This article are provided for information purposes only, and are not intended as legal advice.

Do tax structures which minimize income taxes help or hinder your bank financing?

September 17th, 2009

Many people do estate planning in order to save income taxes on the death of a parent. They may be very successful in saving money however there could be a problem for the surviving family members get financing for the business after the founder passes away.


This may be easier to describe by way of an example.  Dad owns a business in an operating company and owns the building which the operating business rents from him personally.  In order to avoid taxes on death, the tax planners transferred the building into a corporation.  Only the title was registered in the corporation, the actual ownership remained with the dad.  If an entity is the registered owner but not the beneficial owner,  it is called a bare trustee.  This is a method for someone to hide the real owners of the business from the public and also can be used for tax planning purposes.


During dad’s life, he put on a mortgage on the property.  When dad died, he transferred the shares that he owned and the building into a spousal trust.  A spousal trust is a tax structure which allows the surviving spouse to earn the income generated by the assets in the trust but the original capital will transfer to the ultimate beneficiaries, typically the kids, after the spouse passes away.


The owner of the operating company is a spousal trust.  The owner of the building is the spousal trust but some of the legal documents say it is owned by a company.  The business is the registered owner but the building is legally owned by the spousal trust.   This is a great tax structure however the banks do not understand it.  They do not know what a spousal trust is, they want to structure a loan in such as way that will taint the tax structure and cause the estate to owe over $1 million in taxes.


Although this was an excellent tax planning structure, the dad never anticipated that the trust needed to renew the mortgage.  If the financial institution does not understand the legal structure, in this market, they will turn down the financing and will not renew the loan.  Dad passed away in my example therefore the legal structure cannot be changed.


Saving taxes is an excellent idea but if you get too complex, the tax savings could be the least of the problems of the next generation, calling the loans because no one will renew a mortgage due to the complexity of ownership could create worse problems for the next generation.  This tax planning was done without thinking of the operational problems that was be created

Filed under: Tax Planning — Gary Landa @ 6:53 pm

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