinarily, silence in the face of an offer will not amount to acceptance unless there is a relationship between
the parties or a previous course of dealing pursuant to which silence would be understood as acceptance
[Southern Cal. Acoustics Co. v.
1. V. Holder, Inc. (1969) 71 Cal. 2d —, 79 Cal. Rptri 319]. The question of acceptance by silence or
acquiescence is one of fact [Calhoun v. Huntington Park First Sav. 8c Loan Assn. (1960) 186 Cal. App. 2d
451, 9 Cal. Rptr. 479]. An underlying principle to be taken into account is that a party will not be permitted
to receive and enjoy benefits that he knows are being offered to him at a price without paying for them, if
he had an opportunity to reject them when they were offered without any expense or material
inconvenience. Silence may here consummate his acceptance because the facts fairly call upon him to
speak [Durgin v. Kaplan (1968) 68 Cal. 2d 81, 65 Cal. Rptr. 158]. If one party to a contract receives and
accepts a writing purporting to embody all of the terms of a contract but signed only by the other party,
both the signing and accepting parties will be bound to the terms of the writing [Benard v. Walkup (1969)
272 Cal. App. 2d 595, 77 Cal. Rptr. 544]. The draftsman should of course eliminate doubt as to the validity
or effect of an acceptance by putting it in writing. However, it is important to keep in mind the fact that an
express acceptance, whether written or oral, is not essential where silence constitutes acceptance.
 Nature of Acceptance

To be effective, an acceptance must be absolute and unqualified, since a qualified acceptance is a new
proposal [Civ. Code 1585]. The acceptance must meet exactly, precisely, and unequivocally the terms
proposed in the offer; a qualified acceptance of an offer constitutes a rejection of the original offer and puts
an end to it [Devereaux v. Harper (1962) 210 Cal. App. 2d 519, 26 Cal. Rptr. 837]. It is important when giving a
qualified acceptance or making a counteroffer, to determine whether it is desired that the original offer
remains in force, subject to acceptance at a future time. A qualified acceptance or counteroffer by the offeree,
relating to the same matter as the original offer, is a rejection of the original offer unless the offeror in his
offer, or the offeree in the counteroffer, states that the original offer shall not be terminated in spite of the
counteroffer [Born v. Koop(1962) 200 Cal. App. 3d 519, 19 Cal. Rptr. 379], Furthermore, the intention to
accept the offer as stated must be clear; mere statements of intention or promissory expressions, will not
suffice to constitute an acceptance [Amer, Aero. Corp. v. Grand Cen. Aircraft Co.(1957) 155 Cal. App. 2d .69,
317 P.2d 694].
 Drafting Considerations

To recap some of the important points to consider in drafting an offer or an acceptance, offers should be
stated in offer language such as “I offer” or “I agree” or “I promise” rather than language which suggests a
mere intention to quote a price or to suggest terms of a possible agreement. The offer should be addressed to
a specified offeror if only one is contemplated or to the general public if that is the intention. A time limit
should be specified during which the offer may be accepted, and, if an option agreement is involved, the
consideration for the option should be stated. The offer should specify the manner in which it is to be
accepted and any restrictions on acceptance. An acceptance, on the other hand, should comply with the
conditions stated in the offer and should clearly and unequivocally accept the terms of the offer if no changes
are to be made. If any additions or changes are to be made in the terms of the offer, they should be clearly
stated in the counteroffer. If any rights of accepting the original offer are to be preserved, a specific statement
to that effect should be included.
1. NAME AND DATE OF CREATION AND GOVERNING

DECLARATION OF CONTRACT AND INDENTURE

OF
(NAME OF TRUST)
(DATE OF CREATION)

I, , Settlor of this Trust Estate, declare and announce that I intend to create and do create a Trust to manage
other Trust and legal entities. This allows the Trustees of it to act under the name as shown above and as
named in Section I, Paragraph A, below.

This document is a Declaration of Contract and Indenture and is hereinafter referred to as an “Indenture.”

The Settlor declares and sets up an inter vivos Trust Estate for the benefit of heirs shown on suitable schedules
within this indenture as Trust Holders, hereinafter referred to as Holders, and their Beneficiaries. The
Trustees thus appointed are charged with the responsibility to govern wisely so the generations to follow
enjoy the benefits of this Trust Estate.

Settlor agrees and covenants that the Settlor has not engaged and will not engage in any secret agreements
or pre arrangements of any type with the Trustees of this contractual Trust Estate. The Trustees are not
obligated to act in any manner other than as fair, unbiased and independent fiduciaries in the best interest of
the Holders.

It is expressly declared that a Trust Estate by Contract is created and not a:

•Trust agreement by gift

•Partnership
•A company by statute
•Association
•Corporation or Limited Liability Company
•Joint Venture
•Entity of statutory nature

Nothing hereon will be construed as an intent to evade or go against any law, nor to delegate any special
power belonging only to a company or to a franchise of incorporation.

The Settlor requires, as part of considering this Contract, the Board of Trustees to act solely on the rights
secured under the Common Law of Contract, and the immunities granted by it, in managing this Trust Estate.

A court of law does not grant authority or is it required to give authority to the Board of Trustees and no court
exercises of any power conferred within this. There is no need to make current reports or any accounting to
others than the Holders.

Should it become necessary for a court of competent jurisdiction to protect the corpus here, it too will be
guided by the terms, conditions, purposes and intent of this Indenture, and the minutes interpreting the same.

1. a. This Common Law Trust Estate, also known as (NAME OF TRUST), contractual entity, created on (Date
of Creation), in (City and State or Country).
1. b. It is sanctioned to exist and function by an through the Board of Trustees, by all the conditions outlined,
described explained in this document. Listed on proper schedules, certain assets are managed by the
Trustees for Holders represented by Trust Capital Units as show on numbered Trust Certificates, under
the inalienable Common Law rights granted to man.
 CERTIFICATION AND DOMICILE OF COMPANY

2. Irrevocable Status and Jurisdiction

a.) Irrevocability: This Trust Estate is irrevocable and cannot be changed in any manner by
the Settlor. The Settlor does not reserve or hold dominion or control over the Trust Estate,
nor any power to control the Trust Estate. They cannot change Beneficiaries, or remove or
appoint other Trustees, or exercise administrative powers over the Trust Estate or its
property. The Settlor will not revoke, change or end, or change in any manner this
Indenture. The Settlor cannot exercise any other significant power about this Trust Estate
after its creation not specifically set forth to be exercisable by the Settlor within this
Indenture.

b.) The Settlor has no possessory interest in the Trust Estate, no reversionary interest, and
no retained interest whatever.

c.) Neither the Exchanger nor any Holders will have any right to revoke or amend this
indenture.

d.) This indenture may be amended only by the unanimous action of all Trustees and Trust
Holders of this Trust Estate. This change or adjustment is only applicable if it is considered
necessary to prevent dissipating the income or assets of the Trust Estate. It may also be
amended to secure a more efficient administration of the Trust Estate. Any change is in
accord with the purposes of the Settlor expressed in this Indenture. This power will not
extend to nor to used for ending this Trust Estate.

e.) The Settlor further states the Trustee has been fully advise about the legal effect of
completing this Trust Estate and admits that Trustee is fully informed about the character
and amount of the property herein transferred and conveyed. Further, the Settlor gave
careful consideration to the question of whether this Trust Estate is Revocable or
Irrevocable and the Settlor or others may transfer other property to the Trustee. This
brings the property from other Holders within the management of this Trust Estate.

3. Common Law Organization

a.) The Settlor expressly declares this Trust Estate is created based on the freedoms and
rights inherent in the common law of the Republic of the United States of America. All
references in this document to the United States refer to the Continental United States of
of Rights and the state constitutions of the several sovereign States comprising the union of
the United States of America. Created under the common law of contracts, this Trust Estate
is protected by Article 1, Sec. 10, Paragraph 1 and Amendment 14. Section 1 of the
Constitution for the United States. It is, therefore, not created under the statutes of any
United States and does not depend on any statute for its existence. It is neither a
partnership or a corporation, but a separate legal entity having the its own common law
identity. It is not subject to the definitions found in the Buck Act about a “State within a
State,” nor a federal territory as defined in the Buck Act.

b.) Nothing contained herein is intended to consent to, or participate in, the “conduct of a
trade or business,” in”commerce,” “commercial activity,” or “business” within an alleged
federal jurisdiction (federal zone or insular possession) of the District of Columbia. This
applies to other actual or asserted federal places or jurisdiction or a corporate judicial
district, including, but without limitation to, Article 1 Section 8, Clause 17, Article IV, Section
3, Clause 2 defined as a “Federal area” or “State” as defined in, among other places, the Buck
Act at 4 U.S.C.S., Sections 105-110 (d) and (e), respectively. It is further described within ”
Jurisdiction Over Federal Areas within States, Report of the Interdepartmental Committee
 for the Study of Jurisdiction Over Federal Areas Within States,” presented to the Attorney
General and President Eisenhower (Part I April 1956; Part II, June 1957).

4. Governing Instruments

The terms set forth in this Indenture as interpreted by resolutions recorded in the minutes
of its meeting serve as the governing instruments of this Estate, and its Board of Trustees.

5. Certification

a.) This agreement, conveyance, and acceptance is made on the date appearing on this
Indenture, as this is the date of verbal agreement. The notarized signature testifies to the
date of the verbal agreement.

b.) This Indenture is by and between the Settlor and the First Trustee who establish this
Trust Estate for and in consideration of HFRN (No less than $1000.00), and the acceptance
by the First Trustee of the property to be conveyed, and the conditions, terms and
provisions of this Indenture.

c.) The Settlor transfers to the Board of Trustees of this Trust Estate certain property, the
description of which is now and described as Initial corpus and accepted through minutes of
the Board of Trustees. These minutes are incorporated by reference immediately on its
execution. The Settlor warrants his authority to transfer such interest in this property as is
named to be exchanged in minutes.

6. Domicile of Company – Situs

a.) This Trust Estate is originally domiciled and governed under the Constitutional Laws of
the Republic of California of 1787 where the Indenture will be interpreted and construed.
The controlling interpretational laws, under which this Trust Estate is construed, may be
changed to any other state or nation believed prudent, wise, necessary, or proper by the
Board of Trustees or by the Protector’s decision under his or her powers listed in Section XI.

b.) The principal resident address of this Trust Estate may be changed by the Board of
Trustees in the best interest of the administration.

7. Board of Trustees

a.) No Trustee will be a corporation or banking institution as these organizations often change management.
The disposition of this Trust Estate may be shuffled in the transitions and , thus, ignored. Only people of
personal integrity, known by others to be reliable and steadfast, will be Trustees of this Trust Estate.

b.) The First Trustee is the first member of the Board of Trustees of this Trust Estate.

c.) The assets and emoluments thereof immediately vest in any new Trustee chosen by the First Trustee as
fiduciary without further act or conveyance, except as may be required by local law.

d.) The Board of Trustees, at its sole discretion, appoints Trustees or officers who serve to protect the assets
of this Trust as appropriate to its affairs.

e.) The First Trustee, by signing this Indenture and the Acceptance hereby accepts on behalf of the Board of
Trustees the property and fees now agreed to and set forth in schedules and subsequent minutes.

f.) The first Trustee and subsequent Trustees and Officers hold collectively the majority of Trust Capital Units
(TCUs).

g.) The First Trustee appoints other Trustees and Officers who constitute the entire Board of Trustee for this
Trust Estate.

i. The Board of Trustees cannot have any less than three(3) members, i.e., two (2) Trustees, and
one (1) Executive Secretary who is not a voting member.

ii. The Board of Trustees is the governing body of this Trust Estate.

iii. The Trustees, and not the Officers, are legally responsible for this Trust.

iv. Trustees who are appointed by the First Trustee sign an Acceptance of Trust and thus become
responsible to uphold the terms of the Indenture.

v. The assets and emoluments of it immediately vest in any new Trustee(s) as fiduciary without
further act or conveyance, except as may be required by local law.

h.) The First Trustee is not required to have a bond. No bond is required of any Trustee appointed to the
Board of Trustees unless the Board, by proper minutes, needs such of any newly appointed Trustee for legal
reasons or specific applicable circumstances. In this matter, the Trust Protector needs to be involved in the
decision.

8. Managed as a Trust Estate

a.) Anyone made add property of value to the Trust Estate by gift , grant, conveyance, exchange,
insurance proceeds, assignment, will or any other method so long as the property and method of
transfer is approved by the Trustees.

b.) The criteria for accepting assets is as follows:

1.) Intrinsic Value

2.) Longevity or is it likelihood to increase in value.

3.) If the Exchangors want to sell the asset prior to his or her death, it should not be put into
the Trust Estate, unless the proceeds of the sale are to accrue to the Trust Estate.

4.) Capacity to create a positive cash flow.

5.) A valuable collectible.

6.) Use by Beneficiaries.

7.) Can be converted to cash.

c.) All assets belonging to the Trust Estate are listed on the schedules kept in the record books of the
Trust Estate, and are managed as provided herein.

d.) The Board of Trustees must use discretion in accepting assets, and not burden the administration
with unnecessary inventories and cataloging unless assets merit the time and expense to keep them.
9. Trust Estate Corpus

a.) The property forming the initial corpus of the Trust Estate is Federal Reserve Notes of (Name of
Exchanger), plus assets shown on Schedule A in the section of the Trust records applicable to assets
including suitable exhibits as necessary, listed and recognized in the initial minutes.

b.) The Board of Trustees handles the administrative needs of the initial corpus.

c.) Such property, with any other property added by the Settlor or other Exchangers, is to become
part of the Trust Estate and subject to all the terms of this Indenture.

d.) The first assets of this Trust are used for the initial administrative purpose. The initial exchange of
assets received from the Settlor creates the initial Corpus. Any added property received from any
future Exchanger or any party will be added to initial corpus and considered corpus.

e.) The corpus total forms the baseline to be used in accounting methods and procedures, and to
determine the difference between income and corpus.

10. Trust Estate Purpose

The purpose of the Settlor in setting up this Trust Estate, besides those purposes expressed or implied in
other sections of this indenture, include:

1. To provide for managing the Trust Estate assets by natural persons acting in the fiduciary capacity to
preserve, conserve, keep, invest, and develop such assets for the benefit of the Holders and their heirs.
This administration is recorded in minutes, and in the manner designated in this indenture.

2. To prevent the dissipation of wealth;

3. To provide for loved ones and others;

4. To provide for and encourage wise stewardship of asset;

5. To begin a program to increase the liberty and freedom of the Officers and Holders of the Trust Estate;

6. To promote family, and lend support to families associated with the Trust Estate;

7. To have the Trustees of this Trust receive property, income, profits, interest, dividends or other objects of
value to be paid out yearly as set forth within this indenture and its attached schedules;

8. To provide information so the Trustees have a clear understanding of the direction and intent of the
Settlor;

9. To provide liability protection, privacy , and asset protection from unwarranted creditors and spendthifts
on the Trust Corpus and assets;

10. To encourage moral integrity;

11. Protector

a.) The protector ensures mediation and arbitration.

b.) The protector secures and protects the present and contingent distribution rights of the Trust Certificate
Holders. This includes:

i. The overall legal status and holding of Trust property;

ii. Actions by its fiduciaries which could be harmful or destructive to the Trust Estate;

iii. Actions which might bring discredit on the Trust Group.

c.) The protector cannot be subservient or subordinate to any Trustee or family member of the Trustees.

d.) The Protector can advise the Board of Trustees, should the Trustees so wish.

e.) The protector receives at least one Trust Capital Unit or one percent as agreed between the Settlor and
the Protector.

f.) The protector signs a separate agreement that becomes part of this indenture when accepting the position
with this Trust.

g.) Appointments

i. The Settlor appoints the first Protector.

ii. The Settlor has the right to choose a succession of at least two Protectors to be on file within the
minutes of this Trust Estate.

iii. The Settlor reserves the right to set up instructions and standards for choosing succeeding
Protectors. The details will be in the minutes.

h.) Powers of the Protector

i. The Protector has the right and authority, on due cause , in his or her sole discretion, to dismiss a
Trustee on written notice, delivery by Certified Mail with a Notarized Affidavit of Mailing to said
trustee’s address. Due cause can be, for violation or lack of fulfillment of the indenture, and behavior
which causes dishonor to the Trust.

ii. While the First Trustee can dismiss a Co-trustee, only the Protector can dismiss a First Trustee.

iii. The Protector has the right to change characteristics of the Trust to avoid exposure of the assets
to risk. This includes a change of Trustee, situs or country.

iv. The right to increase or decrease Trust fees, salaries, wages, and distribution percentages to
ensure they are in alignment with cash flow to protect the corpus of the Trust for the Beneficiaries.

v. The right to ask for an audit of the Trust to help, teach and develop better protocols to protect
assets, or as part of an investigation into the Trustee’s conduct. Phone*:

vi. The right to break a tie vote of the Trustees.

1.) This may occur on the following occasions:

A.) If the Board of Trustees has an even number of Trustees, and they become
deadlocked in a decision;

B.) If some of the Board of Trustee Members abstain from voting, causing the
number willing to vote to be an equal number, and they are divided equally in their
 vote, thus unable to make a decision.

2.) The Board of Trustees may choose to:

Recent Articles

A.) Table the matter, to decide later.

B.) Call the Trust Protector to cast the deciding vote.

3.) The TCU and/or UBI Holders may ask the Protector to cast the deciding vote. If the
Beneficiaries request the decision be made, the vote cannot be tabled.

4.) If the decision impacts the welfare of Beneficiaries and cash flow, or the Trust Estate’s
status, the Protector may intervene and call for a vote.

5.) The Trust Protector must settle the issue based on the following criteria:

A.) The long range benefit to the Beneficiaries

B.) The best circumstances for the Beneficiaries

C.) The least harmful course

D.) The most suitable decision in alignment with the terms of the Trust Indenture

E.) The most applicable course in alignment with the design of the Trust Settlor

F.) Other deciding reasons relevant to the matter.

Secured Party Creditor

6.) The Trust Protectors reason of the decision must be recorded, and is final and binding on
the Board of Trustees.

i.) Limits

i. The Protector is not a member of the Board of Trustees.

ii. The Protector cannot be a Beneficiary, nor can his or her spouse, children, sons or daughters-in-
law, mother, father, or brothers and sisters, or anyone to whom the Protector may be loyal.

j.) Removal of a Protector

i. The Settlor keeps the right to fire or hire the Protector at (his or her) own discretion.

ii. The Board of Trustees has the authority to replace a Protector on death or resignation, only if the
Settlor is unavailable to choose another.

iii. If the removal of the Protector is for medical reasons, the Board of Trustees has the power to
demand the Protector get a certification of competency to continue to serve in the role of Protector.
Failure to produce the necessary medical certification within a reasonable, named time, is an
automatic resignation.

iv. Removal of a Protector can be by:

 1.) The Settlor with or without cause

2.) More than two-thirds of the Certificate Holders based on the TCUs held.

3.) The Board of Trustees, based on satisfactory and enough evidence of unfit.

A.) Drug or alcohol addiction.

B.) An illness which prevents the Protector from functioning.

v. All procedures to remove a Protector are confidential.

vi. The Minutes of this removal documents the Protector removal proceedings.

k. Removal of a Trustee

i. Keep the removal of a Trustee confidential if the Trustee so removed wishes the matter kept so.
The Trustee should express this wish to the Protector or the Board of Trustees.

ii. Before dismissing a Trustee for medical reasons, the Protector can insist the Trustee get a
certification from, at least, one doctor stating he or she is fit to serve as a Trustee. Any refusal to
provide the proper documentation within a named period of time, not to exceed Twenty (20) days, is
a resignation.

iii. The Board of Trustees has the authority to replace a Protector on death or resignation only if the
Settlor is unavailable to choose another.

l. Settlor’s Power to Remove a Trustee

i. Only if the Protector does not perform his or her duties, in response to the request of the Trust
Certificate Holders or Beneficiaries, will the Settlor help with the removal of a Trustee.

ii. The Settlor enters with others to remove a Trustee for just cause, and under the guidelines set
forth within this Trust Instrument.

iii. The Settlor holds the power to remove a Trustee for violation of the Indenture if there is enough
documentation to show the following added circumstances also exist:

(1) The Protector is nonresponsive or there is no Protector.

(2) To prevent the Trust from needing a court-appointed Trustee.

iv. The Settlor becomes involved in removing a Trustee, if there is no other Trustee or the current
remaining Trustee is unresponsive or part of the trouble. The Settlor may, then, appoint a new
Trustee with the approval of no less than one-third of the Trust Certificate Holders, based on the
number of TCUs each holds. Two-thirds must approve only if any of the Trust Certificate Holders
oppose appointing the new Trustee.

m. Counseling Trust Members Calendar is loading...

The Protector is the natural counselor and mediator should any disputes arise between the members of the
Trust.

n. Investigation of Trustee
 i. Inform the Protector by giving him or her copies of relevant or periodic minutes.

ii. Any Trust Certificate Holder or Beneficiary may ask for an investigation into a Trustee’s conduct
and behavior only as it relates to the Trust. The Protector may ask support from the Certificate
Holders in examining any of the Trustee’s conduct.

iii. He or she may ask the Board of Trustees and other suitable advisers to review circumstances and
evidence, or to report to him or her any events about the investigation.

iv. The Protector can receive any information or documentation of any transaction, correspondence,
or any other dealings of the Trust.

o. Replacement of Trustees is by either of these methods:

i. Majority vote of the Trust Certificate Holders, excluding the Trustees.

ii. Approval of the Trustees’ choice by a majority of the Trust Certificate Holders.

12. Trust Capital Units (TCUs)

a.) 500 TCUs for Exchange

i. The Trust Estate is comprised of 500 TCUs (TCUs) KEYBOARD (Increase 500 to 1000+ if several
beneficiaries) representing the corpus of the Trust Estate. These units are non-assessable,
nontaxable and nonnegotiable.

ii. There will not be more than 500 TCUs. These units can be fractionalized at the discretion of the
Board of Trustees.

iii. The TCUs are to be exchanged for property placed in the Trust Estate, to represent a basis for
distribution to the Officers of the Trust Estate and to be passed on to those who inherit the TCUs.

b.) Proportional Share of the Trust Estate

i. Those people holding TCUs are eligible to be on the Board of Trustees as advisers, but only the
Trustee and Co-Trustees are responsible for the legal administration of the Trust Estate.

ii. TCUs entitle the Holder of it to a vested proportional share of the Trust Estate corpus at
termination of the Trust Estate. All Holders will be listed on the Trust Estate Certificate Register in
the Trust Estate Book.

iii. No one Holder Exchange will have more than forty-nine percent (49%) of the TCUs, and there will
never be fewer than four (4) Holders among the Officers and the Exchangers of the Trust Estate.

c.) Title Only Vests at Termination

i. No title to any of the Trust Estate assets or the income from it will vest in or to any Holder until
terminating the Trust Estate.

ii. Neither its income nor its principal will be liable for any debts of any Holder. Holding Units does
not entitle the Holder to any management power or rights.

iii. The death of a Holder or transfer by a Holder does not entitle heirs, legal representatives, or
 transferees to demand a division of the assets of this Trust Estate; nor any special account; nor
entitle them to any greater rights than that to which the former Unit Holder was entitled.

d.) Inheritance of TCUs KEYBOARD (Expand this section. Be specific.)

i. TCUs belong solely to the Holder and not to the marriage partner.

ii. TCUs can only pass to a direct descendent (issue of the body) of (Name of ancestor of Settlor), or
to those no greater distant than second cousin of (Name of cousin). Those descendants are listed on
proper schedules within the records of this Trust Estate documents.

e.) TCUs for Officers of the Trust

i. TCUs belonging to Trustees and officers of this Trust Estate representing their portion as steward
of this Trust Estate are surrendered to the Board of Trustees on termination of their responsibilities.

ii. TCUs given for exchange of property into the Trust remains with the Holder as long as the Holder
does not act contrary to the instruction in this Indenture.

iii. If the Trustee receives TCUs as Trustee, and then exchanges property in the Trust, the Trustee
now holds two separate certificates, one as Trustee, and one as an Exchanger. This applies to all
officers of this Trust Estate.

iv. Exchangers not blood related to the Settlor and direct heirs can only pass their TCUs on to one
generation.

v. Officer TCUs surrendered at the time of termination of responsibilities, return to the Board of
Trustees, except for TCUs for exchange.

vi. Officers may activate TCUs for service or by adding to corpus.

f.) No Personal Liability

As this Trust Estate is a pass-through business Trust, where the final control of the business is held by the
Trustees and not by the TCUs Holders, the latter are not personally liable on the duties incurred by the
Trustees or the managing agents appointed by the Trustees.

g.) Transfer of TCUs

i. The legal Holder of any TCUs, as recorded in the records of this Trust Estate may, by proper
writing, surrender to the Board of Trustees all claim to such, leaving to the discretion of the Trust
Estate Board of Trustees the possible issuance, or not, of such Units as the Trustees will see fit. The
trustees may consider any suggestion made by the previous Holder, transfer is not effective until it
has been approved by the Board of Trustees. Any such transfer is effective only after the old Units
are surrendered to the Board, the transfer is noted in the records of the Trust Estate, and a new
Certificate is issued to the new Holder.

ii. Any Holder may file a request with Board of Trustees naming any person or persons to whom he or
she wishes his or her units to be transferred to on his or her death. Such request will be considered
and approved or not in the same manner as other requests for transfers.

iii. If an approved transfer at death from the Holder is found in the minutes, then on proper notice of
such death to the Board, and receipt of the old Units, the Board notes the transfer in the records of
 this Trust Estate and issue a new Certificate according to such approved transfer. If no such
approved transfer appears in the minutes, then the Board will transfer such Units, in like manner, on
a proportional basis among the remaining Holders. If there be no remaining Holders alive, nor
approved transfer instructions from the former Holders, then the sole Certificate will be issued to
the Settlor or the Settlor’s lawful heirs.

h.) TCU Holder Removal

i. Holders are required to be law abiding, to use Beneficial distribution for peaceful means, and to not
use distribution funds contrary to the purpose of the overall intent of the Trust.

ii. Holders must be in alignment with the overall intent and purpose of the Trust and cannot act
against it, nor can they act with malicious intent against other members of the Trust group, such as
officers and other Holders. This provision does not apply to a reasonable request for an investigation
into the conduct of officers of this Trust Estate. Examples of the intent of this paragraph follow:

1.) Malicious intent includes spreading lies, as well as overt and covert acts to bring harm to
another.

2.) A reasonable request for an investigation is founded on circumstances that can is

believed to be reasonable, or on proof of misconduct.

iii. Holders cannot set up a business that is in competition with any business set up by the overall
Trust complex.

iv. Holders convicted of harmful activities can be removed from Beneficial status or have:

1.) Beneficial income placed in a special account to accumulate for rehabilitation.

2.) Beneficial income temporarily suspended, and specific determination made by the Board
of Trustees how to control the funds to the Holder in accordance with circumstances.

v. It is the intent of the Trust that all Holders receive enough support from the Trust funds and Board
of Trustees to allow them to grow and develop. Holders must show a sincere desire to improve
before the Board of Trustees is required to provide the necessary training, healing, or other support
for their benefit.

vi. It is also not required of the Board of Trustees to take Trust funds for the benefit of one who has
caused difficulties from those who have been supportive. Those who have been supportive have
priority.

vii. Procedure for Holder Removal

1.) First a warning must be given to the Holder about removal, unless the Holder has been
involved with crime, whether convicted or not. The Holder has the right to answer any
allegations, or respond to the warning.

2.) Consult with the Trust Protector in all considerations to remove a Holder.

3.) Because of the political entanglements of the courts, and the power of those who have
enough money to hire the best lawyers, it is up to the Board of Trustees to decide whether
the Holder is involved in crime. Enough circumstantial evidence may be enough to remove a
Holder.
 4.) Should termination of the Beneficial interest be proper, then the Holder must be told by
certified mail, return receipt requested.

13. Units of Beneficial Interest (UBIs) KEYBOARD (Delete section if UBIs do not apply)

a.) UBIs are shown on Certificates of Beneficial Interest.

b.) Holders of Certificates of Beneficial Interest are not Exchangers, and are named on Asset Holding Trusts
managed by this Trust Estate. UBI holders have given no assets in exchange.

c.) This Board of Trustees is responsible for the Beneficiaries listed on suitable schedules of managed Trusts.
The Beneficiaries may receive either certificates of Beneficial Interest or Certificates of Trust Capital Units
belonging only to the managed Trust. UBIs are separate and distinct from TCUs.

d.) Beneficiary status is designated by receipt of certificates of Beneficial Interest or TCUs as issued by the
Board of Trustees. For all Beneficial interest, whether in the form of distributed profits or provisions from the
Trust, a Beneficiary agrees to the purposes of the Trust.

e.) Beneficiaries are encouraged to act in accordance with the Trust purposes of stewardship, to foster
honorable values and concepts, and to honor privacy. The Trust will provide such encouragement in the best
interests of the Trust at the discretion of the Board of Trustees for the protection, well-being, health, welfare,
care, education, security, and safety of the Trust Beneficiaries.

f.) UBI interest will not entitle the Beneficiaries to take part in all distributions from the profits of the Trust.
Distributions to Holders of certificates of Beneficial interest are in reference only to the pure Trust, also
known as asset holding Trust, managed by this Trust Estate, and proper distribution formulas set by the Board
of Trustees.

g.) Beneficial distribution is controlled by the Board of Trustees through the appropriate Holder or Holder of
Units of Beneficial Interest (UBIs) as listed in the Trust register.

h.) In a serious family or medical emergency, or other similar situation, the Board of Trustees has the right to
provide Trust funds to a Beneficiary besides those received through normal Trust distributions. The Board of
Trustees first decides such a pay-out is in the best interest of both the Trust and the Beneficiary. Trust funds
do not exist to bail out Beneficiaries who squander their assets or are involved in frivolous or speculative
activities that dissipate their assets. The Settlor believes Trust funds are for aiding those to achieve greater
abilities and talents, and the Beneficiaries need to be accountable for their actions. Therefore, true family
emergencies as well as that significant opportunity qualify for consideration by the Board of Trustees.

i.) The Trustee is not to recognize any transfer, encumbering, mortgage, pledge hypothecation, order, or
assignment of any Beneficiary by anticipation of any part of the income or principal. The income and principal
of the Trust is not subject in any manner to transfer by operation of law, unless otherwise provided, and will
be free from the claims of creditors and other claimants and from orders, decrees, levies, attachments,
garnishments and executions, and other legal or equitable process of proceedings to the fullest extent
permissible by law. Each Beneficiary is expressly restricted from any of the above.

j. Audits Requested by the Beneficiaries

i. Beneficiaries may ask for an audit of the Trust records of only the Trust on which they are named
as a Beneficiary.

ii. The Board of Trustees must approve the credentials of those selected to audit the records before
the records can be examined. The auditor must pledge to keep the information within this Trust
private, and must be of a fair mind without any intent to act contrary to the purpose of this Trust
 Estate.

iii. If the request for an audit is because the Beneficiary(ies) distrusts the Trustees, then the matter is
to be brought before the Protector first for review. The Protector will then review the details and
decide whether an audit is necessary or another course of action is suitable.

iv. The cost of the audit is to be split equally between this Trust Estate and whomever requests the
audit.

k. Restrictions, Responsibilities and Options

i. Because it is the wish of the Settlor for Beneficiaries to gain enough experience in life so they are
not dependent on distribution from this Trust Estate, no Beneficiary (TCU or UBI Holder) under the
age of KEYBOARD (30? Rewrite this) receives more than an average of one-month’s rent for a
modest one bedroom apartment in the area in which they live, plus any yearly gift distribution.

ii. After the Beneficiary reaches the age of thirty (30), the Beneficiary becomes eligible for his or her
full distribution, unless for serious considerations of Board of Trustees because of known matters at
the time this distribution is delayed.

iii. (Explain what is done with funds due to the Beneficiary beyond the one month rent. Is it put
into a fund, used to by a condominium, applied to other benefits for him or her?)

iv. The Settlor believes experience (is more important than) a college education. Therefore, a
Beneficiary is refunded for any tuition and books they originally paid for from funds earned. If a TCU
Holder has more than five years experience in the workforce, and the Board of Trustees feel the
Beneficiary is mature, this Trust Estate may pay for tuition and books as well as extra living expenses.

v. Vocational Training can be supplemented by this Trust Estate or paid for in full by this Trust Estate,
depending on circumstances.

vi. It is the wish of the Settlor that all Beneficiaries receive an education in bookkeeping and
accounting. It is not required that any Beneficiary receive a license or become professionally
engaged in this profession. These studies are paid for by the Board of Trustees.

vii. Specific educational opportunities are (encouraged) in the following areas:

1.) (Fill in the list)

viii. Lawsuits

1.) No contest: Any Beneficiary that sues the Trust to terminate it, challenges the validity of
any portion of this Trust, or who instigates disruption within the Trust group causing the
Trustees to be interrupted in their duties, will no longer receive a distribution in accordance
with the decision of the Trust Protector.
A.) All considerations of a lawsuit or any legal proceeding in which this Trust is
involved must first be brought to the attention of the Trust Protector to resolve the
matter.

B.) The Trust Protector has the authority to decide proper proceedings regarding
legal status or action, or has the authority by his rights under this Trust Instrument
to decide the matter.

C.) No TCU Holder or UBI Holder responsible to this Trust group has the right to
bring any matter to a court of law without the involvement or approval of the Trust
 Protector.

D.) Should the certificate holder require a hearing, the Trust Protector has the
option to call upon a religious organization who sustains a court procedure within
its definition of rules of conduct for its members for assistance. The arrangements
made are in accordance with the Trust Protector and the religious organization
thus called on.

14. Obligations to the Settlor

a. Funeral and Death Responsibilities

i. This Trust Estate is not responsible for funeral arrangements. All arrangements are the
responsibility of the Settlor, either through a Pour-Over Will, insurance, or other arrangements.

ii. The Settlor can receive an option of a maximum of 1% OF THE Trust estate is applied to or set
aside for the benefit of the Settlor in later years to insure comfort and care. In no way does this
provision allow the depletion of the Trust Estate. If the Settlor rejects this option in writing, it is not
available thereafter.

15. Trustees

a. Number of Trustees

i. The Board of Trustees consists of at least two (2) Trustees; one shall be the “First Trustee”, and the
other Trustees will be “Co-Trustees”.

ii. All Trustees have the title of Trustee, but are distinguished from the First Trustee who has the
leadership responsibility within the Trust Estate and holds the largest amount of TCUs.

b. The First Trustee may terminate a Co-Trustee for violations of Trust with at least one witness of, evidence
of or any other substantial verification of the following:

i. Mishandling of funds, payments without authorization, payments of personal expenses out of the
Trust account, or any other misappropriation of funds where the Beneficiaries get less than
deserved.

ii. Taking Trust property and using it for personal gain, personal usage, and/or without authorization.

iii. Removing the Trust books from Trust premises, or the area allocated as the place dedicated to the
Trust business.

iv. Distorting facts or making false allegations, and covering up actual events; using or create
documents that include false statements

v. Without adequate reason, failure to

(1.) Consistently attend Trust meetings

(2.) Respond to Trust needs

(3.) Take care of Beneficiary needs in a timely manner

(4.) Be present at any Trust functions or to participate in any Trust business for one
(1) year.
 (5.) Distressing or attacking Trust Beneficiaries

vi. Written correspondence of the facts of the termination must precede the action of termination.
The Co-Trustee must have the opportunity to

(1.) To have 30 days to respond

(2.) Voluntarily resign

c. Majority

i. The Trustees may take any action with respect to this Trust, whether discretionary or otherwise, on
which a majority of Trustees agree.

ii. If there are more than three (3) Trustees, a Co-trustee (one who is not the first Trustee) failing to
act through absence or inability, or a dissenting Co-trustee who shall have joined in carrying out the
decision of the majority of the Trustees, as the case may be, if his or her dissent is expressed
promptly in writing to all the Co-trustees, shall not be liable for the consequences of any decision by
the majority.

iii. All decisions must be made by a unanimous vote when there are only two (2) Trustees. If there are
more than two (2) Trustees, then a majority of two-thirds (2/3) is required to act for this Trust Estate.

d. Qualifications

i. Any Trustee appointed or succeeding may be a domestic or foreign natural person who has proper
identification to be used with financial institutions.

ii. If the succeeding Trustee is a member of another Trust Estate, or Trustee of another Trust, he or
she must be named individually and be individually responsible for the Trusteeship offered and the
nature, scope or intent of that person’s functions, powers or activities must not be in conflict with
this Trust Estate.

iii. A Trustee cannot be related to the Protector, and cannot have conflicting interests with the
purpose of the Trust Estate. A Trustee cannot be engaged in any business that would be contrary to
the goals of the Trust Estate as described in Section X. Trust Estate Purpose.
Recent Articles

iv. The Trustee(s) should possess some or all of the following qualifications:

(1.) Have business acumen and an understanding of accounting principles and procedures.

(2.) Have a legal inclination, some paralegal training, an interest in or training in legal
research, or be a lawyer whose priority is the protection of this Trust Estate.

(3.) Be willing to learn the difference between Statutory and Common Law.

(4.) Be assertive when necessary and have the ability to stand up to other people, especially
to judges, attorneys, the Internal Revenue Service and others who may attack or seek to do
harm to this Trust.

(5.) Live a stable lifestyle; the Trustee needs to be available to administer the Trust Estate.

(6.) Have a sincere interest in the welfare of the estate, realizing that the success of the Trust
Estate holds his or her own security and best interests.
e. Adverse and Independent Trustees

i. Adverse

(1.) If related by marriage, or is a brother or sister of the Settlor, The Trustee must possess
more than 33% of the TCUs.

(2.) If not related by blood, or marriage, the adverse Trustee must possess the largest
amount of Units or more than 25% of the TCUs.

(3.) An adverse Trustee is required to insure the legal classification of this Trust Estate as
an irrevocable Trust, and gives the Trust Estate its status is irrevocable.

ii. Independent Trustee

(1.) May or may not be related by blood or marriage to the Settlor.

(2.) Shall be vested with no less than ten percent (10%) of the Trust.

iii. If there is an Independent Trustee operating as the Adverse Trustee, then the Co-trustee, can be
related, and is not required to have 33%.

f. Additional or Successor Trustees

i. The Successor Trustees shall always be on file in the minutes of the Trust Estate. This shall be
reviewed no less than every two (2) years.

ii. Upon the death, resignation, or removal from the Board of Trustees an additional or Successor
Trustee shall be elected to the Board of Trustees. Should the entire Board of Trustees become
vacant, the Settlor shall choose the “First Trustee”. The newly selected Trustee appoints the Co-
trustee(s).

iii. Should the Settlor not be available to select the first Trustee, then the Trust Protector selects the
first Trustee.

iv. The First Trustee is not subordinate or related to the Settlor.

v. A Successor Trustee, so named within the Trust instrument shall first be considered for
replacement. The Board of Trustees is then to approve the acceptance. Should none of the
Successor Trustees accept the position offered, or be qualified due to circumstances not foreseen
when they were selected as Successor Trustees, then the Settlor retains the option of selecting other
Successor Trustees.

vi. Upon the appointment of such Successor Trustee any attorney-in-fact, agent, custodian or
depository of the property comprising the Trust Estate or income thereof becomes the same for such
Successor Trustee without the necessity of executing or filing any papers or any further act.

g. Trustee Management and Control of Trust Estate

i. The Trustees shall exercise collectively the exclusive management and control of the Trust Estate
property and affairs.

ii. The property of the Trust Estate is held in joint tenancy by the Board of Trustees.
16. Officers of the Trust Estate

a. Officers of the Trust Estate are appointed by the First Trustee and approved by a majority of the Trustees.
The duties and responsibilities of the Officers of this Trust Estate to the Trustees are specified in contracts or
acceptances applicable to each of their positions.

b. The Trustees have the option of appointing the following Officers and any other additional officers as may
from time-to-time be necessary:

i. Protector, only if the Settlor is incapable of choosing another

ii. General Manager

iii. Secretary

iv. Treasurer

v. Steward, Caretaker

vi. Counsel

c. Co-trustee

i. A Co-trustee signs minutes and financial documents over $50,000 committing this Trust Estate in
one year.

ii. The Co-trustees shall all the specific duties, but especially relate to charitable causes and
concerns. This includes the welfare of the Holders, as well as the administration of any assets for the
benefit of the public.

iii. A Co-trustee shall assume the responsibilities of the First Trustee should the First Trustee be
unavailable, ill, or incapacitated until another First Trustee is selected.

iv. If there is more than (1) Co-trustee, the following criteria determines which Co-trustee shall
assume the duties of the First Trustee:

(1) Seniority

(2) Experience with the immediate needs of the Trust Estate

(3) Willingness to assume the responsibility

v. The Co-trustee assumes the position of temporary First Trustee upon the following conditions:

(1.) Emergency, where the Board of Trustees must act immediately and the First Trustee
cannot be located by telephone, fax or other reasonable methods of communication.

(2.) Where two (2) independent physicians advised the First Trustee should be temporarily
relieved of his or her duties.

(3.) Where the First Trustee has requested a temporary leave of absence, not to extend
beyond ninety (90) days.

vi. If the First Trustee is unavailable for more than ninety (90) days, then the Board of Trustees
appoints a new First Trustee unless circumstances indicate it is better to wait until the First Trustee
 can resume his or her duties.

d. General Manager

i. The General Manager works as a contractor to the Trust Estate and is responsible for the everyday
operation of the business. Duties are outlined in his or her contract and include hiring, firing,
negotiating, and dealing with financial institutions.

ii. This person will be familiar with the business of the Trust Estate and serves as an adviser to the
Trustees. The General Manager can have a custodial account.

e. Executive Secretary

i. The Executive Secretary works as a contractor to the Trust Estate and is responsible for
correspondence minutes, assembling, formatting and typing documents.

ii. The Secretary has no authority to release information to anyone without the approval of the First
Trustee, who is subject to the limits within this Indenture.

iii. The Secretary receives training in his or her responsibilities.

iv. The Secretary can sign checks, at the discretion of the Trustees, on Trust Estate accounts and can
have a custodial account.

v. The position as Executive Secretary to this Trust Estate is not the same position as a secretary
hired by the General Manager to work for the business in the day-to-day routine affairs. The
Executive Secretary and the secretary can be the same person only with full approval of the Board of
Trustees.

vi. The Executive Secretary attends all meetings of the Board of Trustees, records the resolutions,
and witnesses and signs minutes and resolutions of the Board of Trustees.

vii. If the Board of Trustees believes it necessary to have a Trust Estate Seal in its name, this Seal is
the official seal used by the Executive Secretary.

viii. The signature of the Executive Secretary, and if appropriate the Trust Estate Seal, is required
on documents approving the sale, transfer or purchase of real property by this Trust Estate.

f. Treasurer

i. The Treasurer works as a contractor under the direction of the Board of Trustees to manage the
assets and finances of this Trust Estate.

ii. The Treasurer is responsible for all funds and securities of the Trust, and deposits all such funds in
the name of the Trust in bank Trust accounts, Trust companies, or other depositories selected by the
Board of Trustees. He or she will also disburse the funds of the Trust as directed by the Board of
Trustees and record in minutes or in agreed on procedures.

iii. The Treasurer keeps and preserves acceptable and correct accounts of the Trust’s properties and
business transactions, including accounts of assets, liabilities, receipts, pay outs, gains and losses.
These records are kept in a manner to enable proper tax reporting.

iv. Provides all financial accounts as itemized above are available to the Board of Trustees whenever
a need for an accounting is needed.
 v. Certifies any necessary financial reporting as may be needed to conduct business.

vi. If the Trust does not have an immediate need for a Treasurer, then either the General Manager or
the Executive Secretary will be responsible to provide reports.

g. Steward

i. The Steward works as a contractor and is responsible for the affairs of an estate.

ii. The Steward’s duties include supervision of the kitchen and the servants, management of
household accounts, arrangements for large social functions.

iii. On approval of the Board of Trustees, the Steward can have his or her own Trust Estate custodial
checking account.

h. Caretaker

i. The Caretaker works as a contractor and is responsible for keeping buildings, both inside and
outside, and the ongoing management of all Trust Estate lands.

ii. On approval of the Board of Trustees, the Caretaker may have a Trust Estate custodial checking
account.

17. Trustee Responsibilities and Restraints

a. The Board of Trustees has no power to take any action contrary to our inconsistent with the terms of the
indenture or minutes interpreting the same.

b. The Trustees must avoid any action or decision causing the income of this Trust Estate to be taxed to the
Settlor (except to the extent the Settlor is a Holder). This applies to any other people other than the Holders
as income distributees.

c. If a termination occurs, the remaining corpus and income is delivered to the Unit Holders of record.

d. The Board has a general power of appointment consistent with the terms of this Indenture over the corpus
and its income.

e. Under no circumstances does the Settlor have any interest in investments made by the Board of Trustees
other than such legal interest as would a stranger to this Trust Estate in the particular transaction, or under
specific Settlor to purchase property or to sell property, but always at the fair market value and for adequate
and full consideration.

f. Funds accruing to the Treasury of this Trust Estate forms its working funds. The Board of Trustees may
approve liquidation of assets for adding to these working funds. The Board will, as it believes proper and
necessary, provide for working funds through any borrowing, either unsecured or directly or indirectly
secured. It may also appoint third parties to hold funds for specific purposes necessary to the use of this Trust
Estate.

g. The Board of Trustees pays all legal and lawfully due taxes, assessments, charges, debts, bills and debts
arising out of the maintenance, and administration of this Trust Estate. They will be charged on the Estate
and will be paid out of the income from it. If and to the extent the income may be lacking for such they will be
paid out of the principal. Board decisions about all such matters will be final. The Board pays expenses
incurred by Trustees, officers, executives, the General Manager, and like people while on this Trust Estate
business.
h. If doing business directly under this Trust Estate is not believed to be legal because of laws in other
countries, or other similar circumstances, the Board is allowed to do business in the name of one or more
individual Trustees, with suitable references to their fiduciary capacity provided such does not adversely
affect the legality of either the business done or this Trust Estate.

i. The Trustees must follow the policy of diversification of investments. A broad asset base protects the
Beneficiaries from the ups and downs of life. Therefore, the Trustees are instructed to make prudent and
wise investments in a minimum of four (4) areas where assets may appreciate or where an income flow is
assured to continue this Trust Estate. The Settlor gives the following areas as example only, and relies on the
wisdom of the Board of Trustees to decide, by current trends and events, which are the best investment
arenas to follow: residential or commercial real estate; farm or vacant land; lending and other profitable
banking; animals, such as race horses, or breeding animals; collections or fine art; start up business ventures;
stocks, bonds, commodities.

j. Trustees are paid a percentage of distribution, and if applicably and hourly or periodic remuneration for
services, depending on the cash flow of the Trust. This negotiable on a yearly basis.

k. If a Unit Holder hires any person or organization(s) to dissolve this Indenture, or if any Unit Holder sues to
demand funds or assets that belong solely to this Trust Estate, the Trustees may remove any Holder or
Income Beneficiary (hereinafter referred to as “Unit Holder”) from their respective unit register(s) and void
the corresponding Trust certificates.

l. The Trustee owes a duty to the Holders to manage the affairs of the Trust solely for the Holders, and to
exclude from consideration his or her own advantages and the welfare of third persons. Therefore, if the
Trustee finds him or herself in a position of conflict, the Holders receive primary consideration, and the
Trustee must extract him or herself from the conflict or resign, or this conflict of interest is grounds for
termination.

18. Trustee Powers

The Trustees will have the following powers about personal property, real property and the assets of the
Trust Estate, except as otherwise limited or restricted by the other terms of this Indenture:

a. The power to hold, manage or gain productive property.

b. The power to hold, manage or gain unproductive property for development.

c. The power to buy, sell, lease, exchange, deed, transfer, assign, hypothecate, invest, loan, borrow, and grant
options.

d. The power to lease or rent.

e. The power to improve, change, and alter.

f. The power to demolish improvements.

g. The power to abandon as worthless.

h. The power to subdivide, encumber, partition, and to adjust boundaries.

i. The power to fulfill covenants, agreements, contracts or credits.

j. The power to create servitudes, grant easements and rights-of-way, impose conditions and limits, and to
release the same.

k.The power to seek zoning, rezoning, variance, or nonconforming use permits.

l. The power to set up and keep reserves for depreciation.

m. The power to employ employees, consultants, caretakers, property managers and other agents.

n. The power to Dedicate Trust Estate properties for public use.

Send

o. The power to carry insurance of all kinds; including, but not limited to: personal liability and property
damage, fire casualty and extended coverage, income protection insurance, life insurance and catastrophic
insurance.
i. Prescriptions
p. The power to manage or pay for health-related care or benefits for the members of this Trust Estate only.
ii. Vitamins, minerals and food supplements

iii. Medical insurance

iv. Payments for the services of alternative healers who may not fall under insurance categories

v. Massage and deep-tissue bodywork

vi. Hands-on healers

vii. Oriental medicine

viii. Hypnotherapists/regression therapists

viiii. Emotional and psychological therapy

x. Retreats for

(1.) Recuperation

(2.) Spiritual self-discovery

xi. Chiropractic care

xii. Stress reduction therapy

xiii. Ayurveda medicine

xiv. Homeopathy

xv. Weekly support groups

xvi. Psychiatric care

xvii. Nursing home and long-term care

q. The power to set up and keep reserves in the event of a natural or man-made disaster.

r. The power to hold an undivided interest.

s. The power to deal with title and title insurance problems.

t. The power to deal with or secure patents, copyrights, trademarks or the like.

u. The power to incorporate, enter partnerships, associations or other joint ventures, perform, distribute,
diversify, change, liquidate, or otherwise run the business.

v. The power to delegate authority to trustees, agents, caretakers or employees.

w. The power to pay reasonable compensation to Trustees, consultants, caretakers, employees, managers,
agents and others for services rendered.

x. The power to continue mortgage investments after maturity either with or without renewal or extension.

y. The power to buy securities, both foreign and domestic, and gain stock positions within international and
domestic markets.

z. The power to prudently buy long and sell short options, futures, and positions of securities which have
contractual agreements.

aa. The power to withhold income temporarily to build up the corpus of the Trust.

bb. The power to determine income and corpus.

cc. No person other than the Trustees have or exercise the power to vote or direct the voting of any shares or
other securities of the Trust Estate; to control the investment of the Trust Estate either by directing
investments or reinvestments; or by vetoing proposed investments or reinvestments; or to reacquire or
exchange any property of the Trust by substituting other property of an equivalent value.

19. Powers of the Settlor to Build the Assets of the Trust

a. The Settlor elects to keep certain power as listed in XIX.B. below for the express and clear purpose of
building the assets of this Trust for the benefit of the Holders, and related Beneficiaries. These powers revert
to the Board of Trustees on

i. Written and notarized authorization from the Settlor,

ii. The Settlor’s inability to function because of illness or accident, as verified by two (2) independent
physicians, after which these powers revert to the Settlor on recovery,

iii. Death of Settlor,

iv. Settlor’s lack of interest, cooperation or refusal to be involved.

v. If Settlor has deleted his powers, then the same items in XIX.A. apply to the one to whom the
powers were delegated.

b. Powers Held (Note: Not all powers need to be given)

 i. To withhold income from a Beneficiary during disability to build up the corpus of the Trust.

ii. To temporarily withhold income to build up the corpus of the Trust.

iii. To decide what makes up the Trust Estate’s principal and income and the value of assets held, and
to distribute in cash or in kind.

iv. How the income of this Trust may be applied for the benefit of the Beneficiaries.

v. How the income of the Trust is to be increased.

vi. How the corpus is to be distributed.

vii. Power to allocate between corpus and income.

20. Trustees Duties and Limited Liability

a. The Trustees will be subject to that standard in performing their duties in behalf of this Trust Estate as is
provided by law, with the following exceptions:

b. No liability accrues for any loss or expense suffered by the Trust Estate, except such loss or expense as is
occasioned by gross negligence such as deliberately acting to undo the financial structure, behavior akin to
one who is drunk, or irresponsible, unlawful, or immoral conduct by the Trustee leaving a negative impact on
the Trust Estate.

c. No liability accrues for any depreciation to the value of assets or other losses caused by any investments
made, provided the Trustees act in good faith in making such investments.

d. No liability accrues for any payment or distribution needed in this Indenture that is made in good faith and
without notice or knowledge of any change in the conditions or status of any person receiving such payment
or distribution.

e. No liability accrues to any Trustee for any act or default by any Co-trustee, unless the liability results from
that Trustee’s own bad faith or gross negligence as referred to in Paragraph A of this Section.

f. No liability accrues for any or default in the transaction of Trust business by any agent properly selected by
the Trustees to carry out specific duties and needs contained in this Indenture, absent willful default or gross
negligence as referred to in Paragraph A of this Section.

g. No liability accrues for losses resulting to the Trust Estate from any action taken by the Trustees for any
option or advice presented by a consultant or any executive Trustee to the Trustee, or by any opinion or
advice from legal counsel or Trust Estate accountant.

21. Third Parties

a.The Trustees of this Trust Estate are not personally liable to any third-party for any contract made or action
taken about this Trust Estate. If the action taken was within the scope of their authority and they clearly
marked on the document that they were doing it in behalf of the Trust Estate, or the words “as Trustee, and
not personally” appeared on it by their signature, all such aggrieved third-parties must look solely to the Trust
Estate for any remedy, settlement, indebtedness or the like about such transactions.

b. Such liability in those cases by the Trustees is intended to be representative in nature and not personal. The
Trustee will have no right of indemnification against the Trust Estate because of a lawsuit or claim by third-
party outsider.
22. Resident Trustee Termination

a. A Resident Trustee is one domiciled in a country where Trust assets are secured and who takes
responsibility for assets in that jurisdiction.

b. At any time before termination of the Trust Estate, the happening of any of the following events or
circumstances terminates the tenure of any Trust, company, or person incorporated, domiciled or resident
within the situs of this Trust Estate as Trustee hereof for the time being (hereinafter collectively referred to
as “Resident Trustee”) so that the Resident Trustee ceases to be the Trustee hereunder and to act as such
Trustee. He or she is divested of title to the capital and income of the Trustee Estate:

i. Passing any law or any action by or by any government authority, agency, or officer of a foreign
government, or having in fact or de jure jurisdiction of the Trust situs. The purpose or effect of which
is as follows:

(1.) The acquisition, expropriation or confiscation of any of the assets comprising the Trust
Estate.

(2.) To restrict in any way the use, investment or distribution of the Trust Estate fund.

(3.) The limit, suspension or abrogation in whole or in part of the Trust made up by this
indenture. This applies to any contract about the Trust Estate created or to the Trust Estate
fund, in which event the Protector dismisses the Trustee, the Board of Trustee will
immediately appoint the successor Trustee. The new Trustee will be entitled to
remuneration calculated according to its scale of fees in force.

(4.) The declaration or existence of war in consequence of which the citizens, nationals or
residents of the Trust Estate are declared to be or considered to be enemies of any foreign
government; invading the Trust Situs by military forces.

c. Any Trustee may be dismissed by the Protector, as named in XI.C.1. Powers of the Protector, or by the
Settlor, as named in XI. E. Settlor’s Power to Remove a Trustee.

23. Trustee Liability for Negligence

a. The Trustee will not be personally liable for any loss or expense suffered by the Trust Estate, except such
loss or expense caused by the Trustee’s willfulness or gross negligence as referred to in XX. A. Duties and
Limited Liability of the Trustees.

b. All legal fees in which the Trustee engages for the benefit of a Beneficiary, or group of Beneficiaries, or for
defending the corpus will be paid by the Trust, unless it is proven the matter was caused by the Trustee’s:

i. irresponsibility;

ii. Action that was harmful to the Trust or the reputation of the Trust or its members;

iii. Negligence.
24. Legal Representation of the Trust

a. Trustees are authorized to represent this Trust without a licensed attorney or lawyer under the following
conditions:

i. A Trustee has a working knowledge of the law pertaining to both Trusts and the issues to be
represented.

ii. He or she has adequate experience with court procedures as determined by the Trust Protector.

iii. He or she wants to represent this Trust, and is not pressured to do so

iv. The full Board of Trustee supports the Trustee who will represent the Trust.

b. It is preferred and desired by the Settlor that a Trustee represent this Trust to preserve privacy, and
because a competent Trustee has a much deeper and more thorough knowledge of Trust decisions,
background and actions than any third-party representative.

c. Should a Trustee chose to represent the Trust:

i. A complete set of Minutes concerning the circumstances and the reason why the Board of Trustees
supports the decision of the Trustee to represent this Trust is to be available for the court to review
concerning representation should this matter become an issue.

ii. A statement from the Trust Protector concerning this decision and why it is the best course of
action.

d. The Trustee may have a Co-trustee, who may be a license attorney if the Trust Protector and the Board of
Trustees approves of the choice of Co-trustee, or another Trustee maybe a Co-trustee.

e. The legal paperwork required to proceed with a legal challenge may be created by a paralegal, attorney, or
the Trustees, so long as it conforms and clearly represents the Trust as a viable and competent entity to
handle the circumstances.

f. This Section, “Legal Representation of the Trust,” may be excerpted from the Declaration of Contract and
Indenture as proof of the Settlor’s intent.

g. The Board of Trustees and the Trust Protector shall be involved in any court protocols or processes that a
judge or magistrate may suggest to solidify or define this format.

25. Third parties relying on the actions by the Trustees

a. The purpose of this action does not add to the powers of the Trustees, but simplifies and speeds the
effective administration of this Trust by protecting third-parties who are relying upon the actions of thee
Trustees.

b. Third-parties are not subject to any duty to inquire into the authority for, or propriety of, any actions taken
or considered by the Trustees of this Trust Estate. Such third-parties, including but not limited to banks, Trust
companies, security exchange organizations, title companies, lending institutions or others, may fully rely on
any written action taken by the Trustees. Such written action by the Trustees binds this Trust Estate and its
assets as fully as if such action was granted and approved in this indenture.

c. This section protects the privacy and confidentiality of the other portions of this Indenture from the prying
eyes of outsiders. No third-party need read any other section of this Indenture to be protected from any
possible action by any other party for participation in a breach of this Trust Estate, and such third-parties will
be held harmless by the Trust Estate if the so rely.

26. Trustee Resignation and Appointments

a. This section is in conjunction with Trust Protector Responsibilities detailed in the Trust Protector Section of
this Indenture.

b. Any Trustee, Co-trustee, or successor Trustee under this Trust Estate may, resign without leave of court
and without prior judicial accounting unless this accounting is demanded by the Board of Trustees. However,
according to the wishes of the Board of Trustees, the resigning Trustee must give either verbal or written
status of his or her Trustee duties so the Trust may carry on smoothly. The resigning Trustee or Co-trustee
remains liable until the status as requested is delivered to the Board of Trustees.

c. The resignation must be notarized and delivered to at least one (1) other Trustee. This letter of resignation
will specify the date of resignation, not less than thirty (30) days after giving such notice, when such
resignation will be effective. The letter of resignation will be upheld by the Trust Estate record keeper in the
Trust Estate records. Any third-party to whom a letter of resignation is shown may rely on the validity of that
letter of resignation as thee true state of affairs for this Trust Estate.

d. If a Trustee leaves without a letter of resignation, then a report of such event will be entered into the
minutes, and this will be notarized with the signatures of the entire Board of Trustees.

e. Recording Names of Trustees

i. For protecting banks, Trust companies, lending institutions, or third-parties who need an assurance
of the validity of the identity of the current Trustees of the Trust, all current Trustees of the Trust
have their names recorded by the Trust Estate record keeper in the Trust records.

ii. Any letter or form may be used, and will be signed and certified by at least one other Trustee. All
banks, security exchange organizations, Trust companies, lending institutions, or third-parties, may
rely on such letters or certificates as being the true accurate state of affairs for the current Trustees
of this Trust Estate.

27. Meetings and Minutes

a. This Trust Estate will have no less than two (2) Board of Trustees meetings per year. The purpose of the
Board of Trustees meeting is to continually increase the trust administration education for all Trust Officers,
and to develop plans and methods to educate all Trust members about Trust functions and responsibilities. In
these meetings, the Board of Trustees is to be continually reviewing and expanding investment opportunities
to promote cash flow and diversification.

b. In minutes of their meetings, the Board of Trustees may schedule and provide for regular meetings to be
held at stated and specifically determined times and intervals with or without notice.

c. The Trustees may also provide in the minutes for holding special meetings, which ay be called by the
unanimous consent of all Trustees. No one, other than the Trustees, has the authority to request or compel
the Trustees to hold regular or any special meeting, and the Trustees are required to discount and resist any
external pressure to do so.

d. No action for the Trust will be taken except on the unanimous concurrence of all the Trustees having
authority to take such action under the terms of the Indenture.
e. Minutes are to document activities and must be accurately and consistently recorded for protecting the
Trust Estate. The Trustees have the right to record later.

f. All minutes of this Trust are protected, to remain private and they are not to be loaned, borrowed, or
disclosed by anyone. Also, all minutes are beyond the reach of any person, other than the Trustees and
suitable officers of the Trust Estate, as shown by the following decision of the U.S. Supreme Court:

i. The Trustees for the Trust Estate have all the power necessary to carry out their Trust and their
books and records are NOT subject to review or subpoenas ducees tecum, and so held in...Boyd v
U.S., 116 U.S. 618 (1886);Silverthorn v U.S. 251 385 (1920); and the Fourth Amendment to the
Constitution for the United States of America.

g. When necessary and suitable by the Board of Trustees, a specific minute or portion of it may be extracted
for creating bank resolutions, and other such purpose, and presented to a person or entity outside the Trust
Estate.

28. Privacy

a. It is stressed and reaffirmed here that in all matters about this Trust Estate the Trustees, officers and others
involved in this Trust Estate are bound by the Path of Privacy which they signed. The Oath of Privacy is in full
force, and the information mentioned in the Oath of Privacy is considered private and secret must not be
revealed to any person outside this Trust Estate; and not even within the Trust Estate to any other Trustee,
Officer or Staff Member, unless such person “needs to know” such information for the responsibilities held
within this Trust Estate, or any fictitious name, also known as a D.B.A. of this Trust Estate.

b. All inquiries may be directed to any of the Trustees or other officers, employees or contractors f the Trust
Estate, either individually or collectively, in writing by the inquirer and submitted to the Board of Trustees for
processing at the next scheduled meeting of the Board of Trustees.

c. No document, record, bank account, or any other written information dealing with the internal affairs, or
the operations of this Trust Estate will be disclosed to any third-party, except on formal written approval of
the Board of Trustees given at the regular or special meeting of the Board of Trustees as set forth above.

d. This indenture and all Trust Estate business is kept private, protected by the Privacy Act of 1974, 5 U.S.C.
552(a), the Fourth and Fifth Amendments to the Constitution for the United States of America, and the
common law privacy rights available in the United States of America and every other applicable jurisdiction.

e. When people, involved in Trust documents or sensitive materials, are invited to join the Trust Estate, the
Board of Trustees must approve of the person before he or she is given an employment agreement, or an
independent contract. The basic procedure to follow is:

i. Discussion with the Board of Trustees recorded in the Trust minutes before an offer is made.

ii. An offer is made to the prospective person.

iii. The Trust Oath of Privacy is agreed to and signed by the prospective person.

iv. An employment agreement or an independent contract agreement signed before the person is
given any significant information about the internal workings of the Trust.
29. Power to Distribute Principal

a. The Board of Trustees has the sole discretionary power over this Trust Estate, its assets and earnings. The
Board of Trustees has the power, exercisable only according to the terms, standards and conditions otherwise
set forth in this Contract and Trust Estate Indenture, to pay out principal to Holders and earnings, or to divide
distributions, for delivery or transfer of any part or any portion of it, at such value as is settled by the Trustees
to be the fair value of that part or portion; or the Trustees may convert the Trust Estate or any portion of it
into cash and give out the net earnings to the Holders.

b. The Trustees receive a small percentage of the Holder distribution and are cautioned against taking excess
remuneration for performance of duties as this is looked on as a violation of the implied oath of a Trust as
recognized by courts of law.

30. Power to Deal with Trust Estate Property

a. In the exercise of the powers by the Trustee dealing with property of the Trust Estate, the Trustees must
apply the principle of investment diversification or setting up reserves for depreciation and depletion.

b. No more than Fifty-five percent (55%) of this Trust Estate, or less than Twenty-five Percent (25%) is applied
toward diversified high risk ventures during the lifetime of the Settlor. It is understood the greater the risk,
the greater the opportunity for gain. After the death of the Settlor, no more than Fifteen (15%) will be in high-
risk ventures.

c. Wasting Assets, such as mines, leaseholds, timberlands, oil and gas wells, and quarries can be held in the
Trust for the Holders, and are to be sold when the Wasting Asset is still profitable if it forecast the
profitability give a decreasing return.

d. Nonproductive property can be sold at the discretion of the Board of Trustees.

e. All Trust Property is held for the Holders and should be increased for the benefit of succeeding generations.

31. Power of Attorney

a. The First Trustee will not sign over full Power of Attorney to anyone for any reason. It is
better to resign the position than to give away the Trusted power.

b. A Limited Power of Attorney is allowed, as long as it expires within six (6) months, and
belongs only to specific duties, as approved by the Board of Trustees.

c. Full Powers of Attorney can be given to the Board of Trustees by any of the Officers,
Holders, Exchangers or Holders. The Board of Trustees must unanimously accept the
responsibilities thus entrusted.

32. Power to Borrow from the Trust Estate

a. The Trustees are allowed to exercise a general lending power to make or receive loans to or from any
person associated with the Trust Estate. Depending on specific circumstances and the prudent judgment of
the Board of Trustees, they may make loans for under $5000.00 without regard to interest or security.

b. Trustees are to consider carefully unsecured loans as they are regarded as imprudent and can be
questioned by Holders, thus bringing the Trust Estate into scrutiny.
33. Termination of the Trust Estate

a. This Trust Estate may be terminated only with the consent and approval of all the Trustee and Holders, and
all parties having interest in the Trust Estate, vested or contingent.

b. Any reason for termination must be grounded in sound reasoning for the overall benefit of all members of
the Trust Estate.

34. Accounting

a. Responsibilities

i. The Trustees pay all the expenses incurred in the administration, management, conversation and
protection of this Trust Estate.

ii. The Trustee keeps the books, records, documents and accounts of the Trust Estate. This role may
be delegated to a bookkeeper or accountant outside the Trust Estate who understands Common Law
Trust.

iii. The Holders may inspect any of the books, documents, or other records of the Trust Estate at any
reasonable time, on written notice to the Secretary or appointed Record Keeper. The Trustees are
not required and need not make any formal accounting to, or in behalf of, the Holders, except on
written demand. The Trustees may, however, make an accounting to the Holders, should the Board of
Trustees believe this necessary and prudent.

iv. Increase in Trust value is shared at least yearly, whether or not actually distributed.

v. The Trustees, acting for the Trust Estate and for the Trust Estate, not the TCUs Holders, will take
all deductions for the depreciation of Trust Estate property.

b. Distributions

i. If it is determined by the Board of Trustees, or by the Settlor, if the Settlor has reserved this power,
there is sufficient profit to distribute to the Holders of TCUs, or gain might become taxable to this
Trust Estate if not distributed, the Board may distribute, but is not required to distribute, sufficient
to prevent such increase from being taxable to this Trust Estate.

ii. The Board makes a determination yearly about whether the Trust Estate will be considered
“simple” or “complex” under lawful tax laws for that year. If after any distribution, any income
remains, it will be considered to be principal and allocated to the corpus of this Trust Estate. The part
each Holder is entitled to/of any distributable income or corpus is not discretionary, but is
determined solely by the number of TCUs held.

iii. The Board of Trustees makes a determination about the existence or non-existence of
distributable Trust increase at contingent intervals no greater than yearly.

iv. Any Holder may waive a right to any distribution, if a written declaration of waiver is delivered to
the Board of Trustees before the date when the distribution is to take place. Such waiver is accepted
by the Board and recorded in the minutes of this Trust Estate.

(1.) The effect of such waiver will be to assign the share such Holder would receive to the
remaining Holders on a proportional basis, solely for that particular distribution.

(2.) As an alternative, the share can be held for a later distribution to the Holder.
 v. No future benefit devolving on any Holder under this Trust Estate terms or settlement forms a
portion of any communal or joint estate of such Holder, but remains his or her sole, separate and
exclusive property. Should such Holder be married or marry in community of property, then any
benefit so accruing is expressly excluded from the community property. These benefits are free from
interference, control, or marital power of any spouse of such Holder. For this paragraph, the term
“benefit” includes movable and immovable property and the terms of this paragraph apply not only
to the benefit devolving on such Holder, but also to any benefits any time, directly or indirectly
gained by the funds thereof.

vi. Distribution to or for a Minor or Incompetent

(1.) If a Holder entitled to receive income or principal is a minor, an incompetent or a person

whom the Trustee decide to be unable to wisely or properly handle funds if paid to him or
her directly, the Trustee may make any payments in the Trustees’ discretion, in any one or
more, or any combination of the following ways:

(A.) To the natural Guardian or the legally appointed Guardian, Conservator, or

other fiduciary of the person or Estate if the Holder;

(B.) To any person or organization providing support for Holder;

(C.) By Trustees paying directly for the support of the Holder;

(D.) Partial payment directly to the Holder;

(2.) The decision of the Trustee about direct payments or applications of funds in the manner
here prescribed are final and binding on all parties when made in good faith.

(3.) The Trustee is to make all pay-outs in a way calculated to dispense with the need of
guardianship proceedings.

(4.) The Trustee may, in its sole discretion, require reports and take all steps as it may
consider necessary to assure and enforce the due application of money for the purposes
aforesaid.

35. Charitable Contributions

a. The Holders will be considered first, before any charitable contributions are decided. That is, if a Holder is
in need, the Board of Trustees is to take care of that need, using its discretion, before the support of
charitable organizations.

b. It is the intent of the Settlor that charities and the spirit of charitableness be encouraged. To that end, the
Co-trustee(s) of this Trust Estate is authorized to contribute to one or more qualified charitable
organizations.

c. When this Trust Estate achieves over $5,000,000.00 in assets, or cash flow of greater than $1,000,000.00 a
year, the Board of Trustees, at their discretion, is directed to set up a Charitable Trust for the benefit of
(example: runaway teenagers). They will be provided with:
i. Shelter, food, clothing

ii. Administrative personnel

iii. Psychological, alternative healing methods and professional care as needed.

iv. Vocational training will be available per their interest, or as recommended by counselors.
36. Administration Expenses

The Trustees pay out of Trust Estate Funds only those expenses incurred in the administration,
management, conservation and protection of this Trust Estate, including:

a. Reasonable remuneration of the Trustees, managers, caretakers, and any person or entities providing
services, articles, or utilities to the Trust Estate.

b. Expenses in the operation, maintenance, cleaning, repairing and otherwise caring for the property of the
Trust Estate.

c. Expenses in providing necessary supplies, equipment, and materials for the Trust Estate, either by purchase,
lease, rental, or otherwise.

d. Payment of taxes, charges, assessments, or license fees for the Trust Estate.

e. Insurance premiums for polices for the Trust.

f. Legal, bookkeeping, accounting, and other professional expenses, for the Trust Estate.

g. All ordinary and necessary expenses in caring for this Trust Estate and its property.

37. Life and Duration of the Trust Estate

a. This Trust Estate, unless terminated earlier as provided here, will continue for twenty-five (25) years. The
life of the Trust Estate may, however, be extended for another 25-year terms, subject to an unanimous
affirmative vote of the Board of Trustees at least thirty (30) days before each termination date.

b. At dissolution, the Trust Estate will be divided on a proportional basis to the then-existing Holders and
Holders as judged suitable by the Board of Trustees and accepted legal accounting procedures.

c. This Trust Estate may be terminated if any of the following factors occur:

i. The Trust corpus falls below $50,000.00.

ii. Causes of impossibility arise, for example, natural disasters, and uncontrollable political events,
that damage or impact functioning this Trust Estate.

iii. Dissention and lack of cooperating among Trustees and Beneficiaries, causing the Trust to become
inoperable, or its operation is so impaired to continue becomes too much expense or effort.

iv. Using sound and legal reasoning, all the TCUs Holders feel for the interests of the Trust, the Trust
should be finished.
38. Copies as Originals

A copy of this document bearing the seal or signature of a Trustee attesting to the fact the copy is an exact
copy of the original, or copies certified by the Executive Secretary as a correct copy, are relied upon as an
original document and have the full force and effect of the original document in every respect.

Severability Clause

If any clause, sentence, paragraph, section or provision of this indenture is held to be unenforceable or invalid,
it shall not affect any of the remaining provisions of the Trust Estate, and they are given legal effect
nonetheless.

Signature and Notary on Next Page

In confirmation of our agreement on KEYBOARD (Put the original date the indenture was created):
Witness my hand this ________day of___________________________,2015.

Accepted by:

___________________________________,Settlor
KEYBOARD (settlor’s Name), Settlor

____________________________________,First Trustee
KEYBOARD (First Trustee’s Name)

______________________________________________________________________________

State of KEYBOARD (STATE)

County of (County)________________________

On_____________________________before me, _________________________________Notary Public, personally

appeared

KEYBOARD (names of Settlor and Trustee)

Who proved to me on the basis of satisfactory evidence to be the KEYBOARD (person(s)) whose
KEYBOARD (names) KEYBOARD (are) subscribed to the within instrument and acknowledged to me that
KEYBOARD (he/she/they) executed the same in KEYBOARD (his/her/their) authorized KEYBOARD
(capacity/ies,) and that by KEYBOARD (his/her/their) KEYBOARD (signature(s)) on the instrument the
KEYBOARD (person(s)) acted, executed the instrument.

I certify under PENALTY of PERJURY under the laws of the State of _______________ that the foregoing
paragraph is true and correct.

Witnessed by hand and official seal

_______________________________________
Notary’s Signature
“The reason that this type of trust works for concerns like the Rockefellers and not for your Main Street
businessmen is that the Rockefellers have managers.” – Tom HEALY. IRS auditor to a private citizen on the subject
of international business structures. June 1983. THE ROCKEFELLER MANAGERS that Officer Healy was
referring to are competent and knowledgeable in the proper performance of their managerial duties and
responsibilities. Those trusts which are properly managed work. Those improperly managed don’t work. A
manager is one who oversees a business for someone else. Apart from an owner, a manager decides and
manages day-to-day business routine. He is responsible to “the Boss.” He does not conduct company business
in his own name.

OUR PURPOSE is to provide background and procedural knowledge for those persons responsible for the
administration and management of the Business Trust Organization. We cover start-up and operating
procedures, as well as information necessary to understand its nature, powers, and limitations. The highly
skilled managers of the trusts established for the Rockefellers, Kennedys, Hunts, Mellons, etc., are paid to
control and guide the respective Business Trust Organizations to the achievement of profitable and far-
ranging business goals. To properly manage a Business Trust Organization you, likewise, must understand and
follow the proper procedures. Study this subject until you clearly understand the following general rules of
effective operations:

1. Don’t rely on memory – write it down. Having too much information in the company records costs you
little; too little information could spell disaster.

2. “I should have” does not work; “I could have” doesn’t either.

3. Understand, adopt and implement the information in this course.

4. Begin and continue to improve your professional skills and understanding of administering a Business
Trust Organization.

5. Carefully plan each transaction beforehand; it’s much easier to do it right the first time than fix it later.

6. Once you’ve decided on the correct course of action, implement it. Don’t procrastinate! – see rule number
2

7. Maintain privacy. Don’t disclose any more company business that is absolutely necessary.

8. Any business (“trade and commerce”) in the United States has an obligation to account to the taxing
authorities.

9. As a Business Trust Organization manager, you are not, repeat NOT, doing business as a sole
proprietorship, a corporation, a partnership, or an association.

SUCCESSFUL MANAGEMENT is your road map to effective, profitable professional management of the
Business Trust Organization. Use it as your guide in making sound decisions and drafting the various
documents necessary to organize the business affairs. Become a manager who is qualified and ready to
answer proper questions about the Business Trust Organization and its business – but only if answering the
questions is in the best interests of the company and its beneficiaries. Both you and the Business Trust
Organization have full rights of privacy in the conduct of business and personal affairs.

As your management skills grow, you will automatically begin to change some of your thought patterns and
habits. When a Business Trust Organization is created, it is a full legal person, separate and distinct from its
creators, trustees, officers and capital unitholders. It doesn’t breathe, of course, but, under Common Law, it is
alive Like any child in its formative years, it needs careful preparation and guidance if it is to mature and
succeed in the achievement of its purpose. As it matures, it very well may take good care of its “parents” and
guardians.