Avoiding Sham Trusts and Trust Schemes – Part I – Sham Trusts

Avoiding Sham Trusts and Trust Schemes – Part I – Sham Trusts




authentic trusts are tools used by qualified estate planners and their clients to unprotected to certain objectives, including, but certainly 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 improper purposes. Lurking in the shadows are con artists who promote sham trusts and trust scams for their own gain. These con artists rely on the ignorance of the public, and only education and information can prepare you for their pitch.

Sham trusts and trust scams are usually sold at high pressure seminars, by door-to-door salesmen, and on the internet. In some situations, they are recommended by well meaning but poorly informed CPA’s, financial advisors, friends, or business acquaintances. The marketing techniques can be persuasive, and are aimed at all classes of people.

What is a Sham Trust?

A sham trust is any trust produced for an improper or illegal purpose. For example, “trusts” or “contracts” which purport to avoid, or considerably reduce, all taxes, including all income taxes, for individuals and, in some situations, businesses, are almost always sham trusts. These often use a complicate structure that involves the “irrevocable” move of your assets to one or more business or trust entities which you control. The promoters claim that the arrangement will considerably reduce or eliminate state and federal income taxes.

Although there are authentic estate tax objectives that may be achieved with trust planning, income tax planning is quite a different matter. Generally speaking, someone is going to have to report taxable income, in addition as pay income taxes thereon. While there are authentic credits, deductions, and exemptions obtainable under state and federal law, there is no trust or business entity into which you can convey all of your character and thereby avoid all income taxes. These trusts sometimes come with seductive names. additionally, when the justification for the trust somehow involves the unconstitutionality of the IRS or of income taxes, you are best advised to seek additional or alternate legal counsel.

Another shared illegal purpose for which sham trusts are marketed to the unsuspecting public is the avoidance of the claims of existing creditors. Most states have laws which make unlawful transfers of character to avoid existing or current creditors. These laws, often called fraudulent conveyance or move acts, ensure that persons do not move all of their character to a related person or entity in order to avoid claims. In addition, bankruptcy trustees have rights to character in contemplation of insolvency of a debtor, and to character transferred which prefers one class of creditor over another.

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

How To Recognize a Sham Trust

The name of the trust can often help clarify the trust as a sham. Sham trusts have a variety of forms and names, such as “Freedom Trusts,” “Constitutional Trusts,” “Pure Trusts,” “shared Law Trusts,” “Unincorporated Business Associations,” “Business Trusts” (not to be confused with authentic Massachusetts Business Trusts), and “Family Trusts” (not to be confused with authentic 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 clarify the trust as a sham. For example, an “deliberately Defective Grantor Trust, ” sounds bad, but is a well accepted technique for “halting” the value of your estate for estate tax purposes. So ask yourself if the purpose of the trust seems proper. If the trust seems too good to be true, it 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 into retirement savings, the trust may be a sham. If the trust is promoted to avoid all of the claims of creditors, including existing creditors and the government, the trust is likely a sham.

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

An additional information, consider the Martindale-Hubbell® Peer Review Rating,(TM) and the Martindale-Hubbell® Client Review Ratings,(TM) obtainable here. Based upon self-reported specialized credentials and other fact-based performance data, the Peer Review Ratings contribute to a comprehensive view of a lawyer, which can help you clarify, estimate and select the most appropriate lawyer for a specific task. Martindale-Hubbell® Lawyer Ratings serve as an objective indicator that a lawyer has the highest ethical standards and specialized ability.

Similarly, you should request and verify the specialized licensing of any advisor recommending or selling any investment, insurance, or annuity. The authentic specialized will encourage, instead of discourage your verification, and will ease your investigation by, for example, proving numbers for the state department of insurance, the SEC, Comptroller General, or the like.

Another way to determine the validity of the claims made by a trust promoter is to compare them to materials published by third parties in magazines, newspapers, and books. Materials that are used to sell sham trusts often contain incorrect references to the Constitution, references to court situations that have been overturned or changed by statute, and often cite scripture. An attorney will always be able to provide you with articles from popular or specialized publications which discuss the use of authentic trusts and business arrangements. In fact a specialized will usually encourage you to have a greater understanding of the authentic estate planning technique, and will never discourage you from learning as much as possible about the arrangement, or its costs and benefits.

Scam artists will usually discourage you from seeking additional information. They might suggest that the government conspires with the media to suppress truthful information that might sustain their claims. They might already suggest that the efforts of the government to shut down such scam artists proves how worried they are that the truth not come out! One con man successfully made such arguments to continue marketing his plans after being indicted for tax evasion!

They might already caution you against having your CPA or attorney review the documents they sell to you. They often say that CPA’s and attorneys simply do not understand them, or have a vested interest or bias against them. While it may be true that certain attorneys or CPA’s may dislike or have biases against authentic estate planning techniques which they may not fully understand or appreciate, or with which they have little experience, no authentic specialized will discourage you from seeking additional advice or counsel. additionally, it is a sign of confidence in the advice that an attorney is giving you that the attorney welcomes a second opinion, or agrees to provide documents for review by another attorney or trusted advisor.

Some con artists discourage your education by suggesting that you do it “now.” Beware of seminars where materials or sets are sold only closest following the presentation, especially if large groups of people literally run to the back of the room to buy materials. It is well known that con artists will use “plants” or “shills” to encourage people to “go along” with the group by purchasing materials. The shills, and/or the promoter may already resort to making comments disparaging or embarrassing those few who do not go along. The bottom line is that there is no replace a specialized service performed professionally. authentic professionals use time to inform and educate their clients, in addition as to learn the specific circumstances of their clients, so that an estate or financial plan is tailored to the needs and expectations of the client.

Risk of a Sham Trust

Trusts and business arrangements that are marketed as a way of avoiding all or a substantial amount of income tax are almost always illegal. The IRS considers these “abusive arrangements.” Any person who creates one of these trusts will, when caught by the IRS, have to pay all back taxes owed, interest, and penalties. Remember that failure to report or pay taxes upon income may be a crime. Criminal sanctions are often imposed upon all who participate in the promotion of abusive trusts, if they can be located. A move of real estate to a sham trust may consequence in a reassessment by the county appraiser, resulting in considerably greater character taxes. And, of course, usually the promoters of these trusts are long gone when you need assistance or get into trouble.

There are often minor point unintended costs and expenses associated with these sham trusts. For example, move of your real character to a sham trust may consequence in loss of a homestead exemption, or speeding up of your mortgage. You may learn too late that your insurance coverage no longer covers character transferred to a sham trust. The reality is that since these trusts are shams, they are not well thought out and conceived, and consequently there can be many unintended negative consequences.

If You Think You May Have a Sham Trust

If you think you may have a sham trust, see an attorney closest. Do not return 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 attorneys will review your trust for a moderate fee; some will review the trust for free (although, there may be a moderate fee if you want a written legal opinion). The sooner that you learn whether your trust is authentic, the better.

Proper estate planning requires consideration of your specific needs, goals, and circumstances. When performed correctly, by competent professionals, estate planning can accomplish much. When estate planning is done incorrectly, or for improper purposes, much may be lost.




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