Dubious Estate Plans
people greatly fear a potential personal lawsuit leading to the
loss of some or all of their assets. Others fear an "oppressive"
IRS which would "seize" their estates. In both cases they
seek a type of estate plan which would totally insulate their estate
from a lawsuit and which would lower or eliminate income taxation.
This is an impossibility. You will have more success inventng the
perpetual motion machine or the sky hook. Still, people try.
are certain basics in U.S. law. One of these is that neither a trust
nor a corporation can be set up for any illegal purpose. Evading
the claims of legitimate creditors or legitimate income (and other)
taxes has long been considered an illegal activity. This automatically
makes some trusts and corporations invalid.
Trusts. An irrevocable trust is one which, after having been created
and funded, cannot be changed. Along this line have also come recent
Alaska and Delaware trusts. These are designed to frustrate creditors.
The proplem is that those selling these trusts are off somewhat
in their thinking. "Irrevocable" simply means that the
creator of the trust can make no changes in it. A court of law can
penetrate and set aside any trust with legal reason. No created
trust is higher than U.S. law.
Limited Partnerships/ These is a legal arrangement where an asset's
ownership is subdivided into shares among close family members where
the original owner retains management control over the whole. In
doing so, it is claimed that the value of the asset (as a whole)
can be "discounted" (assuming smaller shares would be
worth less than a unified whole).
plan ran into a number of IRS problems where aggressive discounting
was used. In addition, if among the several partners there were
to occur a divorce, bankruptcy, lawsuit, or tax lien, the entire
arrangment would be affected. A successful lawsuit against a minor
partner could introduce the presence of an unwanted and adversarial
where legally used this is limited to business assets and business
inventory assets only. One cannot place personal assets into such
an arrangement. It may work for a family farm or small business
which carries an inventory, but as an over-all estate plan it leaves
a great deal to be desired. In addition, it has stringent bookkeepiig
and records requirements. It is not a simple plan. Nor is it an
Trusts. Off shore trusts are legal, but are also somewhat unwise
for a number of reasons.
are placing assets under the rule of law of another country. Anyone
experiencing a trial in a Mexican court can expect a very lengthy
delay before that court reaches a decision. One's assets could
be tied up for generations in this arrangement.
placed in a trust beyond U.S. law must pay a special tax found
in IRC 1491. In addition, if the creator of the trust (the Trustor)
retains any powers over the trust (ie. can make withdrawals, change
trustees, change beneficiaries, etc.), then the trust is a simple
Granto Trust under IRC 671-679. This means that creditors and
the IRS would have full access to such trusts.
An important tax case in 1999 was FTC v. Affordable Media, LLC
(9th Cir). In this case the Trustors had their assets in an off
shore trust to avoid creditors. It was shown in court that the
Trustors had certain powers over the trustee of the trust. The
judge simply ordered the Trustors imprisoned for contempt of court
until they had ordered the trustee to return to the U.S. the assets
in question. Their assets may have been safe, but the defendants
were in jail until they cooperated with the court.
Corporations. One particular former debt-collector attorney designed
an interesting plan. This was after he was suspended from the Colorado
Bar for fraudulent conveyance. He sells a plan for clients to create
a Nevada Corporation, with its own tax identification number, and
they transfer their assets into it. It is then claimed by the owner
of the corporation that they, as individuals, "own nothing"
- the corporation owns everuthing. Hence, their assets are beyond
the reach of creditors.
are three problems with this:
is the "doctrine of merger." If the creator of this
arrangment has the same use and enjoyment of the assets as they
formerly had, then no real change has been made.
transferring assets to another entity with its own IRS tax number
without a legitimate sale, the person is violating gift tax laws.
If the assets are exchanged for "corporate shares" and
the person retains the use and enjoyment of these same assets,
then the arrangement has violated IRC 1031 (A)-(E). If no gift
taxes were reported, no exchange is recognized. If it can be shown
that the individual formerly held these assets in their name then
the entire arrangement is a sham.
entire arrangement is a fraudulent conveyance simply to avoid
creditors and taxes.