Abusive trusts are usually sold at high costs to consumers with promises of lower taxes but no loss of control over assets. The trusts try to hide the true ownership of assets or the size of income. Though there are many different types of abusive trusts, they all essentially work the same way. A vendor sets up the trust for a taxpayer who transfers assets over. The vendor acts as trustee and provides a means of accessing those funds - sometimes it's a credit card secured by the money in the trust, sometimes it's presigned blank checks. In the case of business trusts, they will sometimes make payments to the taxpayer as dividends that are labeled as business expenses. Either way, the original owner is supposed to have full access and full control of the money. However, someone has to pay the tax. In the eyes of the IRS, it's the person who derives use from the income that pays. And sometimes the person who sold the trust services steals the assets!
Both legitimate and abusive trusts go under many names. Businesses are placed in business trusts or unincorporated business trusts. The machinery used by a business is usually placed in an equipment or service trust. A house is placed in a family residence trust and personal property or income is often placed in a charitable trust. In some states, unincorporated business trusts can be used to limit state business income tax liability but they can never be used to limit federal income tax liability. Charitable trusts are used by people who want to give their money to charity when they die but still want to use it while they live. The taxpayer pays income taxes but avoids probate taxes. The problem comes when trusts are misused in an illegal attempt to avoid income taxes.
Don't believe it when anyone tries to tell you that by setting up a trust, either in this country or offshore, you can avoid paying taxes. It can't be done. You'll only wind up paying a lot of money for something that does nothing. And if you're caught, the price can be high. In a case brought by federal prosecutors, James Noske was convicted of setting up these trusts for others and sentenced to serve 6 1/2 years in prison by a federal judge. If you're caught using the trusts to avoid paying your own taxes, you'll owe the government the original taxes plus interest on those taxes plus fines plus an additional penalty of 75% of the original tax. You could pay more than twice the original tax when it's all over.
The Internal Revenue Service suggests that anyone who has used such trusts in the past file an amended returns and pay the taxes owed to the IRS. And, if someone approaches you trying to sell you such a trust, you should report them to the IRS immediately.
For more information about taxes, check out the IRS website. For advice about managing your assets, consult with a licensed attorney or certified financial planner.
If you have questions or wish to report an incident, contact NCL's National Fraud Information
Center at 1-800-876-7060 or use one of our
online forms.
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