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Trust Shams to Avoid

There are many trusts that are illegitimate and are frequently promoted by firms and individuals that prey on a gullible public. There are no trusts or tax-diversion entities that predate our tax laws and are immune from taxation, despite frequent claims by a community of sham artists that claim they can lawsuit-proof assets.

One of these shams is the pure trust, which does not provide legitimate tax benefits or any advantage that is not easily obtainable from a more respected trust entity. The IRS has challenged the pure trust and penalized its promoters and taxpayers who unlawfully used these trusts to avoid taxes. Because a grantor trust requires the grantor to pay taxes on the trust income and an irrevocable trust pays the taxes on its income, in any event taxes are ALWAYS payable on trust earnings. A trust is generally not the way to avoid income taxes and it is important to carefully analyze the tax consequences of any trust program.

A pure trust can conceivable protect assets, but it would be entirely dependent on the irrevocable status of the trust and whether the grantor fully surrendered control. Most pure trusts are simple, revocable grantor or nominee trusts that are comparable to living trusts that provide neither asset protection nor tax benefits. Individuals should avoid organizations or promoters that claim their trust enjoys special powers or immunities and every trust document should be reviewed by a qualified attorney.

Gifting for Asset Protection

Many individuals use gifting as a strategy to reduce estate taxes and protect their assets. By transferring income-producing assets to a recipient in a lower tax bracket it is possible to reduce taxes and gifts can also reduce a taxable estate while simultaneously reducing assets exposed to creditors.

The annual gift tax exclusion permits a tax-free gift transfer of $13,000 provided that the gift is immediately available to the recipient. A husband and wife can jointly gift $26,000 per recipient, so a couple with three children could gift $78,000 annually, tax-free. Gifting can be accelerated using some of these other transfer strategies:

  • Transfer property in exchange for an installment sale note payable over a number of years, forgiving $13,000 installments per recipient annually without tax consequences. The promissory note would be self-liquidating and the transfer would be a fair consideration exchange and therefore not fraudulent. To further protect the note from creditors it could be titled to a LP or LLC.
  • Use a bypass-generation gift to accelerate your gifting, noting that such a gift could cause a generation-skipping transfer tax of 50% (plus the gift tax that applies to larger gifts). Alternatively, use a generation-skipping trust.
  • Make a gift of assets that are most vulnerable to creditors and retain assets that are exempt from creditor claims or have other inherent protections.

Transfer property to a minor child through a children's or minor's trust, or make gifts under the Uniform Transfers to Minors Act. If the transfer is fraudulent, absolute protection will not be provided but the beneficiaries' creditors would not be able to seize any funds until actually distributed to the beneficiaries.


The best defense is a good offense.