Sham Trusts vs. Wills (MATA)

[Parvati]

One of the issues some of the MATA customers/victims/whatever are dealing with is what to do about wills that were never administrated properly because they believed that the wills were invalidated by MATA's trusts.

While the government has been maintaining that MATA produced sham trusts, a few of the attorneys who have been enlisted to deal with the aftermath seem to be divided on the subject. Some have said that the trusts are valid as written but that they have not been properly managed, others have declared the trusts to be utter garbage and not worth the ink they were printed with. (To the best of my knowledge, they are boilerplate documents, identical save the names and addresses of the people who purchased them.) If the trusts are invalid, should there be a retroactive distribution of the (remaining) assets, as the wills intended?

This is proving to be especially confusing for the elderly individuals who used MATA's services on the advice of their children. Is it possible that the DoJ will issue some kind of advice or guidelines to the people on MATA's customer list that will sum up the issue and suggest some ways that they can begin to set things to rights? (Or isn't that something they generally do in these situations? I realize that "Lawyer up," is almost certainly the best advice they could receive, but the elderly sometimes need a little more hand-holding than most, and under the circumstances, their children might not be the best people for the job.)

[LPC]

Whether a trust is a valid trust under state law is different from the question of whether the trust is a "sham" that is ignored for federal income tax purposes. As the Tax Court stated in Zmuda v. Commissioner:

When the form of the transaction has not, in fact, altered any cognizable economic relationships, we will look through that form and apply the tax law according to the substance of the transaction. [citation omitted] This rule applies regardless of whether the entity has a separate existence recognized under State law [citation omitted], and whether, in form, it is a trust, a common law business trust, or some other form of jural entity.

Zmuda v. Commissioner, 79 T.C. 714, 720 (1982) (emphasis added), aff'd 731 F.2d 1417 (9th Cir. 1984).

Because the validity of the trust is a question of state law, the US Department of Justice really has no say in what happens to the "trusts" that were created.

If a trust is not valid under state law, then the trust property reverts to the settlor of the trust and, if the settlor is dead, the property would become part of the deceased settlor's estate to be administered and distributed as part of the estate. If there is a will that has not been probated, then the will is probated now.

If a trust is valid under state law even though considered a "sham" for federal income tax purposes, then the trust continues and the trust property is administered according to the terms of the trust.

In states that have enacted the Uniform Trust Code, it may be possible to modify or even terminate a trust, even a trust that is expressly irrevocable, if the settlor is living and gives consent, along with all of the beneficiaries. (The UTC also provides rules that allow adult beneficiaries to give consent on behalf of minor or unborn beneficiaries.)

I'm often disappointed to find lawyers who are unable (or unwilling) to deal with unfamiliar situations and find practical solutions to problems. If they can't find a form in a book, or a precedent squarely on point, then they are unable to act except to insist on complicated and expensive court proceedings. Lawyers are supposed to be problem-solvers not problem-creators, and yet many lawyers seem to lack the courage to take the risks necessary to make situations better instead of worse.

[LPC]

One of the issues some of the MATA customers/victims/whatever are dealing with is what to do about wills that were never administrated properly because they believed that the wills were invalidated by MATA's trusts.

I'm not sure what that means. A will could never be "invalidated" by a trust. A will might become irrelevant if there are no assets in the decedent's name because all of the decedent's assets were transferred to a trust, but that's different. As I explained above, if a trust is recognized as invalid and the trust property reverts to the settlor's estate, then you simply begin the estate administration at that time.