Avoid the Sham Master and Sham Trusts

Physician's Money Digest, March15 2003, Volume 10, Issue 5

There are certain things in life thatare unavoidable. And, as it turnsout, most of these unavoidable thingsare not enjoyable. Fortunately, whileyou can't get out of annual dental visitsor changing the oil in your car regularly,some of the more unpleasant taskscan be made a little easier by establishinga sound plan of attack.

Taxes are one of these unavoidablelife facts that offer such an opportunity.For example, there are legitimate waysto defer or avoid the payment of taxes.And with the help of a qualified taxattorney, you can protect your walletand your stomach. However, avoidingthe unavoidable does have its limits. Inthis case, postponing taxes is perfectlylegitimate, but evading them is not.

THE GREAT TRUST SHAM

Recently, I met with a physician-investorto discuss her tax planning strategies.During this meeting, the physician-investorinformed me that her brother-inlawhad been sold a trust that protectedhim from all types of taxes. "What a wonderfultrust," I said. "Do you know thatthe IRS has a word for such a trust?""No," she responded. "What is it?"Unfortunately, she wasn't too happywhen I told her the answer: abusive.

SONG AND DANCE PROMOTERS

There are many different namesbeing used for what are essentially shamtrusts. Some of the more common namesare common law trusts, contract trusts,family estate trusts, peer contract trusts,peer equity trusts, common law trustorganizations, and commonwealth trusts.Very often these trusts share some ofthe characteristics of legitimate entities.Unfortunately, the incredible claimsmade by the promoters (eg, that thetrustmaker can maintain control overtheir trust, improve asset protection,and reduce or eliminate income taxes)blur these lines of legitimacy.

To create these sham trusts, trustmakershave 2 options: transfer assetsto a third person who will place theassets into the trust for the benefit ofthe creator, or place the assets into thetrust in exchange for certificates of beneficialinterest. Unfortunately, thesecertificates of beneficial interest arerarely transferable.

SMOKE AND MIRRORS

In addition to presenting potentialpurchasers with their "valid" legal opinion,trust promoters tend to discourageany independent legal review of thetrust. It's not uncommon to be warned"not all attorneys are specialists andmost just want to keep their probatepractice alive." They won't, however,discourage you from protecting yourselffrom the ravages of taxes (whichinclude the Constitution, the Bible, theMagna Carta, and the NorthwestOrdinance). Fortunately, no court in thisnation, including tax court, actuallybuys any of these far-fetched theories.

Unfortunately, if you do wind up purchasinga sham trust, you'll face the consequences,which include: income taxpenalties, fines, fees, interest penalties,and other remedies the IRS has in its well-stockedarsenal.

If you happen to be a victim of theseruthless promoters, contact an attorneyright away. They'll be able to unwind ordismantle the trust and you'll save yourselftime and money. There are very legitimateways to defer paying your taxes.But evading them is not one of the bestor most legal ways. Keep yourself safe bynot mistaking a sham trust for a properlyimplemented trust.

Donald J. Purser is a managing member of the Attorneys'

Estate and Business Planning Group, with offices in Salt Lake

City and Virginia. He has served as an adjunct professor

of law and has lectured nationwide on tax strategies. He welcomes questions or comments

at 801-532-3555. For more information, visit www.estateplanning.com/donpurser.