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There are trusts and then there are trusts--good trusts and 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
may also claim that their plans, for which they charge a hefty fee, will
also 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 who have fallen 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 Massachusetts 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. The "Alliance for Mature Americans" used sales agents
(who were not attorneys) to provide legal advice in the course of
selling and preparing living trusts. These sales agents convinced
elderly people that in order for the trust to be valid, the clients
retirement money would have to rolled over into an annuity with a
company called "Fremont Life". Fremont Life was an unrated,
unstable insurance company that made below market payouts, required huge
surrender charges for withdrawal and, in some cases, denied ever having
received the retirement funds from the elderly clients.
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 my 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.
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 (in many cases
the interview, if there is one, will last for no more than one hour).
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 don't work because they are not properly funded. The
client is usually given a letter of instructions on how to fund the
trust (i.e., transfer assets into the trust), but no help is given 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.
 
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