Pure Trust vs. "Common Law/Contract Trust"?

[Parvati]

Given the ferocity of recent threads, I think it prudent to preface this post with a disclaimer. To that end: I am not a TP/TD. I am related to someone who certainly seems to fit that bill, but I choose to spend my time trying to talk him OUT of thinking that way. And I come in peace.

To put it another way... Please don't hurt me.

So, I have a question for those of you who are interested in trust law. My Sainted Relation (SR) is on a Pure Trust kick again. He threw some out-of-context quotes at me today (saying that he'd "looked them up on FindLaw") but it turns out they're cut-and-pasted directly from section IV. of this site: http://www.ira-wg.com/library/significa ... rusts.html

The ol' SR is claiming that the cites in section IV. of the web site above are court findings in support of his notion that "Pure Trusts are not subject to capital gains tax." Firstly, the site specifically mentions "common law" and/or "contract trusts", not "Pure Trusts." Are they all the same thing? (EDIT: My bad--their explanation of a "Pure" Trust is here: http://ira-wg.com/InformationResourceAssociates/.) (FWIW, I've been under the impression that Pure Trusts are, by and large, BS.)

While I am not a lawyer, the entire web site just smells fishy to me. I am looking up their cites one by one, but it seems like they're taking the quotes out of context. Does anyone have an opinion on any of this...?

[Demosthenes]

Pure trusts, common law trusts, contract trust and about a dozen other names are all the same thing.

"Pure Trusts are not subject to capital gains tax."

Absolutely true, nor are pure trusts subject to federal income taxes. This is because, for tax purposes, the trust is ignored, and all income and capital gains taxes pass through to the taxpayer.

[Nikki]

As soon as someone mentions 'pure' 'constitutional' 'common law' within six feet of the word 'trusts', put on your best running shoes and make tracks.

I'm sure your relative won't listen, but there are dozens of Tax Court and Criminal Court cases documenting how those theories are losers.

They cost gullible participants significants amount of penalties and sometimes jail time.

Next, it's usually a safe bet that if a legal, financial, or tax strategy is on the Internet and costs ANY money to get the details or documents it is bogus. Another good clue is that it wants payment by PayPal, blank postal money order (no PAY TO), or cash.

The red lights should be flashing by now.

Finally, visit the Tax Court opinion search site, enter "pure trust" in the text search area, and read the sad results.

[ASITStands]

In my experience ...

... which has been helping former tax protesters or tax deniers get straightened out ...

It matters little whether someone has a "pure trust," "common law trust" or "contract trust" (or, a corporation sole) if the income is accurately accounted for, meaning, if the beneficial recipient of the income accounts for its receipt by filing the proper tax returns.

It may be that there's unrelated business income (which simply means, income unrelated to the purposes of the trust or entity which is generated by some sort of business activity whether through employment, self-employment, business, profession or trade).

Study TITLE 26 > Subtitle A > CHAPTER 1 > Subchapter F > PART III

In other words, Pay the taxes!

Otherwise, you get in trouble like 'Nikki' suggested. The best way to convince your SR is to search tax court opinions (as suggested) and see how the courts have treated them.

There's normally nothing illegal about forming a trust (or some other entity). It's how it's used, and if someone suggests it can be used to avoid payment of taxes (though it can reduce taxes in some very limited instances), they're simply not telling you all the truth.

Be wary! Be very wary of anyone promoting a scheme to avoid taxation. It leads too easily to evasion, and it's simply not correct in law, as many here will tell you. Good luck!

[Farmer Giles]

I didnt mean to call you any names before, but you jumped in with a razz, so I have to razz back. i can't imagine what favor you think these people would ever show you. they will not help you or your loved ones. in real life, if they saw a dime in it someone would be happy to take it from you, but its not likely any good service would be rendered.

so trusts and all that are VERY USEFUL. Because whatever you can exclude from your own estate is immune from the final taxpayers liability. So the above point is actually useful, if you interpret it correctly. Tax liability passes through straight to the real debtor.

All personal liability of any sort goes direct to the Debtor. What if she hasn't got any thing to attach? that's called "judgement proof". So that tax lien cant be placed on a property that doesnt belong to the taxpayer.

Now some will surely pipe up here and say the "veil of ownership" can be easily pirced by a court order, but that's not really true. First, if its been long settled in a trust name, its less likely to be judged later. As long as there is no appearance of evasion or interference, its hard to prove anything otherwise. And this isnt all about taxes. I never have THAT problem, but my properties such as they are will ALWAYS be held in trust, to create some distance between me and that stuff. Go ahead and sue me; Ive got nothing to take.

There are many situations where trust documents are sufficient to get a job done. I have opened several bank accounts, titled real estate, mptpr vehicles (which is great because it keeps the warrants off the individual and leaves only a corporate responsibility in my experience)

The bigger picture here is the evolution away from HAVE. We dont need to OWN anything in order to enjoy it. Trusts and such are useful vehicles for all sorts of legal situations and even as a good way to promotoe harmony bewteen civil actors. Why would anyone "get" a state corporation? it just costs more money takes more effort and makes more responsibilities. maybe some have their reasons but it's not something most people probably need to think about.

[LPC]

so trusts and all that are VERY USEFUL. Because whatever you can exclude from your own estate is immune from the final taxpayers liability.

If you're saying that property held in trust is exempt from death taxes, you're going to be wrong more often than you're right.

For federal estate tax purposes, a trust is still included in the gross estate if the grantor retains the income or use of the property, or can control the income or use of the property. See IRC section 2036. So only if you give property in trust and *really* give it away, so you have no more interests in the trust or powers over the trust, have you made a completed gift (subjuect to gift tax) and the property is no longer subject to estate tax.

All personal liability of any sort goes direct to the Debtor. What if she hasn't got any thing to attach? that's called "judgement proof". So that tax lien cant be placed on a property that doesnt belong to the taxpayer.

Also wrong. At common law, and under section 505 of the Uniform Trust Code, the creditors of the grantor of a trust can attach all of the interests of the grantor in the trust, notwithstanding any "spendthrift clause" or other restraint on alienation. And, even if the grantor has not retained the *right* to the income or use of the property, but the trustee has the power to pay the income to the grantor or return the property to the grantor, the grantor's creditors can reach the trust property to the maximum extent of the powers of the trustee.

So, once again, if you set up a trust and retain the income or use of the property in the trust, or any possibility of receiving any property from the trust, your creditors can still reach that income, use, or property.

Some states (most notably Alaska, Delaware, and Missouri) have changed this result and allowed grantors to set up trusts that are not subject to the claims of the grantor's creditors, but those states are the exception to the rule.

Now some will surely pipe up here and say the "veil of ownership" can be easily pirced by a court order, but that's not really true. First, if its been long settled in a trust name, its less likely to be judged later. As long as there is no appearance of evasion or interference, its hard to prove anything otherwise.

All of the rules I've explained above are rules of law that have nothing to do with "piercing" any "veil of ownership," but there are several other principles that can come into play.

If a trust is set up with the *actual* intent of defrauding future creditors, then it is voidable by those creditors under the Uniform Fraudulent Transfer Act.

Similarly, if the terms of the trust would make the trust a taxpayer separate from the grantor but the grantor ignores the actual provisions of the trust and continues to treat the trust property as his/her own, then the trust may be considered a "sham" and ignored for income tax purposes. See, for example, Zmuda v. Commissioner, 73 T.C. 1235, 1241 (1982), aff’d 731 F.2d 1417 (9th Cir. 1984); Holman v. United States, 728 F.2d 462 (10th Cir. 1984); O’Donnell v. Commissioner, 726 F.2d 679 (11th Cir. 1984); Hanson v. Commissioner, 696 F.2d 1232 (9th Cir. 1983), affg. T.C. Memo. 1981-675; Schulz v. Commissioner, 686 F.2d 490 (7th Cir. 1982), affg. T.C. Memo. 1980-568; Vnuk v. Commissioner, 621 F.2d 1318 (8th Cir. 1980), affg. T.C. Memo. 1979-164; Wesenberg v. Commissioner, 69 T.C. 1005 (1978); Markosian v. Commissioner, 73 T.C. 1235 (1980). This rule applies regardless of whether the entity has a separate existence recognized under state law (see Furman v. Commissioner, 45 T.C. 360 (1966), affd. per curiam 381 F.2d 22 (5th Cir. 1967)), and regardless of the form of the entity, such as a trust or common law business trust. See Zmuda v. Commissioner, 731 F.2d 1417 (9th Cir. 1984). In all these cited cases, “family trusts” were set up using forms, materials, and step-by-step instructions bought from promoters of trust schemes, and the parties attempted to avoid all income taxes by transferring both their properties and their future earnings to the trusts, which they then controlled as trustees, and from which they were entitled to all the income. As is typical of “pure” or “constitutional” trusts, the taxpayers claimed to transfer title to the income and property to the trust, but as a practical matter the taxpayers continue to use the property and spend the income, making it very easy for the courts to find that the trust is a “sham” and “without real economic effect” and to disregard the existence of the trust.

The bigger picture here is the evolution away from HAVE. We dont need to OWN anything in order to enjoy it.

As explained above, if you continue to enjoy it, then it's still yours for tax purposes as well as creditor purposes.

And I don't really want to hear any anecdotes about unnamed people who have been very successful in avoiding taxes and creditors through some superficial trust paperwork. The fact that a fraud is sometimes successful does not mean that it is not still a fraud.

[Nikki]

Farmer

Did you bother to read the first post in the thread or even its title?

No. You saw the word "trusts" and decided to pollute a rational discussion with your half-truths, misperceptions, and flat-out errors.

But keep it up. Someday you'll attain an attention-whoredom status equivalent to that of David.

[ASITStands]

Also, just as a suggestion ...

Before you answer, take a look at Daniel B. Evans, Attorney at Law.

Know with whom you have to do before you stick your foot in your mouth!

[Farmer Giles]

Next, it's usually a safe bet that if a legal, financial, or tax strategy is on the Internet and costs ANY money to get the details or documents it is bogus. Another good clue is that it wants payment by PayPal, blank postal money order (no PAY TO), or cash.

You just condemned every advertising lawyer and accountant, and I won’t say you’re wrong either.

[Farmer Giles]

Farmer

Did you bother to read the first post in the thread or even its title?

No. I gave an inconsiderate, poorly thought out and mean-spirited response. Obviously from the writing you can see i’m way off base and have no empathy for the original poster’s plight. Actually, i’m in it for the money.

You saw the word "trusts" and decided to pollute a rational discussion with your half-truths, misperceptions, and flat-out errors.

You saw what i wrote on “trusts” and have nothing to say, so we’ll leave it at that.

But keep it up. Someday you'll attain an attention-whoredom status equivalent to that of David.

You’re just mad ‘cause I shine on your wind.

[Farmer Giles]

Also, just as a suggestion ...

Before you answer, take a look at Daniel B. Evans, Attorney at Law.

Know with whom you have to do before you stick your foot in your mouth!

He probably doesnt want me for a client.

[Gregg]

Well at the risk of asking a legitimate question....

I am divorced and getting remarried, and have thought of putting my home in a trust to protect it from any possibility of getting attached should I get divorced again. My second home has never been in my name, so no worries there, but the primary residence is in my name. Any help or suggestions are welcome....

[Farmer Giles]

so trusts and all that are VERY USEFUL. Because whatever you can exclude from your own estate is immune from the final taxpayers liability.

If you're saying that property held in trust is exempt from death taxes, you're going to be wrong more often than you're right.

I’ll be right sometimes then, and we don’t have to speculate further. Thats the one I want, attorney-man. Yes, the one where some times and in my case all the time we bypass probate altogether.

You just mentioned this on the other thread, and it’s still a good point. Yes, we NEED to give up control in order to be FREE. Here is a very good use for a trust- to eliminate the OWNERSHIP altogether from a property, especially land and buildings, writing a deed-constiution that simply allows any legitimate user and occupier to participate in the general enjoyment of the place. In other words, you can be there and do whatever is lawful to do.

Ideally, a real estate parcel should DISAPPEAR from the tax-map, and the ownership record with it. This ELIMINATES property taxes obviously, there is no number or service address. Its simply impossible to tax it. And it has no attachable value as an asset in commerce, it is NOT within the ordinary buy and sell of things. But you can live there, and use it.

Kung Fu.

At common law, and under section 505 of the Uniform Trust Code, the creditors of the grantor of a trust can attach all of the interests of the grantor in the trust, notwithstanding any "spendthrift clause" or other restraint on alienation.

Yes it’s best to do these transfers before any outstanding debt issues come up. But this can work for us as well, BECOMING a creditor over atrust might be a better position. It’s a card game.

And, even if the grantor has not retained the *right* to the income or use of the property, but the trustee has the power to pay the income to the grantor or return the property to the grantor, the grantor's creditors can reach the trust property to the maximum extent of the powers of the trustee.

Yes thats why its wrong to dismiss these “pure” trusts and such because that is precisely their purpose, to”fully realize” an alienation so we can avoid further liability. And thats a telling phrase there, one for which I thank you and ,cnn remember, that

the grantor's creditors can reach the trust property to the maximum extent of the powers of the trustee

because that’s just what i’m talking about. Trustees with limited powers cant affect the enjoyment of the ”beneficiaries”, which may be as simple as “open access”.

I hope the trusts you write for clients are truly suited to their fully-informed needs.

So, once again, if you set up a trust and retain the income or use of the property in the trust, or any possibility of receiving any property from the trust, your creditors can still reach that income, use, or property.

Hear you loud and clear. The truth is however, try getting an insurance annuity company to respect that, even when it’s part of a court ordered settlement. The People are lost and gone today, and cant follow something so simple as “don’t touch”.

See, the main point of Trusts, for whoever might be listening, is to hide your property. And no, that’s not evasion thats avoidance. The bottom-line here is some property named in some unconnected way to a Debtor or Defendant is far safer than personal titles. They’re called titles for a reason, they are State Grants, and they come with a price.

Some states (most notably Alaska, Delaware, and Missouri) have changed this result and allowed grantors to set up trusts that are not subject to the claims of the grantor's creditors, but those states are the exception to the rule.

Some States have great rules for all sorts of things, and lets not forget overseas. How about a variable annuty with a few offshore (but reliable) entities, all in trust names. I realize its harder and harder to hide money, but if nothing else up to yesterday it was very easy, and still is on the civil level, regardless of what people “think”.

The bigger picture here is the evolution away from HAVE. We dont need to OWN anything in order to enjoy it.

As explained above, if you continue to enjoy it, then it's still yours for tax purposes as well as creditor purposes.

No, you didn’t, you addressed continued USE. Now you jump over to ‘enjoy’. Thats my whole point from the beginning, you’ll never find a tax or claim on someone else’s ENJOYMENT. Its unalienable.

I understand fully that “use” is attachable. But you can’t stop me from merely enjoying something, if the owner lets me. I’m going to be starting another thread about utility bills that you might like, following the difference between USE and ENJOY.

[Nikki]

Well at the risk of asking a legitimate question....

I am divorced and getting remarried, and have thought of putting my home in a trust to protect it from any possibility of getting attached should I get divorced again. My second home has never been in my name, so no worries there, but the primary residence is in my name. Any help or suggestions are welcome....

Well, a trust will probably be useless since you want to continue to live there which makes you the effective benefactor of the trust which makes the trust effectively void.

But, depending a lot on your state of residence, consider two words: PRE NUP To be fair, perhaps vesting the future Mrs Gregg according to some schedule so that, after say 20 years of being a good faithful loving wife she'd have a 50% share?

Although, if you're walking into a marriage with the possibility of a future divorce gnawing at you, perhaps ...

[LPC]

Well at the risk of asking a legitimate question....

I am divorced and getting remarried, and have thought of putting my home in a trust to protect it from any possibility of getting attached should I get divorced again. My second home has never been in my name, so no worries there, but the primary residence is in my name. Any help or suggestions are welcome....

Here are the possibilities:

1. A spouse has no rights in property you owned before you were married.

2. A spouse has rights in property you owned before you were married but those rights can be defeated by a transfer into a trust for your benefit before you are married.

3. A spouse has rights in property you owned before you were married and those rights can NOT be defeated by a transfer into a trust for your benefit before you are married.

Without knowing anything about what state you live in or in which you are going to be married, proposition #2 seems somewhat unlikely to me, but you should seek legal counsel if the answer is important to you.

And, as others have suggested, the differences between 1, 2, and 3 might become irrelevant if there is a legally binding pre-marriage contract.

[LPC]

If you're saying that property held in trust is exempt from death taxes, you're going to be wrong more often than you're right.

I’ll be right sometimes then, and we don’t have to speculate further. Thats the one I want, attorney-man. Yes, the one where some times and in my case all the time we bypass probate altogether.

If by "probate" you mean the administration of a decedent's estate, then you are misinformed, because "probate" and "taxes" are two different issues. Something can be entirely exempt from the estate administration process and still subject to tax (although it is difficult to be subject to probate and not subject to tax).

For example, a revocable trust is not part of a decedent's estate, and yet it can be subject to the same taxes as a decedent's estate, and is subject to the same claims of creditors.

Ideally, a real estate parcel should DISAPPEAR from the tax-map, and the ownership record with it. This ELIMINATES property taxes obviously, there is no number or service address. Its simply impossible to tax it.

No, the property is still subject to tax and the record owner is still liable for that tax. Transferring the tax liability from an individual to a trust hardly eliminates the problem.

At common law, and under section 505 of the Uniform Trust Code, the creditors of the grantor of a trust can attach all of the interests of the grantor in the trust, notwithstanding any "spendthrift clause" or other restraint on alienation.

Yes it’s best to do these transfers before any outstanding debt issues come up.

It doesn't make any difference when the debt issues come up. Under common law rules, and section 505 of the Uniform Trust Code, the creditors of the grantor of a trust have rights. Period. It doesn't make any difference when the trust was created or when the debt arose.

And, even if the grantor has not retained the *right* to the income or use of the property, but the trustee has the power to pay the income to the grantor or return the property to the grantor, the grantor's creditors can reach the trust property to the maximum extent of the powers of the trustee.

Yes thats why its wrong to dismiss these “pure” trusts and such because that is precisely their purpose, to”fully realize” an alienation so we can avoid further liability. And thats a telling phrase there, one for which I thank you and ,cnn remember, that

the grantor's creditors can reach the trust property to the maximum extent of the powers of the trustee

because that’s just what i’m talking about. Trustees with limited powers cant affect the enjoyment of the ”beneficiaries”, which may be as simple as “open access”.

What you have written might be very interesting to you, but has no meaning as far as the law of trusts is concerned.

See, the main point of Trusts, for whoever might be listening, is to hide your property. And no, that’s not evasion thats avoidance.

You say potato, I say potahto.

You say "hide your property," and I say "fraud."

We'll let a court decide who's right.

As explained above, if you continue to enjoy it, then it's still yours for tax purposes as well as creditor purposes.

No, you didn’t, you addressed continued USE. Now you jump over to ‘enjoy’. Thats my whole point from the beginning, you’ll never find a tax or claim on someone else’s ENJOYMENT. Its unalienable.

In this context, "enjoy" means "use" or "receive the income from."

I understand fully that “use” is attachable. But you can’t stop me from merely enjoying something, if the owner lets me.

I can't stop you from "merely enjoying something," but if you transfer the title to property but continue to get the benefits of ownership even after you have transferred the title to the property, then the courts are quite willing and able to consider you to be the owner of the property, despite any technicalities of title.

That's reality. Deal with it.

[Tax Man]

Well at the risk of asking a legitimate question....

I am divorced and getting remarried, and have thought of putting my home in a trust to protect it from any possibility of getting attached should I get divorced again. My second home has never been in my name, so no worries there, but the primary residence is in my name. Any help or suggestions are welcome....

Just put it all in an offshore trust.

[fortinbras]

Many (perhaps most) of these "pure trust" cases turn out to involve something that wasn't really pure and wasn't really a trust. I shouldn't have to explain the concept of a trust to this crowd, but suffice it to say that, generally, a trust is created by one or more persons for the benefit of entirely different persons; the most common being in the form of bequests and charitable gifts.

But what these tax dodgers are doing is essentially passing their own income through a particular pocket, which they call a trust, and pretending that the money that passed through that pocket is somehow invisible and unreachable to the IRS. Not only do they uniformly lose in court but - although the courts enforce this only sometimes in such cases - since a real trust is a sort of corporate body separate from any one person, the trust must be represented in court by a bona fide lawyer, not the trust recipient pro se.

Trusts are the creation of statute law, not common law.

[LPC]

since a real trust is a sort of corporate body separate from any one person, the trust must be represented in court by a bona fide lawyer, not the trust recipient pro se.

Although a trustee cannot appear in court pro se, but must be represented by counsel, a beneficiary can appear pro se and, in effect, represent the trust. See, for example, Tenpenny v. United States, 490 F. Supp. 2d 852 (N.D. Ohio 2007). The difference is explained by the fact that a trustee is representing the interests of others, while a beneficiary is enforcing his or her own interests.

Trusts are the creation of statute law, not common law.

No, trusts are very much a creature of common law. In recent years, some states have enacted statutes that codify the law of trusts, the Uniform Trust Code being the clearest example, but even the UTC refers to the "common law of trusts" and provides in section 106 that the common law continues to supplement the UTC except as modified by statute.

[Prof]

A few comments from an asset protection perspective:

A spendthrift trust should always be cosidered when creating inter vivos or testamentary trusts in order to protect these assets from the creditors of the beneficiary or from dissipation by a beneficiary who is immature or fading into old age.

Those states which permit self-settled trusts with spendthrift provisions do not waive the fraudulent conveyance laws so the trust will be vulnerable for the limitations period which is generally 4 years. Also the assets protected must be in the state where the trust is situated.

I still argue that a homestead transferred into a trust is no longer exempt but so far the courts wiggle around the issue .