Taxes on LLC-Trust-Private Charitable Foundation

[JoshDom1898]

What is the name of your state (only U.S. law)? NV

I want to form a Nevada LLC whose sole member is a complex trust.

The trust will hold the intellectual property rights of several trademarks and copyrights. Revenue will flow into the LLC from sales of the material used to license such trademarks.

My understanding is that these are both pass through entities and the beneficiary of the complex trust would get taxed by a k-1 at the end of each year for monies distributed to the beneficiary. My question is what happens when the beneficiary is a 501c3 private charitable foundation (which I am the trustee of). It is a tax exempt entity.

Ex. #1: LLC makes $100,000 which at the end of the year gets distributed to the complex trust. The trust donates the $100,000 to the tax exempt foundation. Who gets taxed and at what rates(federally as Nevada has no state taxes).

Ex.#2: LLC makes $100,000 which is distributed to the complex trust. The complex trust puts $50,000 into the corpus of the trust and donates the remaining $50,000 to the private charitable 501c3 foundation. Who gets taxed what? (again federally as Nevada has no state taxes).

Thank you.

 

[tranquility]

My understanding is that these are both pass through entities and the beneficiary of the complex trust would get taxed by a k-1 at the end of each year for monies distributed to the beneficiary.

Maybe. Taxation can be at the trust or beneficiary for many things, but an irrevocable trust consisting of intangible assets which flow to an exempt entity is going to have a LOT of decisions at tax time. You need a tax professional to run through your plan.

Why do you want to do this? What is your goal?

My question is what happens when the beneficiary is a 501c3 private charitable foundation (which I am the trustee of). It is a tax exempt entity.

Any money they receive will not be for a charitable purpose, so they will have unrelated business income. (UBI) There is not exemption for income earned in the way people earn income. It's competition, you have to pay taxes to compete. (Unless this complex scheme developed over time, I'm thinking this will be the sad news for the OP.)

Also, are you sure you can have a non-person be a member of a Nevada LLC?

 

[JoshDom1898]

Maybe. Taxation can be at the trust or beneficiary for many things, but an irrevocable trust consisting of intangible assets which flow to an exempt entity is going to have a LOT of decisions at tax time. You need a tax professional to run through your plan.

Why do you want to do this? What is your goal?


Agreed on the tax professional. I am a writer and want to self publish my book. It is for asset protection and tax reduction purposes.

Any money they receive will not be for a charitable purpose, so they will have unrelated business income. (UBI) There is not exemption for income earned in the way people earn income. It's competition, you have to pay taxes to compete. (Unless this complex scheme developed over time, I'm thinking this will be the sad news for the OP.)

I've thought about this. The money is supposed to be donated to the foundation, thus not subject to UBI because for UBI to exist (I think) the foundation has to own the asset which is generating the revenue for it.

Also, are you sure you can have a non-person be a member of a Nevada LLC?

yes it can.

 

[tranquility]

There is no tax reduction in your plan. At best you will have tax compliance costs and, at worst, a huge mess. (KISS)

 

[JoshDom1898]

could you elaborate on why there isn't? I was told by a CPA this is a good set up for reducing taxes as the money given to the 501c3 is not taxable. I'm on this forum to confirm his advice.

 

[tranquility]

What is the advantage of this complex plan over the LLC distributing to you and you donating it to the charity? (I'm still not sure of your set up. Are we talking about estate issues or income issues? Why are you gifting all these rights to the charity?)

I recognize there are many tax situations it could be an advantage, but you haven't describe it yet. That's why looking at all the facts matter and you have to go to the guy you know and trust to interpret them for you.

 

[davew128]

could you elaborate on why there isn't? I was told by a CPA this is a good set up for reducing taxes as the money given to the 501c3 is not taxable. I'm on this forum to confirm his advice.

What happened when you asked him to explain the idea to you in form rather than end result? I mean seriously, you're jumping through hoops like a retriever because "my CPA said so", yet you're going on an internet forum to explain why he said what he did. Think about that.

 

[JoshDom1898]

Ok, I'll try to explain it as best as I can. I guess I'm looking for validation because I don't think it's as easy as he says. I feel like I'm missing something.

The LLC generates revenue through licensing of the trademarks and the sale of works using the trademarks (the published material).

The sole member of the LLC is a complex trust, which is a pass through entity and gives its beneficiaries a K-1 at the end of the taxable year.

However, because one of the beneficiaries of the trust is a non-profit organization which I am a co-trustee of, it qualifies as tax exempt except for UBTI. He says that because UBTI (per IRS publication 598 which requires that the exempt organization has to be the one to conduct the business).

So because the charity is exempt, the K-1 it files is basically $0 taxable dollars.

Does this make more sense? (I'm sorry, I'm trying the best I can. I don't know any other CPA's to verify his statements with).

 

[tranquility]

Sorry, I tend to be extremely good with such matters in general and in specific and I'm not seeing the benefit. I believe we'd have to talk to see the step I, or you, are missing.

All I'm getting is:
1. Collect underpants.
2. ?
3. Profit.

Thinking edit:
Wait! Was there mention of a charitable lead trust?

 

[JoshDom1898]

Not a Charitable Lead Trust specifically. I suppose the Complex Trust could be a CLUT or a CLAT, but I'm not sure.

I guess the benefit is that with the money going into the charitable foundation which I control and is tax exempt, I can get the most amount of my profit and retain control over my money without self employment taxes and other taxes which would typically burden a business.

So my understanding is i control 90% of my money in the foundation instead of 70% that I keep without the tax exemption...

 

[tranquility]

Whatever.

Trying to paper around reality is expensive and can run afoul of the law. You've presented nothing which is useful in helping you, so you you will have to rely on your advisors. I see nothing in your plan which does what you say unless you intend to commit tax fraud. You know, take advantage of the fuzziness of words in a casual sense and how that lack of precision causes difficulty in knowing what happens in reality. Some try to take advantage of that fuzziness, and the audit lottery, for tax benefit. You seem to smart enough to know the tax ramifications if they are explained to you, but you can't explain them to another.

Until you can, you should not do this. Period.