{"id":12868,"date":"2024-01-28T06:00:46","date_gmt":"2024-01-28T12:00:46","guid":{"rendered":"https:\/\/legaltalktexas.hammerle.com\/?p=12868"},"modified":"2025-06-18T12:43:03","modified_gmt":"2025-06-18T17:43:03","slug":"irs-issues-alerts-on-common-law-trust-and-dozen-scams","status":"publish","type":"post","link":"https:\/\/hammerle.com\/legaltalk\/wills-trusts\/irs-issues-alerts-on-common-law-trust-and-dozen-scams\/","title":{"rendered":"IRS Issues Alerts on the Common Law Trust and a Dozen More Scams"},"content":{"rendered":"

In the Monopoly game of life, there is a type of trust that could take you straight to jail.<\/span><\/p>\n

Like all good <\/span>scams<\/span><\/a>, this trust has gone by different names over the years, with the most popular being called \u201cPure Trust,\u201d \u201cConstitutional Trust,\u201d or \u201cCommon Law Trust.\u201d Most recently it has gone by the catchy name \u201cNon-grantor, irrevocable, complex, discretionary, spendthrift trust.\u201d<\/span><\/p>\n

What Is a Non-Grantor, Irrevocable, Complex, Discretionary, Spendthrift Trust?<\/span><\/h2>\n

The trust is marketed as a structure to avoid tax on the income of the assets that are placed in the trust. It is complicated, which is a hallmark of scams.<\/span><\/p>\n

The general structure is that a third party (not you) sets up an <\/span>irrevocable trust<\/span><\/a> on your behalf. You are appointed as a \u201cCompliance Overseer.\u201d You are not the beneficiary of the trust, although in some of the marketed trusts your spouse or children are.<\/span><\/p>\n

The trustee is given sole discretion over the distributions of principal and income. The trust is ambiguous about whether you can veto or direct the distributions. The trust supposedly provides asset protection to the assets in the trust.<\/span><\/p>\n

How Does the Non-Grantor, Irrevocable, Complex, Discretionary, Spendthrift Trust Work?<\/span><\/h2>\n

You fund the trust by selling the assets to it. The trust gives you a promissory note for the purchase price. The trust then leases the assets back to you.<\/span><\/p>\n

The promotional materials state that none of the current income of the trust is taxable as long as the trustee allocates the income to the corpus. The materials rely on Internal Revenue Code Section 643(a)(3) to provide the loophole to avoid taxation.<\/span><\/p>\n

To which the IRS replies \u201cBull***\u201d (or words to that effect). The trust has become so popular that the IRS Chief Counsel was prompted to issue a Chief Counsel Advice Memorandum describing why the trust does not avoid taxation.<\/span><\/p>\n

The Warning from the IRS\u00a0<\/span><\/h2>\n

Without going too deeply into the technical discussion, here is the gist of the Memorandum:\u00a0 Section 643(a)(3) does not address the taxability of income; it merely addresses whether the tax on the income is paid by the trust or by the <\/span>beneficiary<\/span><\/a>. The promotional materials fail to mention Section 641, which describes how taxable income is computed and whether it can be held in the trust or distributed to a beneficiary. The promotional materials skip right by Sections 61 and 63 which define gross income and taxable income.<\/span><\/p>\n

The Memorandum states that it does not discuss any other questions that such a trust might present, such as whether the transfers to or from the trust are taxable events, the trust provides asset protection, the gross income is an extraordinary dividend, the trust could be challenged as a \u201csham trust\u201d, and the transactions could be \u201creportable transactions.\u201d The mere inclusion of that list, of course, is a powerful hint to sellers and buyers of the trust that they will need to set aside years of their lives to defend the trust in an audit. And money \u2013 lots of it.<\/span><\/p>\n

Two main takeaways from the Memorandum are:\u00a0<\/span><\/h3>\n
    \n
  1. You should not rely on promotional materials for either tax or estate planning<\/span><\/li>\n
  2. Do your research before you spend good money on these schemes<\/span><\/li>\n<\/ol>\n

    Here are some of the tax scams that the IRS warns about: <\/span><\/h3>\n