Avoiding Shell Trusts and Trust Schemes – Part I – Shell Trusts
Legitimate trusts are tools used by qualified estate planners and their clients to accomplish certain goals, including, but not limited to, controlling the disposition of assets, avoiding probate, reducing administration costs, saving estate taxes, and preserving family heritage for future generations. Unfortunately, trusts are often used for inappropriate purposes. Lurking in the shadows are scammers promoting fictitious trusts and trust scams for their own benefit. These scammers rely on the public’s ignorance, and only education and information can prepare you for their pitch.
Fake trusts and trust scams are often sold at high-pressure seminars, by door-to-door salespeople, and on the Internet. In some cases, they are recommended by well-meaning but misinformed CPAs, financial advisors, friends or business acquaintances. Marketing techniques can be persuasive and are aimed at all kinds of people.
What is a Fake Trust?
A simulated trust is any trust created for an improper or illegal purpose. For example, “trusts” or “contracts” purporting to avoid or significantly reduce all taxes, including all income taxes, for individuals and, in some cases, businesses, are almost always bogus trusts. These often use a complex structure that involves the “irrevocable” transfer of your assets to one or more business entities or trusts that you control. Promoters claim the deal will significantly reduce or eliminate state and federal income taxes.
While there are legitimate estate tax goals that can be achieved with trust planning, income tax planning is quite a different matter. Generally speaking, someone will have to declare taxable income as well as pay the appropriate income taxes. While there are legitimate credits, deductions, and exemptions available under state and federal law, there is no trust or business entity to which you can transfer all your assets and therefore avoid all income taxes. These trusts sometimes come with seductive names. In addition, when the justification for the trust in any way involves the unconstitutionality of the IRS or income taxes, it is recommended that additional or alternative legal advice be sought.
Another common illegal purpose for which shell trusts are marketed to the unsuspecting public is to avoid the claims of existing creditors. Most states have laws that make illegal property transfers to avoid existing or current creditors. These laws, often referred to as fraudulent conveyances or acts of transfer, ensure that individuals do not transfer all of their property to a related person or entity to avoid claims. In addition, bankruptcy trustees have rights to property in anticipation of a debtor’s insolvency, and to transferred property that gives preference to one class of creditor over another.
Although it is possible to protect assets from creditors, the creditors you must protect assets from must be future creditors. Also, asset protection trusts and business entities have issues that you’ll want to consider carefully. Giving all your assets to the trustee of an irrevocable trust, for example, even if that trustee is one of your children, carries risks that you should consider.
How to recognize a false trust
The name of the trust can often help identify the trust as a sham. Fake trusts come in a variety of forms and names, such as “Liberty Trusts”, “Constitutional Trusts”, “Pure Trusts”, “Common Law Trusts”, “Unincorporated Business Associations”, “Business Trusts” (which must not be confused with legitimate trusts). Massachusetts Business Trusts) and “Family Trusts” (not to be confused with legitimate revocable family trusts), and my personal favorite, the “Patriot Trust.” They often use combinations of names, such as “pure business trusts.”
But the name may not always identify the trust as a sham. For example, an “intentionally defective grantor trust” sounds bad, but it is a well-accepted technique for “freezing” the value of your estate for estate tax purposes. So ask yourself if the purpose of the trust seems adequate. If trust seems too good to be true, it just might be! For example, if the trust is promoted to avoid all income taxes, change nondeductible personal expenses into deductible business expenses, or redirect all or most of a person’s ordinary income to retirement savings, the trust may be a farce If the trust is promoted to avoid all creditor claims, including existing creditors and the government, the trust is likely to be a sham.
Your best protection against a trust scheme is the involvement of a legitimate attorney, licensed to practice law in your state. If another professional refers you to an attorney, it is always a good idea to verify that the attorney is licensed by the Supreme Court of his or her state to practice law. Most states maintain disciplinary actions against attorneys as public records available through state or local bar associations.
For additional information, consider the Martindale-Hubbell®, (TM) Peer Review Rating and Martindale-Hubbell®, (TM) Customer Review Ratings available here. Based on self-reported professional credentials and other fact-based performance data, peer review ratings contribute to a comprehensive view of an attorney, which can help you identify, evaluate, and select the most appropriate attorney for a task. specific. Martindale-Hubbell® Lawyer Ratings serve as an objective indicator that a lawyer has the highest ethical standards and professional ability.
Similarly, you should apply for and verify the professional license of any adviser who recommends or sells any investment, insurance, or annuity. The legitimate professional will encourage, rather than discourage, your verification and make it easier for you to investigate, for example, by testing numbers for the state insurance department, the SEC, the Comptroller General, or the like.
Another way to determine the validity of claims made by a Trusted Promoter is to compare them to materials published by third parties in magazines, newspapers, and books. Materials used to sell fictitious trusts often contain incorrect references to the Constitution, references to court cases that have been overturned or changed by law, and often quote Scripture. An attorney will always be able to provide you with articles from popular or professional publications that discuss the use of legitimate trusts and business arrangements. In fact, a professional will usually encourage you to have a greater understanding of legitimate estate planning technique and will never discourage you from learning as much as possible about the arrangement or its costs and benefits.
Scammers will usually discourage you from seeking additional information. They might suggest that the government is colluding with the media to suppress truthful information that might support its claims. They might even suggest that the government’s efforts to crack down on these scammers show how worried they are that the truth won’t come out! A scammer successfully made such arguments to continue marketing his plans after being charged with tax evasion!
They might even warn you not to have your CPA or attorney review the documents they sell you. They often say that CPAs and lawyers just don’t understand them, or that they have a vested interest or bias against them. While it may be true that certain attorneys or CPAs may dislike or be prejudiced against legitimate estate planning techniques, which they may not fully understand or appreciate, or have little experience with, no legitimate professional will dissuade you from seek advice or further advice. Also, it is a sign of confidence in the advice being given by an attorney that the attorney welcomes a second opinion or agrees to provide documents for review by another trusted attorney or advisor.
Some scammers discourage your education by suggesting you do it “now.” Beware of seminars where materials or services are sold only immediately after the presentation, especially if large groups of people literally run to the back of the room to purchase materials. It is well known that scammers will use “plants” or “accomplices” to encourage people to “side” the group by purchasing materials. The accomplices and/or the promoter may even resort to making disparaging or embarrassing comments to the few who do not participate. The bottom line is that there is no substitute for a professional service professionally performed. Legitimate professionals spend time informing and educating their clients, as well as learning about their clients’ specific circumstances, so that an estate or financial plan is tailored to the client’s needs and expectations.
Risk of a false trust
Trusts and business agreements that are marketed as a way to avoid all or a substantial amount of income tax are almost always illegal. The IRS considers these “abusive agreements.” Anyone who creates one of these trusts, when caught by the IRS, will have to pay all back taxes, interest, and penalties. Remember that failure to file or pay income taxes can be a crime. Criminal penalties are often imposed on all who participate in the promotion of abusive trusts, if they can be traced. A transfer of real estate to a fictitious trust may result in a reassessment by the county assessor, resulting in significantly higher property taxes. And of course, usually the promoters of these trusts are long gone when you need help or get into trouble.
There are often unintended incidental costs and expenses associated with these bogus trusts. For example, transferring your real estate to a living trust may result in the loss of a homestead exemption or acceleration of your mortgage. You may find out too late that your insurance coverage no longer covers property transferred to a fictitious trust. The reality is that since these trusts are bogus, they are not well thought out or conceived and consequently there can be many unintended adverse consequences.
If you think you may have a false trust
If you think you may have a fake trust, see an attorney right away. Do not return to the person(s) who provided you with the trust until you have obtained an independent opinion that the trust or business agreement is valid. Most estate planning attorneys will review your trust for a nominal fee; Some will review the trust for free (although there may be a nominal fee if you want a written legal opinion). The sooner you know if your trust is legitimate, the better.
Proper estate planning requires consideration of your specific needs, goals and circumstances. When done correctly, by competent professionals, estate planning can accomplish a lot. When estate planning is done incorrectly or for the wrong purposes, much can be lost.