[Originally published in and © The Charles Arthur Newsletter. Reposted by permission.]
Geo. McCalip
Webmaster and Former Trustee
In 2028 the Olympics will return to Los Angeles. My friend, Michael Giuliano, told me about how he catered Peter Uberoth’s box at the Coliseum during the 1984 Olympics. When Michael’s parents, Frances and Gaetano Giuliano, started their deli in Gardena in 1952, they had no idea that 32 years later, and just under ten miles north, their son would be serving breakfast and lunch to the Chair of the LA Olympic Committee.
In that 32 years Giuliano’s Deli had expanded from their first location in Gardena to locations as far north as the North San Fernando Valley, as far south as mid Orange County, as far west as Redondo Beach, and as far east as La Mirada, an area encompassing over five million people. Given their reputation, it surprised no one when Peter Uberoth chose them to cater his private box.
Less than 20 years later Michael told me how they had closed all but three locations. Inheritance taxes had cost them all of their other locations. While this made me sad, I realized Michael had fared better than many who lose their family business completely to inheritance taxes.
Approximately 20 million families in the United States have family owned businesses generating $10 million or more in annual revenue. How many of them will survive the next ten or twenty years? How many more would survive if they had their assets transferred into a trust?
Ideally, a family trust would hold a business trust, which would hold the business. However, a lack of familiarity with the way trusts function can cause a lack of comfort with the idea of putting everything into a family irrevocable common law trust. A business trust presents an opportunity to learn the advantages of a trust, without anywhere near as much discomfort.
We assume that anyone with the acumen to build an enterprise with an eight digit annual income has taken at least the minimal steps to protect their business. That is to say, they have used some form of corporation. The asset protection similarities between a corporation and a business trust will make the transition a fairly easy process.
Once they have their business in a trust, they will begin to truly appreciate some of the advantages a trust offers in addition to estate planning. They will almost immediately notice that not only did the process of setting up the business trust require much less effort and paperwork (i..e., hours, not weeks), but now they no longer have to worry about such things as registering with the Secretary of State1, the annual Statement of Information filing, and paying the annual Franchise Tax2.
Beyond that, they will start to recognize another major advantage that a business trust has over a corporation: PRIVACY. While they may want customers, especially potential customers, to find their business on Google, they probably don’t want just any one to find all of the details of their business that they would include with the annual Statement of Information filing.
By simply using a D.B.A. or fictitious business name for the business, they can make as much information as they want to available. This would, obviously include contact information, hours (if applicable), location (and/or URL if an online business), but may also include number of years in business and other facts that bolster the business.
Beyond that, prying eyes will learn that they have hit the proverbial brick wall because the D.B.A. belongs to a trust. This means that the business has limited its risk regarding business identity theft, loan fraud, and other nastiness from bad actors with access to sensitive information.
Having made the case for a business trust, we may have also gotten ahead of ourselves. Before any of this happens, the business owner needs to decide what type of business trust to use, and where to get their indenture (i.e., the contract establishing the trust).
Choices as to type of business trust include grantor, simple, and complex. We strongly recommend against a grantor trust because it offers little to no protection of privacy or assets. A simple business trust functions solely to provide and distribute profits to its investors. A complex business trust also allows for distribution to charitable beneficiaries.
As the creator of the Socially Responsible Business Trust™, I obviously prefer the complex business trust. Aside from the altruistic aspect, a complex trust offers a much stronger defense if the trust ever suffers a challenge in court.
So, the business owner has decided on the type of trust. Now comes the question, where do they get their indenture? If you search Google for business trust examples, or something similar, you will find a variety of examples, along with ads for “Putting your business in a trust.” No, Legal Zoom, I don’t want to put my business into a living trust.
The options you discover will run the gamut from a few pages up to 18 or 20 pages, and prices ranging from free to a few thousand dollars. So, why would you want to spend $5,000 for your indenture from The OWL Project?
Let’s say you decide you need a building to house and protect your family’s valued belongings. Would you feel more secure with a “lightly used” unit you could pick up from a nearby mobile home park, or would you rather have an experienced architect work with a top notch contractor to create the structure? Under normal conditions either will keep its contents safe and dry.
If you honestly believe that you know everything you need to know about how to run your trust, that things will always remain normal, that no one would ever challenge your trust, and that your business will never need protecting, then, by all means, opt for one of the lower priced options.
Or, you can choose the Socially Responsible Business Trust™ from the OWL Project. Not only do we include your indenture, but you also get training in how to set up and run your trust, as well as a full set of Policies and Procedures for the Socially Responsible Business Trust™, which serve as a handbook and owner’s manual for your trust.
As we stated in Part 2:
“We had the person who, in 2006, organized and rewrote the master indenture for Frank Ozak and Gwenn Wycoff use his copy of that rewrite as the basis for our indenture. While he was editing and adapting the indenture to work as a business trust, he also included features to make it a Socially Responsible Business Trust™.
We believe our indenture equals or exceeds every business trust indenture we have seen when it comes to protecting your business and your privacy. Other indentures we have seen include the BLACKROCK INNOVATION AND GROWTH TRUST, from the Blackrock Investment Group, and the indenture setting up the trust for the J. Paul Getty Museum. These people obviously had the money to hire the best attorneys to write their indentures, and while the indentures do a great job of protecting the businesses, the fact that we have read them tells you all you need to know about how well they protected privacy.
But, remember where the real difference lies; in the details. Without including the full 26 pages of the indenture, we will share some of the details that protect you, your business, and your privacy:
- Your trust, created under the common law of contracts, protected by Article 1, Sec. 10, Para. 1 and Amendment 14, Sec. 1, of the United States Constitution, does not rely on the statutes of any state or of the United States of America, and does not depend upon any statute for its existence.
- As an expressly irrevocable trust, the settlor has neither the right, nor the power to amend or make any other changes to the indenture.
- While declaring the trust as domiciled in the state of its initial creation, the indenture allows for a change of domicile “to any other state or Nation as shall be deemed prudent, wise, necessary, or appropriate by the Board of Trustees of this Trust Organization.”
- The indenture allows for termination of the Trust Organization “only with the consent and approval of all the Trustees, and all parties having interest in the Trust Organization, vested or contingent.”
- The requirement for an Adverse Trustee, as set forth in the Indenture, ensures the legal classification of the Trust Organization as an irrevocable trust.
- Anticipating inevitable changes, and providing for a smooth transfer when change occurs, the Indenture stipulates:
“Upon the appointment of such successor Trustee any attorney-in-fact, agent, custodian or depository of the property comprising the Trust Organization or income thereof shall forthwith become the same for such Successor Trustee without the necessity of executing or filing any papers or any further act.” - The Indenture allows for a Trust Protector with the duty to, “secure and protect the present and contingent distribution rights of the Shareholders; the Trust property, which provides substances to said rights; and to protect the Trust from any actions by its fiduciaries which could be determined harmful or destructive to the Trust Estate, or which might bring discredit upon the Trust Organization.”
- About that privacy we mentioned earlier. The Indenture covers it in § 39, which requires:
“An Oath of Privacy and either an employment agreement or an independent contract agreement is signed before the person is given any significant information regarding the internal workings of the trust.“
Of course we include the Oath as part of the Socially Responsible Business Trust™ package. - Recognizing the facts that the courts do not necessarily understand trusts, and any court case risks exposure of private Trust matters, the Indenture calls for arbitration and mediation to resolve problems.
- And, last but not least (actually in § 2 of the Indenture), we include the full section on Social Responsibility. Analogous to a B Corp, this allows your trustees to base their decisions on the impact on all stakeholders, not just investors.
While we obviously have the Indenture (and used it to set up The OWL Trust Project), we have not completed the Policies and Procedures for the Socially Responsible Business Trust™, nor have we finished work on the training we intend to supply. To receive notice when we have the package available, register your interest at The OWL Trust Project.
Footnotes:
- A California business trust is not required to register with the California Secretary of State. A business trust formed outside of California, and doing business in California is required to register with the California Secretary of State. If you are not in California, please check your state laws
- https://www2.deloitte.com/content/dam/Deloitte/us/Documents/financial-services/us-fsi-california-ftb-says-ric-business-trusts-do-not-owe-minimum-franchise-tax.pdf