Massachusetts business trust
Encyclopedia
A Massachusetts business trust (MBT) is a legal trust set up for the purposes of business, but not necessarily one that is operated in The Commonwealth of Massachusetts. They may also be referred to as an unincorporated business organization or UBO. Business trusts may be established under the laws of other U.S. states.

Many businesses are formed as MBTs to mitigate taxation; mutual fund
Mutual fund
A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors to buy stocks, bonds, short-term money market instruments, and/or other securities.- Overview :...

s in the U.S. are often structured as MBTs, though sometimes they are organized as Maryland corporations (or other states such as Minnesota). More recently, a Delaware statutory trust
Delaware statutory trust
A Delaware statutory trust is a legally recognized trust that is set up for the purpose of business, but not necessarily in the State of Delaware...

or DST has become a popular form of organization, and many new funds have been organizing as DSTs and exiting funds converting to DSTs. Since mutual funds are investment companies and not operating companies, many traditional corporation rules and requirements don't fit them well.

During the last century and through the mid years of this century the tax
Tax
To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...

 laws and State regulations strongly favored corporate structures, tightening of these laws in the past 10–15 years have resulted in the resurgence of the use of the UBO. For example, in 1985 the Scudder
Scudder
-People:* Alec Scudder, a character in Maurice and Maurice * Bernard Scudder, Translator from Icelandic to English* Bertram Scudder, a character in Atlas Shrugged* Franklin P...

 Capital Growth Fund, Inc. and Kemper
Kemper
Kemper may refer to:* Booz Allen Classic , was a regular golf tournament on the PGA Tour from 1968 to 2006...

 Money Market Fund, Inc. changed their forms of organization from a corporation to a business trust.

History

The business trust made its debut in Massachusetts
Massachusetts
The Commonwealth of Massachusetts is a state in the New England region of the northeastern United States of America. It is bordered by Rhode Island and Connecticut to the south, New York to the west, and Vermont and New Hampshire to the north; at its east lies the Atlantic Ocean. As of the 2010...

 in 1827. As a result, a U.S. business trust today is often called a "Massachusetts trust" in legal circles. The U.S. Supreme Court defined the Massachusetts trust as a form of business organization, common in Massachusetts consisting essentially of an arrangement whereby property is conveyed to trustees: in accordance with terms of the trust. The business is to be held and managed for the benefit of persons who hold transferable certificates issued by the trustees showing the shares into which the beneficial interest in the property is divided.

This method of transacting business in commercial enterprises originated in Massachusetts as a result of negative laws prohibiting the development of real estate without a special act of the legislature or in other words, without "permission" of the State . So, the Business Trust was created under Common-law right to contract to obtain legislatively constructed business organizations advantages but without having to gain "permission" to enter into a business activity and suffer under the burdens and restrictions that are placed on "statutorily constructed organizations".

It states on page 1681 of Black's Law Dictionary 4Ed., 1957, under the term "Massachusetts or Business Trust"; See "Trust Estate as Business Company." This particular definition is found on page 1684 and it states this:

TRUST ESTATE AS BUSINESS COMPANIES. A practice originating in Massachusetts of vesting a business or certain real estate in a group of trustees, who manage it for the benefit of the beneficial owners; the ownership of the latter is evidenced by negotiable (or transferable) shares. The trustees are elected by the shareholders, or in case of a vacancy, by the board of trustees. Provision is made in the agreement and declaration of the trust to the effect that when new trustees are elected, the trust estate shall vest in them without further conveyance. The declaration of the trust specifies the power of the trustees. They have a common seal; the board is organized with the usual officers of a board of trustees; it is governed by by-laws; the officers have the usual powers of like corporation officers; so far as practicable, the trustees in their collective capacity, are to carry on the business under a specified name. The trustees may also hold shares as beneficiaries. Provision may be made for the alteration or specified manner. In Eliot v. Freeman, 31 Sup. Ct. 360, 220 U.S. 178, 55 L. Ed. 424, it was held that such a trust was not within the corporation tax provisions of the tariff act of Aug. 5 1909 See also Zonne v. Minneapolis Syndicate, 31 S. Ct. 361, 220 U.S. 187, 55 L. Ed. 428 (Black's Law Dictionary 1957, 4Ed., page 1684)

Taxation

The terms "business trust", "Massachusetts trust", and "unincorporated business organization" are not used in the Internal Revenue Code
Internal Revenue Code
The Internal Revenue Code is the domestic portion of Federal statutory tax law in the United States, published in various volumes of the United States Statutes at Large, and separately as Title 26 of the United States Code...

. (The terms "business trust" and "Massachusetts trust" are used in other Federal laws to clarify that they are to be treated as corporations under those laws.) The regulations require that trusts operating a trade or business be treated as a corporation
Corporation
A corporation is created under the laws of a state as a separate legal entity that has privileges and liabilities that are distinct from those of its members. There are many different forms of corporations, most of which are used to conduct business. Early corporations were established by charter...

, partnership
Partnership
A partnership is an arrangement where parties agree to cooperate to advance their mutual interests.Since humans are social beings, partnerships between individuals, businesses, interest-based organizations, schools, governments, and varied combinations thereof, have always been and remain commonplace...

, or sole proprietorship
Sole proprietorship
A sole proprietorship, also known as the sole trader or simply a proprietorship, is a type of business entity that is owned and run by one individual and in which there is no legal distinction between the owner and the business. The owner receives all profits and has unlimited responsibility for...

, if the grantor (also known as a "settlor" or "trustor"), beneficiary or fiduciary (also known as a "trustee") materially participates in the operations or daily management of the business. If the grantor maintains control of the trust, then grantor trust rules will apply. Otherwise, the trust would be treated as a simple or complex trust, depending on the trust instrument.
(Source: www.irs.gov)

Federal income tax implications

For federal income tax purposes in the United States, there are several kinds of trusts: grantor trusts whose tax consequences flow directly to the settlor's Form 1040 (U.S. Individual Income Tax Return
Tax return (United States)
Tax returns in the United States are reports filed with the Internal Revenue Service or with the state or local tax collection agency containing information used to calculate income tax or other taxes...

) and state return, simple trusts in which all the income created must be distributed to one or more beneficiaries and is therefore taxed to the non-settlor beneficiary (e.g. the widow of a trust created by the late husband), whether or not the income is actually distributed (which can occur), and complex trusts, which are, in general, all trusts that aren't grantor trusts or simple trusts. Some trusts may alternate between simple and complex under certain conditions. Many but not all trust organizations do their own tax work. This can be highly specialized work.

All simple and complex trusts are irrevocable and in both cases any capital gains realized in the portfolios are taxed to the trust corpus or principal.
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