Farmer Giles wrote: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.
Farmer Giles wrote: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.
Farmer Giles wrote: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.
Farmer Giles wrote: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.