Beware of Trust Scams—and How to Spot Them
Trusts are widely used in estate planning to protect and transfer a person's assets (money, accounts, property, etc.), sometimes in a tax-advantaged manner. Some trusts are highly complex, with multiple parties, intricate structures, specialized legal terms, and references to arcane tax law that can be difficult for the average person to understand.
When properly established with professional guidance, legitimate trusts can provide significant benefits for you and your family. However, it's essential to be aware of potential scams in this area.
Scammers have long taken advantage of this complexity to dupe taxpayers into too-good-to-be-true trust solutions. The Internal Revenue Service (IRS) recently drew attention to a trust tax avoidance scheme involving what are known as § 643(b) trusts.[1] It also warns about another type of trust scam that relies on the so-called pure trust or constitutional trust to make false claims about avoiding taxes and protecting assets.[2]
While legitimate trusts can be powerful tools for estate planning, asset protection, and tax efficiency, fraudulent trusts misuse these principles to deceive individuals. The IRS pays close attention to potential trust tax evasion schemes, and taxpayers who fall victim to a trust scam could potentially face civil and even criminal penalties, making it crucial to create a trust only with a qualified, reputable estate planning attorney.
Trust Scams on the Rise
According to the IRS, in the past few years there has been a "proliferation of abusive trust tax evasion schemes"[3] targeting wealthy individuals, small-business owners, and professionals such as doctors and lawyers. These schemes falsely promise benefits such as
- the reduction or elimination of taxes,
- reduction or elimination of income subject to tax,
- depreciation deductions, and
- a step-up in basis for trust assets.[4]
These trust scams commonly use a layered structure to give the appearance that a taxpayer does not control the trust when in fact they do. Transparency of control over trust assets is important for legitimate estate planning purposes, which is why working with our trusted professionals is essential for creating valid legal arrangements.
Four Signs of a Trust Scam
How can you tell whether a trust is legitimate, as opposed to a scam? The IRS says that abusive trust arrangements typically include one or more of the following elements:
- The purpose of the trust is to hide the true ownership of assets and income or to disguise the substance of transactions. (Generally, there is no legitimate purpose for establishing the trust or carrying out the transactions in this manner.)
- The trusts involve convoluted transactions that serve no meaningful estate planning purpose.
- The trust appears to be a separate legal entity and to create arm's-length relationships with the grantor (the person who created the trust), when in reality the grantor actually controls the trust and its assets. For example, a promoter of an abusive trust might say that you can avoid taxes by transferring all of your business interests to a trust, taking a tax deduction for the full fair market value of these assets, and having the trust pay you for your services but never pay taxes on its income since that income is distributed to a foreign entity.
- The trust arrangers promise that the arrangement will shelter income or assets from federal, state, or local taxes. However, depending on the type of sham trust, the IRS may find that the grantor or beneficiary owes income tax on all the trust's income (under the grantor trust rules of sections 671 to 677 of the Internal Revenue Code), or the arrangers may recommend using impermissible expenses, nonexistent expenses, overvalued expenses, or other unallowable deductions to disguise the nature of the trust transactions.
When choosing an estate planning strategy, be sure to explore both trust and will options to determine what best suits your needs. Each has its own advantages and is appropriate for different situations.
Seek Reputable Advice
Above all, avoid promotions that sound too good to be true, verify the promoter's credentials, and always seek a second opinion from an independent estate planning attorney before creating any trust. If you are considering setting up a trust, consult with our qualified estate planning attorneys to ensure you're making the right choices for your situation.
Understanding probate and how trusts can help your loved ones avoid this potentially complex process is another reason to work with experienced professionals rather than falling for potential scams.
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I.R.S. Chief Couns. Mem. AM 2023-006 (Aug. 18, 2023), https://www.irs.gov/pub/lanoa/am-2023-006-508v.pdf. ↑
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Abusive trust tax evasion schemes - Facts (Section III), IRS (Mar. 29, 2024), https://www.irs.gov/businesses/small-businesses-self-employed/abusive-trust-tax-evasion-schemes-facts-section-iii. ↑
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Abusive trust tax evasion schemes - Facts (Section I), IRS (Mar. 29, 2024), https://www.irs.gov/businesses/small-businesses-self-employed/abusive-trust-tax-evasion-schemes-facts-section-i. ↑
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Id. ↑
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Id. ↑
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Id. ↑
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Id. ↑
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Id. ↑
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Abusive trust tax evasion schemes - Facts (Section III), supra note 2. ↑
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Id. ↑
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Jay Adkisson, The Complex Trust Is Simply The Criminal Tax Evasion Device Known As The Pure Trust Repackaged, Forbes (Aug. 18, 2021), https://www.forbes.com/sites/jayadkisson/2021/08/18/the-complex-trust-is-simply-the-criminal-tax-evasion-device-known-as-the-pure-trust-repackaged. ↑
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I.R.S., U.S. Dep’t of the Treas., Recognizing Illegal Tax Avoidance Schemes, Pub. No. 3995 (2024), https://www.irs.gov/pub/irs-pdf/p3995.pdf. ↑
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Rick Cundiff, Trial notebook: Courts don’t buy the ‘861 argument,’ Ocala StarBanner (Jan. 23, 2008), https://www.ocala.com/story/news/2008/01/24/trial-notebook-courts-dont-buy-the-861-argument/31235965007. ↑
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United States v. Snipes, No. 5:06-cr-22(S1)-Oc-10GRJ, 2007 WL 2572198 (M.D. Fla. 2007), https://abcnews.go.com/images/WNT/061017_Indictment_Snipes.pdf. ↑
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Siobhan Morrissey, Wesley Snipes Sentenced to Three Years in Jail, People (Apr. 24, 2008), https://people.com/crime/wesley-snipes-sentenced-to-three-years-in-jail. ↑
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I.R.S. Chief Couns. Mem. AM 2023-006, supra note 1. ↑
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Id. ↑
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Id. ↑
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Id. ↑
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Id. ↑
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Dirty Dozen, IRS (June 12, 2024), https://www.irs.gov/newsroom/dirty-dozen. ↑
