"Go to Jail" Estate Plans

There are certain trusts which are simply illegal. In the early 1950 a "new creation" came from the U.S. midwest called the "Constitutional Family Trust." Since then it has had many other names (ie. "Pure Trust, Pure Contract Trust, Common Law Trust, Massachusetts Business Trust, Indiana Land Trust," etc..), but has remained much the same in format. An irrevocable trust is created and the assets are divided into Units of Beneficial Ownership. These units can be distributed to family members and heirs and then enforced when the owner of the estate dies. This entire arrangement violates IRC 1031 (A)-(E).

Some have refined the argument that the Trust is based on Common Law which pre-dates U.S. law. This is irrelevant in that statutory law (that passed in legislatures) over rules common law (Note Uniform Probate Code Sec.15002). Others have tried to argue that a "Trust is a Contract" as is thus protected under Article 1 Section 10 of the U.S. Constitution which states, "No State shall enter into any law . . . inmpairing the Obligation of Contracts."

There are two basic problems with this view:

  1. A trust is not a contract. Trusts hold title to property. Contracts do not. A contract is an agreement by two or more parties to provide goods or services where there is consideration involved. A Trust is an entity which hold title to and manages property.
  2. While states cannot pass any laws abrogating contracts, the U.S. constitution reserves that power to the Federal government. The Federal government can, and has, abrogated existing contracts where such contracts have gone against the rule of law.

In short, any trust arrangement must be made under existing state and federal laws in effect at the time the trust is created.

In the past the IRS simply ordered people who had such trusts to pay their back taxes (with interest). Now, they have lost their patience and prosecution is frequent. The IRS has yet to lose one of these cases.

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