The architecture, the entity choices, the money flow, and the
filings — built on statute and published IRS guidance, with the marketed tax theory
stripped out. Wisconsin-grounded, federally sourced.
The one-paragraph answer.
Put an irrevocable non-grantor complex discretionary spendthrift trust at
the top. The trust owns 100% of a holding LLC. The holding LLC owns
each operating business in its own LLC and holds appreciating assets in
separate asset LLCs that lease to the operating companies at fair market
rent. Everything below the trust is an LLC — not an S corp (a non-grantor
trust is an ineligible S shareholder under IRC §1361(b)(1)(B)) and not a C corp (double
tax, no step-up). Income flows up on K-1s to the trust, which either distributes it to
beneficiaries at their rates or accumulates it at the trust's compressed rates. Nothing
is in your probate estate, and nothing depends on a contested tax theory.
The ownership stack
Who legally owns what, and why each layer exists
Legal ownership flows downward. Liability is contained sideways.
Every box has its own EIN, bank account, and books.
Ownership leaves the settlor permanently. Because the settlor is not a permissible beneficiary, a settlor's judgment creditor has no hook; because distributions are discretionary, no beneficiary holds an attachable interest.
Authority: Wis. Stat. §701.0502 (spendthrift), §701.0504 (discretionary interest is not property or an enforceable right), §701.0505(1)(a)2 (settlor's creditor may reach an irrevocable trust only if the instrument authorizes payments to the settlor)
02
Holding LLC
Manager-managed · partnership or disregarded for tax
Owns
Membership interests in every entity below — and nothing else
Tax identity
Own EIN — Form 1065 + K-1 up to the trust (or disregarded)
One clean ownership choke point, so the trust is never re-papered when a business is added or sold, and a charging-order wall between an operating judgment and the rest of the family's assets.
Authority: Wis. Stat. §183.0503(8) — the charging order is the exclusive remedy by which a judgment creditor may satisfy a judgment from a member's transferable interest
03
Operating LLCs
One per business · partnership or disregarded
Owns
The business. Deliberately thin on assets.
Tax identity
Own EIN — Form 1065 + K-1, payroll, 1099s
Each is a liability bulkhead. All the risk — employees, customers, vehicles, contracts, licensure — lives here, and only here. This is where a converted former S corporation lands.
Authority: IRC §1361(b)(1)(B) — a non-grantor trust is NOT an eligible S shareholder
04
Asset LLCs
Real estate · equipment · intellectual property
Owns
The appreciating and passive assets, leased down to the operating LLCs
Tax identity
Own EIN — Form 1065 or disregarded; rents on Schedule E
The building and the equipment never sit inside the entity a plaintiff sues. They are leased to the operating company at documented fair market rent.
Authority: IRC §162(a)(3) (rent deduction), Reg. §1.469-2(f)(6) (self-rental recharacterization), Reg. §1.199A-1(b)(14) (rental to a commonly controlled passthrough is a trade or business for §199A)
Money flow
Where every dollar goes, and what it is called when it gets there
The compressed brackets are why a complex trust's default should usually be to
distribute income to beneficiaries in lower brackets.
1
Customers pay the Operating LLC
Ordinary revenue. Nothing exotic happens here.
2
Operating LLC pays wages / guaranteed payments to people who work
Including the owner. Reasonable compensation, subject to FICA or SE tax. This is not optional and cannot be routed through the trust.
Net profit flows up on Schedule K-1 to the Holding LLC
Holding LLC files Form 1065 and issues its own K-1 upward.
Subchapter K
5
Holding LLC's K-1 lands on the Trust's Form 1041
The trust is the taxpayer of record for everything it retains.
IRC §641 et seq.
6a
Trustee distributes DNI → beneficiary K-1s
Income is taxed to the beneficiaries at their individual rates. This is the default that a complex trust should usually take.
IRC §§661–662; §663(b) 65-day election (2026 deadline: March 6)
6b
…or the trustee accumulates it inside the trust
Taxed at the trust's compressed rates: 37% above $16,000 of retained taxable income for 2026, plus the 3.8% net investment income tax at the same threshold — roughly 40.8% combined on retained ordinary income.
A revocable trust avoids probate but provides zero creditor protection — Wis. Stat. §701.0505(1)(a)1 subjects its property to the settlor's creditors during the settlor's lifetime.
Holding
LLC — partnership or disregarded
S corporation
IRC §1361(b)(1)(B): an irrevocable non-grantor trust is an ineligible shareholder. The S election terminates on the first day it holds the shares.
Holding
LLC — partnership or disregarded
C corporation
Double taxation; accumulated earnings tax (§531) and personal holding company tax (§541) exposure on a passive holdco; no §1014 step-up on stock excluded from the estate.
Operating
LLC — partnership or disregarded
S corporation held by the trust
Same ineligible-shareholder problem. The workarounds both defeat the design: a QSST (§1361(d)) allows one beneficiary and forces full current distribution; an ESBT (§1361(e)) taxes the S portion at the highest individual rate with no distribution deduction.
Operating
LLC electing C treatment (Form 8832)
—
Occasionally justified for fringe benefits or retained capital. Costs the §199A benefit on self-rental (Reg. §1.199A-1(b)(14) needs a passthrough lessee, not a C corp) and reintroduces double tax.
Asset
LLC — disregarded or partnership
Any corporation
Appreciated real estate inside a corporation cannot be extracted without a taxable distribution. The most common irreversible mistake in this area.
Why the 15-year-old S corp becomes an LLC and not a C corp.
The moment a non-grantor trust holds S stock, the S election terminates
(IRC §1361(b)(1)(B)). The two ways to keep it — a QSST (one beneficiary, all income
distributed) or an ESBT (S portion taxed at the top individual rate, no distribution
deduction) — each defeat the discretionary, accumulating design. A C corp is permitted
but costs you entity-level tax, dividend tax, §531/§541 exposure on a passive holdco,
and the §1014 step-up anyway. Read the migration research →
The two trustees
Splitting the offices is what keeps the trust non-grantor
Role
Who
Powers
Authority
Trustee A — Independent
Not related or subordinate within IRC §672(c): not the settlor, spouse, ancestor, descendant, sibling, employee, or subservient party
SOLE discretion over distributions to beneficiaries; signs the Form 1041
IRC §674(c) — broad powers are exempt when no more than half the trustees are related or subordinate
Trustee B — Family cotrustee
Typically a beneficiary-generation family member
Investment, administration, records, banking. NO distribution discretion.
Wis. Stat. §701.0703 — cotrustee duties, delegation, and majority decision
Trust Protector / directing party
A third party. The Red River / Master's format calls this the 'Compliance Overseer'.
Remove and replace trustees, break deadlock, amend administrative provisions, change situs
Wis. Stat. §701.0808 — directed trusts; UTC §808
Wisconsin's cotrustee rule (§701.0703) lets cotrustees who cannot reach
unanimity act by majority — which with exactly two trustees means unanimity.
Draft an explicit tie-breaker, or a two-trustee deadlock freezes the trust.
Each cotrustee also carries an affirmative duty to prevent and redress the other's breach.
Guardrails
The rules that keep this lawful, filed, and left alone
The settlor is not a trustee and not a beneficiary
Keeps the trust non-grantor under §§673–677, keeps the §674(c) independent-trustee exception clean, and preserves Wisconsin's §701.0505(1)(a)2 protection.
No §675(4)(B) power of substitution
That is the classic intentional grantor-trust switch. Omit it deliberately.
The settlor never uses trust property for free
IRC §2036(a)(1) pulls retained possession or enjoyment back into the gross estate at date-of-death value, no matter how irrevocable the paperwork was. Renting to an operating LLC is fine; personal use is not.
Do not run the §643(b) 'income allocated to corpus is not taxable' position
IRS Chief Counsel Memorandum AM 2023-006 addresses this exact marketed product and concludes the reading fails — income assigned to corpus remains taxable. The memo also states that a form being 'copyrighted' is not a tax characteristic.
Personal expenses are never trust deductions
The IRS names 'deductions for personal expenses paid by the trust' and 'depreciation deductions of an owner's personal residence and furnishings' as abusive-arrangement hallmarks. A trust paying a beneficiary's personal expense is making a distribution, which carries DNI out on a K-1.
Do not claim the structure eliminates self-employment tax on your own labor
Routing personal-services income through a trust is an assignment-of-income scheme and a named hallmark of an abusive trust arrangement.
Fund only while solvent, and document it
Wisconsin's Uniform Voidable Transactions Law (ch. 242, renamed by 2023 Wis. Act 246) reaches back 4 years, or 1 year from reasonable discovery if later (Wis. Stat. §893.425). Keep a dated solvency affidavit and balance sheet.
Do not use this as a response to a pending family-law matter
Child support and family support are exception creditors nearly everywhere and are not defeated by a spendthrift clause. Transfers made under a cloud are voidable and damage credibility with the court.
Separate bank accounts, books, EINs, and signatures for every entity
Courts pierce for exactly this kind of sloppiness. Every dollar crossing a layer boundary needs a written agreement behind it.
Arm's-length pricing with a file behind it
Comparables for rent, an engagement letter for management fees, a reasonable-compensation study for wages. Overpayment is recharacterized; underpayment fails to move the income.
Draft an explicit two-trustee tie-breaker
Wis. Stat. §701.0703 lets cotrustees act by majority — which with exactly two trustees means unanimity. Without a tie-breaker the trust deadlocks. Each cotrustee also has an affirmative duty to prevent and redress the other's breach.
Run the basis arithmetic before giving anything away
Rev. Rul. 2023-2: assets of an irrevocable trust not included in the gross estate get no §1014 step-up. With a $15,000,000 per-person exclusion for 2026 (Rev. Proc. 2025-32), an estate comfortably under the exclusion saves no estate tax and loses the step-up — usually a net loss.
Using the reviewed spendthrift format as the drafting guide
What is ordinary trust law, and what is the marketing that draws the audit
Keep — ordinary, defensible provisions
Irrevocable, non-grantor, complex, discretionary, spendthrift character
Independent trustee holding distribution discretion
The 'Compliance Overseer' office — renamed Trust Protector and grounded in Wis. Stat. §701.0808
Certificate of Trust (a real statutory instrument — Wis. Stat. §701.1013 / UTC §1013)
Schedule A corpus schedule and Letter of Conveyance as evidence of funding
Certificate of beneficial interest, as evidence of designation only
No-contest clause
Drop — the parts that draw the audit
The §643(b) 'income allocated to corpus is not taxable' theory Rejected in IRS Chief Counsel Memorandum AM 2023-006 (Aug. 2023).
'Works identically in every state because it is federal law' Trust validity, spendthrift enforceability, creditor exceptions, and perpetuities are state law and vary materially.
Elimination of self-employment tax on the settlor's own labor Assignment of income. A named IRS abusive-arrangement hallmark.
Payment of personal expenses as trust deductions A named IRS abusive-arrangement hallmark.
Settlor as a permissible beneficiary Forfeits the Wis. Stat. §701.0505(1)(a)2 protection that makes the structure work.
Government sources
Where the forms, the statutes, and the filings actually live
Form 709 — Gift (and GST) Tax ReturnFiled by the settlor for the year of funding, with adequate disclosure under Reg. §301.6501(c)-1(f) to start the 3-year clock on the valuation.
FinCEN — Beneficial Ownership InformationUnder the March 26, 2025 interim final rule, entities created in the United States are exempt; only foreign-formed registered entities report. The final rule is still unpublished — re-check before every formation.
This page is research, not advice. Every number, election, and deadline
must be confirmed against the current-year IRS revenue procedure and reviewed with a
licensed estate-planning attorney and a CPA before anything is signed or filed. The
deemed-liquidation tax on an S-corp conversion, and the §1014 basis trade-off on
irrevocable gifting, both decide whether this structure makes or loses money for a
specific family.