Avoiding Shell Trusts and Trust Plans – Part I – Shell Trusts


Legitimate trusts are tools used by qualified estate planners and their clients to achieve certain goals, including, but not limited to, controlling the disposition of assets, avoiding probate, reducing administration costs, saving estate taxes and preserving family wealth for future generations. Unfortunately, trusts are often used for inappropriate purposes. Hidden in the shadows are scam artists who promote bogus trusts and trust scams for their own gain. These scam artists rely on public ignorance, and only education and information can prepare you for their presentation.

Sham trusts and trust scams are typically sold at high-pressure seminars, door-to-door sellers, and on the Internet. In some cases, they are recommended by well-meaning but misinformed CPAs, financial advisors, friends, or business associates. Marketing techniques can be persuasive and appeal to all categories of people.

What is a fake trust?

A sham trust is a trust created for improper or illegal purposes. For example, “trusts” or “contracts” that seek to avoid or substantially reduce all taxes, including all income taxes, for individuals and, in some cases, businesses, are almost always trusts. fictitious. These often use a complex structure that involves the “irrevocable” transfer of your assets to one or more business or fiduciary entities that you control. Proponents say the arrangement 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 an entirely different matter. Generally speaking, someone will have to declare taxable income and pay taxes on it. While there are legitimate credits, deductions, and exemptions under state and federal laws, there is no trust or business entity into which you can transfer all of your assets and avoid all income taxes. These trusts sometimes have enticing names. Additionally, when the justification for the trust somehow involves the unconstitutionality of the IRS or income tax, it is best to seek additional or alternative legal counsel.

Another common illegal purpose for which fictitious trusts are marketed to the unsuspecting public is to avoid claims from existing creditors. Most states have laws that make transfers of property illegal to avoid existing or current creditors. These laws, often referred to as fraudulent acts of conveyance or conveyance, ensure that people do not transfer all of their property to a related person or entity in order to avoid claims. In addition, trustees in bankruptcy have rights to property in the event of a debtor’s insolvency and to transferred property that favor one class of creditors over another.

Although it is possible to protect the assets of creditors, the creditors whose assets you must protect must be future creditors. Additionally, asset protection trusts and business entities all have issues that you will want to consider carefully. Giving all your assets to the trustee of an irrevocable trust, for example, even if this trustee is one of your children, involves risks that you must consider.

How to recognize a false trust

The name of the trust can often help identify the trust as a sham. Sham trusts come in a variety of forms and names, such as “Freedom Trusts”, “Constitutional Trusts”, “Pure Trusts”, “Common Law Trusts”, “Unincorporated Business Associations”, “Business Trusts” (not to be confused with legitimate trusts). Massachusetts Business Trusts) and “Family Trusts” (not to be confused with legitimate revocable family trusts), and my favorite, the “Patriot Trust”. They often use combinations of names, such as “Pure Business Trusts”.

But the name doesn’t always identify the trust as a sham. For example, an “intentionally defective grantor trust” sounds bad, but it’s a well-accepted technique to “freeze” the value of your estate for estate tax purposes. So ask yourself if the purpose of the trust seems appropriate to you. If confidence seems too good to be true, it might be! For example, if the trust is promoted to avoid all income taxes, turn non-deductible 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 sham. If the trust is promoted to avoid all claims from creditors, including existing creditors and the government, the trust is likely a sham.

Your best protection against a trust scheme is the involvement of a legitimate attorney, licensed to practice law in your state. If you are referred to an attorney by another professional, it is always a good idea to verify that the attorney is licensed by your state’s Supreme Court to practice law. Most states keep disciplinary actions against attorneys as public records available from state or local bar associations.

For additional information, consider the Martindale-Hubbell® Peer Review Rating,(TM) and the Martindale-Hubbell® Client Review Ratings,(TM) available here. Based on self-reported professional references and other fact-based performance data, peer reviews contribute to a complete view of a lawyer, which can help you identify, evaluate and select the right lawyer. more appropriate for a specific task. Martindale-Hubbell® Lawyer Ratings serve as an objective indicator that a lawyer has the highest ethical standards and professional abilities.

Likewise, you should request and verify the professional license of any adviser recommending or selling an investment, insurance or annuity. The legitimate professional will encourage, rather than discourage, your verification and facilitate your investigation, for example, by providing numbers for the State Department of Insurance, SEC, Comptroller General, etc.

Another way to determine the validity of claims made by a trusted promoter is to compare them to material published by third parties in magazines, newspapers, and books. Documents used to sell sham trusts often contain incorrect references to the Constitution, references to court cases that have been overturned or changed by law, and often quote scriptures. A lawyer 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 generally encourage you to better understand the legitimate estate planning technique and never discourage you from learning as much as possible about the arrangement, its costs and its benefits.

Scammers will generally discourage you from seeking additional information. They might suggest that the government is conspiring with the media to suppress truthful information that might support their claims. They might even suggest that the government’s efforts to arrest these crooks proves how worried they are that the truth won’t come out! A scammer managed to make such arguments to continue marketing his plans after being charged with tax evasion!

They might even warn you about having your CPA or attorney review the documents they sell to you. They often say that CPAs and lawyers simply don’t understand them, or have a vested interest or bias against them. While it is true that some lawyers or CPAs may dislike or be prejudiced against legitimate estate planning techniques that they may not fully understand or appreciate, or with which they have little experience, no legitimate professional will discourage you from seeking further advice or guidance. Additionally, it is a sign of confidence in the advice a lawyer gives you that the lawyer welcomes a second opinion or agrees to provide documents for review by another lawyer or trusted advisor.

Some scammers discourage your education by suggesting you do it “now”. Beware of seminars where materials or services are not sold until immediately after the presentation, especially if large groups of people are literally running to the back of the room to buy materials. It is well known that scammers use “plants” or “accomplices” to encourage people to “follow” the group by purchasing hardware. The stooges and/or the promoter may even resort to derogatory or embarrassing comments for the few people who disagree. The bottom line is that there is no substitute for professional service performed in a professional manner. Legitimate professionals spend time informing and educating their clients, as well as knowing their clients’ unique 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 arrangements that are marketed as a way to avoid all or a significant portion of income tax are almost always illegal. The IRS considers these “abusive arrangements”. Anyone who creates one of these trusts must, when caught by the IRS, pay all back taxes owed, interest and penalties. Remember that failure to file or pay income taxes can be a crime. Criminal penalties are often imposed on anyone who participates in the promotion of abusive trusts, if they can be located. 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, the promoters of these trusts are usually long gone when you need help or are in trouble.

There are often incidental and unforeseen costs and expenses associated with these bogus trusts. For example, transferring your real estate to a fictitious trust may result in the loss of a homestead exemption or the acceleration of your mortgage. You may learn too late that your insurance coverage no longer covers assets transferred to a fictitious trust. The reality is that since these trusts are shams, they are not well thought out and designed, and as a result, there can be many unintended negative consequences.

If you think you have a false trust

If you think you have a false trust, consult a lawyer immediately. Do not go back to the person(s) who provided the trust until you have obtained an independent opinion that the trust or business arrangement is valid. Most estate planning lawyers will review your trust for a nominal fee. some will review the trust for free (although there may be a small fee if you want written legal advice). The sooner you know if your trust is legitimate, the better.

Good estate planning requires considering your specific needs, goals and circumstances. When done correctly, by knowledgeable professionals, estate planning can accomplish a lot. When estate planning is done incorrectly or for the wrong purpose, much can be lost.

Source by Monty L. Donohew, J.D.

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