I am supposed to be working right now, but I feel like I need to get his post off of my mind and potentially help some people make some decisions. This is a long topic applying to a specific group. So if you have not heard of the following trust, you may not want to waste your time. Also, I am not taking time to edit or proof read this.
I was recently asked to give an opinion on an IRREVOCABLE, NON-GRANTOR, COMPLEX, DISCRETIONARY, SPENDTHRIFT TRUST and told about a guy who is selling these trust which are supposed to allow you to defer income forever and have bullet proof asset protection. Unfortunately I didn’t have time to complete the investigation without actually being hired to do it. However I felt compelled to address some comments to the issue. The short comment is to stay away. The long set of comments follows:
Here is what is being advertised:____________________________________________________
An IRREVOCABLE, NON-GRANTOR, COMPLEX, DISCRETIONARY, SPENDTHRIFT TRUST:
•Totally eliminates exposure to PERSONAL LIABILITY.
•Eliminates PROBATE and all associated expenses.
•Eliminates all INHERITANCE TAXES when properly constructed.
•When properly constructed the trust is MEDICARE/MEDICAID COMPLIANT.
•Eliminates all concerns about INCAPACITY AND GUARDIANSHIP.
•Protects land holdings from loss due to URBANIZATION.
•Eliminates CAPITAL GAINS TAX.
Through discretionary terms and conditions by the correct use of the law and the Internal Revenue Code, the trust can make available EXTRAORDINARY DIVIDENDS and Taxable STOCK DIVIDENDS without taxation.
___________________________________________________________________________
I would LOVE to have reviewed one of his trusts, but the only way to see one is to buy it. (I understand they are 5 or 6 thousand dollars.) So, I read what his “Think Tank” website had to say and listened to a recorded conference call and a live conference call with this gentleman, “Jim” who did not give his last name, would not give the name of his company, his phone number, or his address. He claimed he didn’t want to be overwhelmed with contacts. However, he was willing to give a non-company email address: hayseedpassion@gmail.com.
That was enough to turn on red flag alerts for me. The rest of my issues/concerns follow:
1) Big Sounding Name - The name of the trust has NOTHING to do with whether it is legal or whether it will work. You could take a standard revocable trust and call it the BULLETPROOF FOREIGN ASSET PROTECTION TRUST, but that would not change the fact that the language of the instrument was a basic, run of the mill, domestic, revocable living trust with no asset protection. What matters is the language of the trust which I have not seen.
2) His claims that the trust is “Legal” - Whether the trust is Legal has NOTHING to do with whether or not it will do what you say it will do. What matters is the language of the trust which I have not seen.
3) Opinion Letters – He claims to have opinion letters from an attorney and a CPA who used to work for the IRS. However, you don’t get to see them unless you have already paid. Seriously? Then what is the point of even having one. If you trust and stand behind your product and the opinion letter upholds what you profess, wouldn’t you WANT to show it to us to convince us to buy? I am left wondering if the opinion letters are worth the paper they are written on. They may just say "This trust is legal" or something else just as innocuous. That says nothing about whether the trust will do what it claims within the limits of the laws and regulations.
4) Copyright – He claims the trust is under copyright (or actually implies that). What is under copyright is the book he placed the trust in. It is his “expression” of the legal ideas of the trust. What he sells are completed trusts. Therefore, he is either committing the Unlicensed Practice of Law (UPL) by drafting trusts (which can be copyrighted) or his is simply selling a form to you that he fills in with information that you provide. Forms cannot be copyrighted.
5) Current - He says that his trust was drafted in 1999 and updated in 2002. That means it is not up to date with the current changes in the Uniform Trust Code. Changes in the UTC (which most states have adopted to some extent threaten the asset protections of domestic irrevocable trusts. There are some things which are done to limit the damage, but there is no way of knowing if the attorney that drafted this trust he will sell to you had the foresight to put those provisions in.
6) Will work in all 50 states – Well of course it will. However, it relies on IRC 643(a)(3) for its “deferment” of gains. (Fiduciary accounting calls it “accumulation” of gains which may have negative tax consequences in the future.) I’m not a CPA and I’d need to do more research to be sure, but I don’t have the time. Anyway, I have seen indications that local law affects how 643 is applied to trust income. Further, different states laws will work differently with the updates in the Uniform Trust Code. The trust may work differently in different states (depending on how it is set up).
7) In the Land of the Blind – There is a saying that in the land of the blind, the one eyed man is king. Thinking about what I have read and heard, I am reminded of that saying. In the Q&A part of his call, I heard people thanking Jim for the information had given them. I thought, “What are you talking about? All the guy has done is make a bunch of unsubstantiated claims and tell us about how his trust is supposed to work without being willing to show us ANYTHING to support his statements. They guy sounds like a “snake oil salesman.” (Sorry if that is harsh, but it really is what I thought.) The problem is that “Jim” actually does have some things right and is a pretty bright guy which makes him believable. The problem there is that you believe him when he is wrong too. He gets things wrong on several occasions and misleads people unintentionally. His call was the land of the blind. How are they to know?
8) Capitalizing your trust – Over and over again, “Jim” refers to capitalizing your trust and refers to it as a nontaxable event. However, absent being shown something in his trust or the IRC contrary to this (which he is unwilling to do), I have to disagree with him. When you place assets into a trust (he calls it capitalizing - the estate planning world calls it gifting), it is considered a gift to any beneficiaries of the trust and all of the gifting laws apply. Any gifts of Dinar post-RV could be enormous and would cause large gift tax consequences to the person making the gift. I see no way that this trust could get around that (regardless of what he claims). He tries to use the analogy of contributing capital to a business to prove his point. The difference is that whatever contribution you make to the business increases your own capital account in the business. The gifts to trust are for beneficiaries other than yourself. It is a gift. To believe otherwise, I'd need to see the language.
9) Using a separate “Settlor” – When the Tax Court reviews a case, they are looking at substance over form. “Jim’s” scheme uses someone else to be the Grantor of the trust and create it for your beneficiaries. However, they only fund it with $10 and hand it over. He calls this person the “Settlor.” When you gift assets to the trust, you become a Grantor of the trust (just like the Settlor). The trust will remain a non-grantor trust (which simply means it is not taxed back to the grantor), but depending on the powers that you as Trustee hold, being both grantor and Trustee could bring the trust assets into your estate for estate tax purposes and destroy one of the primary purposes of the trust. It could also threaten the asset protection of the trust.
10) His trust is special – He tells a story and implies that irrevocable trusts are not liked by attorneys or commonly seen by the IRS, I would have to disagree with him there. Irrevocable trusts are a common planning instrument that estate planning attorneys, tax attorneys, investment advisers, and the IRS are all very familiar with.
11) Scott on Trusts – One of his claims is that the trust is in compliance with Scott. He then makes the claim that Scott is the authority on trusts in our country. Well, he may have been an authority at one time, but the Courts don’t care. The written authority now is a combined work of attorneys around the nation called the “Restatement of Trusts.” Not too long ago, the Restatement of Trusts III came out. This is what prompted the changes in the Uniform Trust Code (UTC) that threatens asset protections of irrevocable trusts. No one cares that it is conformance with Scott on Trusts.
12) You could do better for the price – I have been told that he is charging $5,000 to $6,000 for these trusts. I believe that people in most areas of the country could go to a good estate planning attorney who would custom draft a trust to meet their needs. Also, If you see an attorney who drafts a trust for you for a particular purpose, you can also sue them if it fails to meet that purpose. “Jim” disclaims all liability and gives no guarantees. If your trust doesn't work you are still out the money.
13) Self Dealing – One of the big selling points of his trust is that as Trustee, you can buy a car or house and own it inside the trust and have the use of it while you are “managing it for the beneficiaries.” Using the trust so much for the advantage of the Trustee is self-dealing. (It is substance over form.) I'm not sure that whatever discretionary language you have in the trust will be enough to overcome the self-dealing problem. Perhaps the trust allows self-dealing (I’ve drafted some that do), however, we can’t know without seeing the language of the trust.
14) Passing assets on tax free – Of all the issues listed above, I can think of ways they just might be able to work out. However, this is one issue I can think of NO WAY around. He claims that once you are done “managing” the trust assets for the beneficiaries (which really means using them for yourself), that you can pass them on to new trusts owned by your beneficiaries without any tax consequence and avoid all of the deferred (accumulated) capital gains income being taxed on the transfer. I’d love to see some IRC section that allows this. I don’t know of one. I sent an email to a CPA this morning to see if he knows of any way to do it. I don’t.
Okay – I’ve spent WAY too much time on this already so I'll make my final comments. This trust may work just as you “Jim” says it does. In fact the structure is intriguing. Still, I can't feel comfortable without either seeing the trust itself or a detailed opinion letter from an attorney qualified to draft such an opinion (and I may need an opinion from a CPA who understands fiduciary accounting principles). I would also need to see that the trust was updated to deal with the new problems presented by the Uniform Trust Code.
Reviewing this trust reminds me of reading arguments of tax protesters. (I even wrote a paper on why the current income tax structure was unconstitutional.) There are some people out there who are claiming victory over the IRS using what they have been taught. However, we still see people going to jail. There may be people using this trust successfully, but it feels like a tax protester situation. Unless I see this thing properly vetted, I’d tell anyone who asks me to stay away from it. $5,000 or $6,000 is too much to throw away.
I have now spent over 6 hours on this thing (including typing it up) that I should have used to try to make some money for my family. (Still really struggling to get my practice started again now that wife is doing better. Have even gotten help from my church for bills.) I feel guilty for spending so much time on it and hope that it is helpful. However, PLEASE don’t expect me to do any more on this topic. I just can’t afford the time.
Having said that, I am a sucker for learning something new, so if you have an answer that is supported by law (not just what someone said), I’d LOVE you to post it here.
Sincerely,
Mark A. Galloway
Advanced Legal Planning, LLC
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