AVOIDING TRUST SCAMS
The Castleman Law Firm
A Professional Corporation
5870 Stoneridge Mall Road, Ste. 207
Pleasanton, California 94588
(925) 463-2221
Fax (925) 463-0328
There are good trusts and there are bad trusts. Good trusts are part of a process used by legitimate estate planners and their clients to control the disposition of assets, avoid probate, reduce administration costs, save estate taxes, and preserve family wealth for future generations. This article is not about the good trusts. It is about bad trusts.
There are two main categories of bad trusts: scam trusts and mill trusts.
Scam Trusts
What are scam trusts? These are so called "trusts" or "contracts" that are promoted by scam artists who claim that their documents and plans will allow individuals and, in some cases businesses, to avoid or significantly reduce all taxes, including income taxes. The promoters also claim that their plans, for which they charge a hefty fee, will make your assets unreachable by creditors. They often use a complex structure that involves the "irrevocable" transfer of your assets to one or more business or trust entities controlled by you. The promoters claim that the arrangement will significantly reduce or eliminate not only estate taxes but also income taxes. Scam trusts are marketed through high pressure seminars, by door-to-door salesmen, and on the Internet. In some cases, they are recommended by well meaning but poorly informed CPA's, financial advisors, friends, or business acquaintances. The marketing techniques can be very persuasive, and are aimed at all classes of people. I have seen doctors, dentists, accountants, and financial advisors fall for the hype.
How can you recognize them? Remember the following four tests:
The "Name" Test: The name of the trust is often a hint that something is amiss. The scam trusts have a variety of forms and names such as: "Constitutional Trusts," "Pure Trusts," "Common Law Trusts," "Unincorporated Business Associations," "Asset Protection Trusts," "Business Trusts" (not to be confused with legitimate Massachuset Business Trusts), and "Family Trusts" (not to be confused with legitimate revocable family trusts).
The "It Seems Too Good To Be True" Test: If the trust is promoted as one that will reduce or eliminate your personal income tax, watch out. Almost all of the scam trusts purport to allow a person or a family to arrange their assets and business affairs in a manner that will avoid or substantially reduce 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 "Authority Approval" Test: The promotional materials that are used to help sell scam trusts often contain incorrect references to the Constitution, as well as references to court cases that have been overturned or changed by statute. They often cite scripture. The promoters of these fraudulent trusts often incorrectly associate the names of prominent families, such as Kennedy or Rockefeller, with the trusts that they are trying to peddle. Here is part of an actual sales pitch written by a scam trust purveyor:
You can LEGALLY avoid excessive taxation in order to build a financially secure estate; dramatically reduce your liabilities; gain the ultimate in personal and business privacy; and eliminate all the estate and inheritance taxes plus probate costs. This previously "secret" method has been successfully utilized by the nation's wealthiest families: the Rockefellers, the Hunts, the Kennedys and others, plus leading oil and industrial companies. All of these have demonstrated that it is a POSSIBLE, LEGAL, and EFFECTIVE solution to avoid estate shrinkage. First, this is possible because the United States of America is founded on the principle that the peoples' unalienable rights are originally received directly from our Creator! This is why we acknowledge our country to be a "NATION UNDER GOD" ("of the people, by the people, and for the people").
Embodied in this principle is the "Key" to total protection of your personal and business assets - the Constitution. It recognizes our inalienable rights by the use of the Law of the land by which we protect our freedoms, and our property.
The "Dumb Advisor" Test: In almost all cases the promoters of scam trusts will caution you against having your CPA or attorney review the documents that the promoters want to 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.
What is wrong with scam trusts? BEWARE!
The Castleman Law Firm
A Professional Corporation
5870 Stoneridge Mall Road, Ste. 207
Pleasanton, California 94588
(925) 463-2221
Fax (925) 463-0328
There are good trusts and there are bad trusts. Good trusts are part of a process used by legitimate estate planners and their clients to control the disposition of assets, avoid probate, reduce administration costs, save estate taxes, and preserve family wealth for future generations. This article is not about the good trusts. It is about bad trusts.
There are two main categories of bad trusts: scam trusts and mill trusts.
Scam Trusts
What are scam trusts? These are so called "trusts" or "contracts" that are promoted by scam artists who claim that their documents and plans will allow individuals and, in some cases businesses, to avoid or significantly reduce all taxes, including income taxes. The promoters also claim that their plans, for which they charge a hefty fee, will make your assets unreachable by creditors. They often use a complex structure that involves the "irrevocable" transfer of your assets to one or more business or trust entities controlled by you. The promoters claim that the arrangement will significantly reduce or eliminate not only estate taxes but also income taxes. Scam trusts are marketed through high pressure seminars, by door-to-door salesmen, and on the Internet. In some cases, they are recommended by well meaning but poorly informed CPA's, financial advisors, friends, or business acquaintances. The marketing techniques can be very persuasive, and are aimed at all classes of people. I have seen doctors, dentists, accountants, and financial advisors fall for the hype.
How can you recognize them? Remember the following four tests:
The "Name" Test: The name of the trust is often a hint that something is amiss. The scam trusts have a variety of forms and names such as: "Constitutional Trusts," "Pure Trusts," "Common Law Trusts," "Unincorporated Business Associations," "Asset Protection Trusts," "Business Trusts" (not to be confused with legitimate Massachuset Business Trusts), and "Family Trusts" (not to be confused with legitimate revocable family trusts).
The "It Seems Too Good To Be True" Test: If the trust is promoted as one that will reduce or eliminate your personal income tax, watch out. Almost all of the scam trusts purport to allow a person or a family to arrange their assets and business affairs in a manner that will avoid or substantially reduce 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 "Authority Approval" Test: The promotional materials that are used to help sell scam trusts often contain incorrect references to the Constitution, as well as references to court cases that have been overturned or changed by statute. They often cite scripture. The promoters of these fraudulent trusts often incorrectly associate the names of prominent families, such as Kennedy or Rockefeller, with the trusts that they are trying to peddle. Here is part of an actual sales pitch written by a scam trust purveyor:
You can LEGALLY avoid excessive taxation in order to build a financially secure estate; dramatically reduce your liabilities; gain the ultimate in personal and business privacy; and eliminate all the estate and inheritance taxes plus probate costs. This previously "secret" method has been successfully utilized by the nation's wealthiest families: the Rockefellers, the Hunts, the Kennedys and others, plus leading oil and industrial companies. All of these have demonstrated that it is a POSSIBLE, LEGAL, and EFFECTIVE solution to avoid estate shrinkage. First, this is possible because the United States of America is founded on the principle that the peoples' unalienable rights are originally received directly from our Creator! This is why we acknowledge our country to be a "NATION UNDER GOD" ("of the people, by the people, and for the people").
Embodied in this principle is the "Key" to total protection of your personal and business assets - the Constitution. It recognizes our inalienable rights by the use of the Law of the land by which we protect our freedoms, and our property.
The "Dumb Advisor" Test: In almost all cases the promoters of scam trusts will caution you against having your CPA or attorney review the documents that the promoters want to 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.
What is wrong with scam trusts? BEWARE!
Trusts and business arrangements that are marketed as a way of avoiding all or a substantial amount of income tax are almost always illegal. These are classified as "abusive arrangements" by the IRS. Any person who creates one of these trusts will, when caught by the IRS, have to pay all back taxes owed, interest, and serious penalties. Criminal sanctions will be imposed upon all who participate in the promotion of abusive trusts. A transfer of real estate to a scam trust may result in a reassessment by the county appraiser resulting in significantly greater property taxes. Once you have entered into a scam trust, and perhaps transferred title to some or all of your assets, it can be very expensive to undo the arrangement.
STAY AWAY FROM SCAM TRUSTS.
Mill Trusts
Now, let's consider mill trusts.
What are mill trusts? I define a mill trust as a generic "one size fits all" document ostensibly designed to avoid probate and save estate taxes. Often the producer of the document is not a lawyer, but may claim to have the document either "created by," "reviewed by," or "approved by" a lawyer.
How can you recognize mill trusts? Again, there are four tests
The "Lack of Counsel" Test: Proper estate planning requires substantive individual legal counseling. Mill trusts are usually produced after the "client" has filled out a simple form questionnaire (often of the "check the box" type). The client is usually given very little counseling. Often the mill trust client meets only with a "paralegal," a CPA, or a financial advisor, but not with an attorney who specializes in estate planning.
The "Limited Purpose" Test: Mill trusts are often prepared solely for the purposes of avoiding probate and/or saving estate taxes. No consideration is giving to protection in the case of incompetency, planning protective distributions for descendants, or tailoring distributions for families with children or grandchildren of different marriages. No consideration is given to integrating life insurance and retirement funds with the dispositions provided for in the trust documents.
The "Lack of Funding" Test: Most mill trusts do not work because they are not properly funded, meaning that assets are not transferred into the trust. The client is usually given no help in effecting the transfers. As a result, the majority of mill trusts are not properly funded. When a trust is not properly funded, it does not work.
The "Cheap" Test: Mill trusts usually range in cost from $350 to less than $1000. What you get is what you pay for--not very much.
What is wrong with mill trusts?
Mill Trusts
Now, let's consider mill trusts.
What are mill trusts? I define a mill trust as a generic "one size fits all" document ostensibly designed to avoid probate and save estate taxes. Often the producer of the document is not a lawyer, but may claim to have the document either "created by," "reviewed by," or "approved by" a lawyer.
How can you recognize mill trusts? Again, there are four tests
The "Lack of Counsel" Test: Proper estate planning requires substantive individual legal counseling. Mill trusts are usually produced after the "client" has filled out a simple form questionnaire (often of the "check the box" type). The client is usually given very little counseling. Often the mill trust client meets only with a "paralegal," a CPA, or a financial advisor, but not with an attorney who specializes in estate planning.
The "Limited Purpose" Test: Mill trusts are often prepared solely for the purposes of avoiding probate and/or saving estate taxes. No consideration is giving to protection in the case of incompetency, planning protective distributions for descendants, or tailoring distributions for families with children or grandchildren of different marriages. No consideration is given to integrating life insurance and retirement funds with the dispositions provided for in the trust documents.
The "Lack of Funding" Test: Most mill trusts do not work because they are not properly funded, meaning that assets are not transferred into the trust. The client is usually given no help in effecting the transfers. As a result, the majority of mill trusts are not properly funded. When a trust is not properly funded, it does not work.
The "Cheap" Test: Mill trusts usually range in cost from $350 to less than $1000. What you get is what you pay for--not very much.
What is wrong with mill trusts?
Although mill trusts are not burdened with the illegalities of scam trusts, they are usually a waste of money and not suited for proper estate planning. An unfunded mill trust is a waste of money because assets not transferred to the trust will not be controlled by the trust terms and may have to be probated. Many mill trusts contain provisions which can actually result in increased estate taxes. People who prepare mill trusts almost never take into consideration retirement assets and life insurance proceeds. A failure to integrate retirement fund and insurance policy planning with the overall estate plan can lead to increased taxes and ultimate distributions that are inconsistent with your goals.
Proper estate planning requires consideration of your specific needs and family goals. When done correctly, much can be accomplished. When done incorrectly, much may be lost.
Proper estate planning requires consideration of your specific needs and family goals. When done correctly, much can be accomplished. When done incorrectly, much may be lost.
