The
Internal Revenue Service
(IRS) has started cracking
down on five types of
trusts that they have
judged to be illegal.
The
IRS says that, of the
three million active
trusts in the U.S.
today, nearly 6%, are
considered "highly suspicious."
And,
according to the IRS’s
director of Operation
for Criminal Investigations,
even if you are just
a buyer of one of these
trusts, you can face
fines and jail.
Keep
in mind, however, that
not all trusts are
being targeted by the
IRS, and the government
has said that the majority
of trust holders have
nothing to fear. Millions
of individuals and
businesses are using
trusts to set aside
funds for certain individuals,
corporations or organizations
and are not the focus
of this campaign.
The
trust arrangements
that concern the IRS
ignore the true ownership
of assets or the substance
of transactions. According
to the IRS, promoters
of these illegal trusts
have made the claim
that they allow the
owners to retain full
benefit of business
or personal assets
while reducing or eliminating
taxes. The arrangements
usually involve more
than one trust. For
example, a person may
put business assets
in an unincorporated
business trust, transfer
its business equipment
to an equipment trust,
place his home in a
family residence trust,
and set up a foreign
trust to hold the other
trust units and to
receive trust income.
In short, it's a "family of trusts" and the IRS says they are created solely to evade taxes.
The
IRS has issued warnings
for you to be wary
of arrangements claiming
to make personal living
expenses deductible,
to create charitable
deductions for payments
benefitting you or
your family or that
may otherwise result
in you having to pay
no tax while not changing
your control over your
assets.
The
IRS has said that promoters
of these arrangements
are advertising "investment seminars" or "tax seminars" in local media, such as radio personal-finance shows and on the Internet. The
IRS says the trusts
may have names that
refer to constitutional
issues, fairness, equity
or patriotic themes,
but more often have
names similar to common
business organizations
and legitimate trusts.
The
Criminal Division of
the IRS has identified
the five trusts it
is targeting:
Business
Trust
The
owner of a business
transfer the business
to a trust (sometimes
described as an unincorporated
business trust) in
exchange for units
or certificates of
beneficial interest,
sometimes described
as units of beneficial
interest or UBIs (trust
units). The business
trust will make payments
to the trust unit holders
or to other trusts
the owner has created(usually
characterized as deductible
business expenses or
deductible distributions)
that are purporting
to reduce taxable income
of the business trust
to such an extent the
where little or no
tax is due from the
business trust.
Equipment
or Service Trust
The
equipment trust is
formed to hold equipment
that is rented or leased
to the business trust
at inflated rates.
The service trust is
formed to provide services
to the business trust,
again often for inflated
fees. Under these arrangements,
the business trust
claims to reduce its
income by making allegedly
deductible payments
to the equipment or
service trust. The
equipment or service
trust also attempts
to reduce or eliminate
its income by distributions
to other trusts.
Family
Residence Trust
The
owner of the family
residence transfers
the residence to a
trust. The trust claims
the exchange resulted
in a stepped-up basis
for the property, while
the owner reports no
gain. The trust claims
to be in the rental
business and alleges
to rent the residence
back to the owner.
In most cases, however,
little or no rent is
paid.
Charitable
Trust
The
wner transfers assets
to a purported charitable
trust and claims that
either the payments
to the trust are deductible
or payments made by
the trust are deductible
charitable contributions.
Payments are claimed
to be made to charitable
organizations, but,
in fact, the payments
are for the personal,
educational, living
or recreational expenses
of the owner or his
family. For example,
the trust may pay for
the college tuition
of a child of the owner.
Final
Trust
In
some multi-trust arrangements,
the U.S. owner of one
or more fraudulent
trusts establishes
an additional trust
known as the final
trust that acts as
the trust for the others
and receives all income
from the other trusts.
A final trust often
is formed in an offshore
that imposes little
or no taxes on the
trust. In some arrangements,
more than one foreign
trust is used, with
the cash flowing from
one trust to another
until the money ultimately
is distributed or made
available to the U.S.
owner, purportedly
tax-free. This has
been judged by the
IRS as being nothing
more than a money-laundering
scheme.
If
you would like more
information regarding
asset protection, trusts,
family limited partnerships
or the subject of this
article please call
or email our office.
