Irrevocable, Non-Grantor, Complex, Discretionary, Spendthrift Trust

[ExecConsult]

Many of you know that I already posted my thoughts in relation to the IRREVOCABLE, NON-GRANTOR, COMPLEX, DISCRETIONARY, SPENDTHRIFT TRUST on another thread I started. (A copy of that thread can be found re-posted here: )

Recently I was actually given a copy of the trust (minus page 8) and some other materials to review. I have completed as much review of it as I feel is necessary (and as much as I can afford the unpaid time for) and wanted to bring you the results. First I will list some questions that I have received and answer them. Following I'll include some additional thoughts.

(Boring Legal Stuff) I must remind any readers that although I am an attorney and my knowledge and experience is used in the creation of my viewpoints listed below, this is not provided to you as a "legal opinion" upon which you can rely. We have no attorney/client relationship to which I am bound or upon which you may rely. See my profile for an abbreviated disclaimer.

First allow me to share some background information that was passed along by sources on the forums. I have not vetted the information, but I have received the same (with minor differences) from a couple of different sources and now I pass it along to you exactly as one source sent it to me in email:

Background: this Irrevocable, Non-Grantor, Complex, Discretionary, Spendthrift Trust was supposedly created by Austin Wakeman Scott who was a law teacher at Harvard Law School. He gave the trust format to his student, Robert Benson, who later practiced law in Texas & New York. (Great story but can't verify this since Scott is deceased).

Jim Blakeman searched for four years to find a trust attorney who could create a trust similar to an attorney's "escrow account" which does not hold "EQUITABLE TITLE" and any funds held there are TAX DEFERRED until they leave the trust account. Also he was looking for "bullet proof" asset protection Jim paid $50K for this trust but now offers it through a handful of sales agents for $5K.

AUDIO: http://www.byoaudio.com/play/WsfDGnVG <http://www.byoaudio.com/play/WsfDGnVG> 2/24/11 TRUST Q & A with Lynn & Jim 1 hr. 34 min.

Following are some questions that I have been asked and my responses in red.

Trust Questions:

1. Is the copyright on the Trust Main pages valid? There is no name following the words Copyright C 1999. At page top it reads " Master's Trust Copyright Trust Format. Registration Number: Serial Number; 7011470". When I did an online search at the copyright office, nothing came up. In the LEGAL OPINIONS section Four, there is a reference at the beginning for " Trust #: TX-1-Copyrighted Spendthrift Trusts. My copyright search for this came up with nothing.

Question: Is this a NON-VALID Copyright just to scare people off? Can someone actually copyright the words in a trust document? Jim Blakeman, who sells this trust, said the copyright is really for the form (binder & contents) so he can speak about the subject & trust contents in public without getting nailed for giving financial advice without a license.

You can copyright the book or binder that is the expression of ideas. Also, you do not have to file with the copyright office to have copyright protections. You don’t even need to put “copyright” on the document to be able to have protections. However, without the notice of copyright it is more difficult to assert your claims against a violator. If it was filed, there could be greater protections then not filed, but simply not filing does not invalidate the copyright.

2. If the Trust agreement states that the Trustee can utilize Trust assets (house , car, etc) then does that make it so? Or is there a chance that a court might consider it "self-dealing" and "substance over form”?

This is one of the biggest concerns that I have. My thought is that it will be “self-dealing.” It is one thing to get something for the beneficiaries and then have incidental use of it. It is entirely something else to get something for yourself that the beneficiary never gets to enjoy and claim that it is really for the beneficiary so you can avoid taxes and criminal penalties. For instance, the Trustee of a Special Needs Trust might purchase a car for a beneficiary and use it for someone to drive an incapacitated beneficiary around. That Trustee may have incidental use of said vehicle, but if the Trustee starts using it as an every day driver, the IRS is going to say 1) self-dealing in violation of fiduciary responsibility 2) Waste of assets in violation of fiduciary duty and 3) the reasonable rental value of said vehicle is income to the Trustee.

One of my wife’s friends (I guess my friend too) is a criminal investigator with the IRS. She would tear apart anyone enjoying the assets of the trust to this extent.

3. This is a NON-GRANTOR Trust. If the SETTLOR creates and FUNDS the Trust with $10.00, appoints the COMPLIANT OVERSEER & TRUSTEE and then walks away, will he/she never have any further liability or responsibility ever in the future as Jim says?

That is correct. However, the settlor in their structure is a non-related third party. This is another problem. They anticipate that you will add assets to the trust and that you will also be the Trustee. You become a settlor/grantor as soon as you add assets to the trust. Still as a grantor you have no continuing liability in this particular trust. It is as the Trustee that you may develop liability.

4. The "Legal Opinion" letters (really just endorsements) included are from people who are no longer alive. Robert Benson, the attorney who created the trust is deceased as is Judge Boring. The IRS agent supposedly is still around but haven't found him in the US. I did find his name pop up on a search in New Zealand. Jim Blakman is apparently working on supplying new legal opinion letters from a Trust Attorney currently in practice. Haven't received them yet as promised.

I agree that the Opinion Letters do seem more like endorsements. It is also interesting that both the Attorney opinion and the former IRS agent opinion both refer to the trust as “our” . . . trust. The fact that they have all disappeared or have passed on is troubling.

Let us assume for a moment that the attorney and former IRS agent who wrote their opinions of the letter did so as qualified, non-biased third parties. I still don’t believe the opinion letters are sufficient. About all they do is say, “This is a trust that has the following provisions.” The question is not whether or not the trust is a legal trust or even a good trust. The question is whether or not the trust will do what they are claiming it will do and they are selling it for. The opinion letters only address one of the claims, deferment of capital gains. (I address the capital gains deferment in the next question.) The opinion letters do nothing to address the self-dealing issues. The opinions do not address whether or not the assets can be transferred to another trust with different beneficiaries at all (much less tax free). I read the trust (minus page 8) and could give a similar opinion letter. However, even if I gave the exact same opinion letter, I’d still disagree with what the “Hayseed” group is claiming that you can do with the trust.

Let me give you an example. A trust is a tool that is fashioned to perform a specific job. Let’s say, for instance, that you hand me a hammer and ask me to give you an opinion on whether or not it is a valid tool that will do what hammers are supposed to do. I could write you a letter about how this tool is properly designed for pounding in and removing nails. What the “Hayseed” group is doing is saying that the tool can be used to remove nails, screws, and bolts. My opinion letter didn’t say that. The tool is not designed for that. Yet, they are claiming it and attempting to use the opinion letter to lend credibility to their claims.

5. Will "Extraordinary Gains" like the sale of Iraqi Dinar really qualify for TAX DEFERMENT according to IRS Section 643 as referred to in the trust? It suggests in plain English that it does at the Cornell University site: http://iqd.me/l/irc643 <http://iqd.me/l/irc643> . Jim says he's been operating out of this trust for 14 years and even after 3 audits he has never had a problem!

“Extraordinary Gains” is nowhere to be found in IRC 643. This is another area that kills the use of this trust for its intended purpose.

The two areas where a deferment of tax can occur by allocating gains to corpus are:

643(a ) (3 ) Capital Gains and Losses AND

643(a ) (4 ) Extraordinary Dividends and Taxable Stock Dividends

These two sections both allow allocation to corpus which defers taxes. However, subsection 4 does not apply to the trust we are talking about. Subsection 4 (Extraordinary Dividends) only applies to Simple Trusts (not complex trusts) where income is distributed annually. That leaves us to look at (a ) (3 ) Capital Gains and Losses.

This is where things get really sticky. While gains and losses on the sale of a capital asset may be allocated (in good faith) to the corpus of the trust and thereby defer taxes, it is not settled that income from exchanging dinar will be viewed by the internal revenue service as a capital gain. Gains on exchanges of foreign currency are controlled by Section 988 of the Internal Revenue Code. The general rule for physical currency (not contracts for currency) is that the gains are treated as interest income which is classified and taxed as ordinary income (not capital gains). There is a narrowly defined exception through which some individuals will be able to claim capital gains treatment for a “Personal Transaction.” However, even an individual who has purchased dinar as an investment will be hard pressed to claim “Personal Transaction” capital gains treatment under section 988. (For more information on individual tax treatment, see the following link which is a re-post of what I have produced before: )

I see NO WAY at all for an entity such as a trust to claim capital gains on the exchange of dinar. Under section 988, I believe it will be ordinary income and therefore 643 (a ) (3 ) will not apply. The taxes can not be deferred.

Now some other thoughts I had in relation to this trust that I was not asked about.

I was really expecting more. There is nothing special in this trust (unless it was on page 8 that I am missing) that you wouldn't find in any other well drafted irrevocable trust. The provisions are rather standard. It is simply a revocable trust, that is fully discretionary, that has spendthrift provisions. I'm telling you, that is fairly standard for some attorneys. Most will have less discretionary language than this, but making it fully discretionary is certainly not uncommon.

There is actually quite a bit missing from this trust that I am used to seeing in a well drafted irrevocable trust. To give you a general idea, this trust, minus signature pages, is about 10 pages long. The typical, run of the mill, Irrevocable Life Insurance Trusts I am used to seeing come out around seventy pages. It is true that length does not equal quality, but I use this as an illustration to show the amount of information that I am used to seeing that is missing in the "Hayseed" trust. (I don't want to take the time to go through provision by provision for 60 pages worth of trust information.)

The include a provision that allows the Compliance Overseer to remove and add beneficiaries without restriction (except for the Grantor or the Compliance Overseer). This constitutes the ability to affect beneficial enjoyment and as such is an "Incident of Ownership." It most likely causes the value of the trust assets to be included in the Compliance Overseer's estate for estate tax purposes.

There is not enough in the trust to make a lot more comment. It is really pretty basically just an irrevocable trust where the Trustee has full discretion to make (or not make) distributions - oh and it has spendthrift provisions (like every other irrevocable trust drafted in the US today). So what makes it so special? As far as I can tell - nothing. In fact, I think you could do much better.

The only thing special I see from the "Hayseed" group are its claims which, as far as I can tell, remain unsubstantiated. Sure you can allocate capital gains to corpus instead of income. However, that does not mean you, as Trustee get to use and enjoy the assets of the trust. When you place the assets into this trust, you have given them away to the beneficiaries of the trust and have a fiduciary responsibility to maintain them and grow them (see the prudent investors act) for the beneficiaries. Using the assets the way that the Hayseed group suggests goes way beyond simple self-dealing and, in my opinion, could have criminal consequences (embezzlement & theft).

At the very least, if the beneficiaries ever found that you were using their assets for yourself, they could easily win a civil suit against you, have you removed as Trustee, and levy a judgment against you that you would have to pay back to the trust.

My suggestion is see an attorney and CPA post RV and figure out how to minimize taxes and achieve your goals without going to jail.

Best of Blessings,

Mark

[breault]

This is wonderful. It's obvious the amount of time and energy you put into providing us with this, and I just wanted to say thank you...........Thank you.

[Hirsch]

Thank you for taking your time on this. It helped me and Im sure a lot of others of not jumping into that trust and that is something.

I once dealt with Irrevocable living trusts, and even they were complicated not to mention different depending on the state of issuance.

[rozman]

Mark, Your analysis on this trust is very revealing and informative. You have been helpful to many people on this website in explaining the many investment vehicles available and the tax consequences as well as other details that need to be reviewed. I am very interested in how to set up a trust, ibc, llc,etc that would allow the proceeds from cashing in the Dinars after RV to appreciate on a tax deferred or tax free basis. Please leave me a way to contact you on my message board.

[debbieb40]

thank you so much for your heart and giving of your time, talent, information, caring, sharing with your fellow investors.

God Bless

Debbie

[BtrFuture4All]

Thank you ExecConsult for taking your personal time to review and make comments on this. I'm sure it helped many. I had already pretty much made up my mind that I did not feel comfortable with it and your feedback helped me to confirm that. Again, Thank you.

[Texhad]

It is nice to have helpful people who freely share their expertise with others on DV.

Thank You.

Go RV!

Blessings,

Texhad

[Francie26]

It is nice to have helpful people who freely share their expertise with others on DV.

Thank You.

Go RV!

Blessings,

Texhad

[yota691]

Thanks for the time and info!!

[jeffcaleb]

Does any one know how to contact the company selling these trusts? I had worked with Keevon Carnell and can't get in touch with him any longer. I would like to have my deposit returned. I have not been able to reach Stillwater Trusts via their email address or Keevon by phone or email.

Thanks so much for the reply,

Jeff