The term business trust refers to an unincorporated organization that is created by a declaration of trust. A business trust does not receive a state-issued charter; however, it does provide the business with protections similar to those of a corporation.
Also referred to as a Massachusetts trust and common law trust, the structure and formation of a business trust is similar to other forms of this planning tool. The trust is created when the donor(s) or settlor(s) sign a declaration of trust, which provides instructions for the trustee. The assets placed in the trust are managed by the trustee, which has a fiduciary responsibility to the beneficiaries. These trusts will oftentimes conduct a number of business transactions, including the buying and selling of assets, such as real estate, in addition to stocks, bonds, and commodities.
The beneficiaries of a business trust receive certificates of beneficial interest, which acts as evidence of their entitlement to benefits derived from the trust. Certificates of beneficial interest can be transferred or sold to another party. All profits and losses generated by the trust are distributed proportionally to beneficiaries according to their holdings of beneficial interests in the trust. For income tax purposes, a business trust is treated the same way as a corporation.