Special Trusts: defer ALL passive income tax - reduce active income down to 12-18%

[Klemens]

I setup specially designed trust: non-grantor, irrevocable, complex, spendthrift, private contract trust. This trust gives complete asset protection (irrevocable, spendthrift), eliminating all passive income tax for all your investment (rental property, primary resident, stocks, cryptos, etc.) using special IRS tax code, avoiding probate, avoiding all estate tax (regardless the estate amount exemption). The Trust will file tax return 1041 with zero income so no tax is paid. You "move" all your assets into this trust. You own nothing but control everything. You are able to use the trust fund to pay for almost 90% of monthly expenses, except food, fun, and clothing.

For those who have active business income (1099), combine this Private Trust with Business Trust, we can reduce our active income down to net of about 12-18% income to be taxed. Imagine how much tax we can save every year with our high earning income.



[Note: This thread discusses a frivolous tax argument scheme. You may read the entire thread for details, but it is best to understand from the beginning that the technique has been thoroughly evaluated and shown to be fraudulent despite the OPs strenuous assertions otherwise.-WCI]

[The White Coat Investor]

No such thing as "complete" asset protection, but irrevocable is awfully good, at least after a couple of years.

But if you think you and your trust are only going to pay tax on 1/6th of your income because you have a trust, I fear there is something you don't understand about what you have. Or maybe someone is lying to you. Or maybe you have a gob-ton of depreciation you're using to offset investment income. But something doesn't feel right.

Form 1041 is just a tax return for a trust. Trust tax brackets are actually pretty steep.

[Larry Ragman]

You emphasize it is a “special” trust. What is special about it in terms of shielding income? Focusing just on the source of income, whether it is held inside or outside the trust it is still taxable. The only question is whether the trust or the beneficiary will pay the tax. Having the income stream in the trust does not change its nature from active to passive. I think, but I am not sure, you are conflating the trust payout and the income from the revenue source. The IRS still requires income tax on the latter even it is in a trust, but the trust pays it. Section 643 is not a shield.

[spiritrider]

As pointed out by WCI, absolute asset protection does not exist in any trust. Not too mention, while self-settled trusts receive more asset protection from some states. They are more at risk than a trust with a third-party trustee.

[The White Coat Investor]

- If all your current assets are not no longer owned by you personally, these assets are completely protected from you from any claims. Complete asset protection can be achieved permanently.

- First cut: up to 70% of your active income can be converted into passive income for which you do not pay income tax on if this passive income is inside the special trust. The other 30% income will deduct regular business expense to reduce it down to less than 20% (depending on your business expense). This has nothing to do with any depreciation.

- For form 1041, with special IRC Code 643 the Trust results in net zero income, thus no Trust tax bracket applied.

You may not know what you are not aware of. That's why I want to expose people to this.

Okay pal. Do you think that's a little weird that you seem to know about a secret trust that nobody else knows about or has ever written anything about? Does that bother you at all? It would me.

If that's not the case, how about posting a link to irs.gov or even an article written by a reputable trust lawyer or accountant about your special trust that provides "complete asset protection" and "reduces taxes by 80%+ by converting active to passive income".

I find it very interesting that Googling "private contract trust" returns NOTHING. Private trust, yes. Contract trust, yes. Private contract trust, no.

Honestly, this sounds like a frivolous tax argument to me, especially when you start quoting lines in the constitution about what is taxable income. Read more here:

https://www.whitecoatinvestor.com/wh...tax-arguments/

I fear you're setting yourself up for trouble with the IRS.

By the way, the grantor is the person who funds the trust. I'm very curious how you're putting your assets into the trust without being the grantor of the trust. Are you first gifting them to someone else? There are tax consequences for that.

If this thing worked like you say it does, attorneys would be writing all about it all the time and we'd all have one. The fact that this isn't occurring suggests to me that it does not work like you say it does.

[zlandar]

Okay pal. Do you think that's a little weird that you seem to know about a secret trust that nobody else knows about or has ever written anything about? Does that bother you at all? It would me.

If that's not the case, how about posting a link to irs.gov or even an article written by a reputable trust lawyer or accountant about your special trust that provides "complete asset protection" and "reduces taxes by 80%+ by converting active to passive income".

I find it very interesting that Googling "private contract trust" returns NOTHING. Private trust, yes. Contract trust, yes. Private contract trust, no.

Honestly, this sounds like a frivolous tax argument to me, especially when you start quoting lines in the constitution about what is taxable income. Read more here:

https://www.whitecoatinvestor.com/wh...tax-arguments/

I fear you're setting yourself up for trouble with the IRS.

By the way, the grantor is the person who funds the trust. I'm very curious how you're putting your assets into the trust without being the grantor of the trust. Are you first gifting them to someone else? There are tax consequences for that.

If this thing worked like you say it does, attorneys would be writing all about it all the time and we'd all have one. The fact that this isn't occurring suggests to me that it does not work like you say it does.

Try "complex trust":

https://www.forbes.com/sites/jayadki...h=30e816351f45

Same old BS dressed up in a different way. What is old is new again.

[Klemens]

"https://www.forbes.com/sites/jayadki...h=30e816351f45"

That's correct because that Complex trust is Grantor trust as stated in the article, so tax will be paid by Grantor. It is totally different if it is Non-Grantor trust.

[The White Coat Investor]

- Grantor sets up the trust, funds it with intellectual property: Trust document, and $10 to the corpus of the trust. Done officially to create a trust, then gone.

- James, you still have the herd mentality! Read my description of each of the features of the trust again and tell me which one you do not agree or understand.

- This is legal tax avoidance strategy, not tax evasion, and not using any of the IRS frivolous tax argument, as listed in your quoted IRS publication.

- Just think about the elite, the wealthy families who have accumulated and passed on tons of wealth from generation to generation over hundred of years. What structures do you think they use? All the regular legislative structures as corporation, LLC were the recently created for the legislation to control people. These trusts have existed long before these created entities.

- By the way, it's not "that nobody else knows about or has ever written anything about" . It's just only people who do not know what they don't know.

How long have you had this trust and who is providing you the advice about it?

Why don't you walk us through exactly what you did and we'll see if we can assist you by poking some holes in anything that sounds like it may not be legit and then you can at least get a second opinion about it.

I'll try to piece it together from what you've said and you make corrections and fill in the blanks, ok?


Step 1: You had some intellectual property. You somehow gave it to someone else. That someone else (the grantor of the trust) put it in an irrevocable trust (what state?) where you are the beneficiary. You're calling this the "private trust."

Step 2: You open another trust that you are calling the "business trust". Who is the grantor, trustee, and beneficiary of this trust and what state is it in? What is placed into this trust?

Step 3: ?

Step 4: ?

[StarTrekDoc]

Trust fund baby/family. Everyone becomes a Kennedy.

The trick is how to fund the trust with your own assets, be the trustee, AND be the beneficiary of said assets. My understanding is that one cannot be all three, otherwise courts will disallow it. As @WCI pointed out, there's some wonky gifting/3rd party going on if this is to benefit same generation/same person.

There's family trusts and family LLCs setups, sure. Can you explain specifically how the funding of the trust occurs?

Also specifically to many in this forum to get that 18%: how do 401/IRA and pensions get transferred?

[The White Coat Investor]

Try "complex trust":

https://www.forbes.com/sites/jayadki...h=30e816351f45

Same old BS dressed up in a different way. What is old is new again.

I think you're right. I think this is what he's talking about.

The so-called pure trust scheme was a criminal tax evasion ploy that widely circulated from roughly 1995 to 2005. Promising a form of trust which negate the payment of all taxes, the promoters of the pure trust sold these things by the tens-of-thousands to (former) taxpayers who used them for a while until the IRS caught up with them, and sent literally hundreds of promoters and taxpayers alike to nice vacations at Club Fed.

With the IRS and DOJ on the hunt for both sellers and users of pure trusts, the sales of these vehicles dramatically tailed off and I had not heard much of any about them until recently when I had the occasion to cross the path of a promoter of pure trusts, but now referred to as complex trusts. This promoter had the same old marketing materials as went around two decades previously, including representations that John D. Rockefeller used one to avoid paying his income taxes (he didn't, at least when there was an income tax during his lifetime), and these trusts are only known to the super-wealthy, etc. and etc.

The complex trust is simply another name for the pure trust, which have also gone by such names as constitutional trusts, contract trusts, patriot trusts, and the like. The scammer who sells complex trusts will show their marks a letter from the IRS which states that such a trust pays no income taxes. Using that letter, they then tell their marks that if they put all their assets and divert their income into the Complex Trust that it will then be forever free of tax.

I find it ironic that he's accusing us (me?) of "not knowing what you don't know" but so far seems unable to explain exactly how this trust works. If he understands it so well, he should be able to dumb it down enough that the rest of us can understand exactly how it works. I fear he's been swindled into a "pure trust" or "complex trust" now being called a "private contract trust" in its current iteration of this tax evasion scheme.

[The White Coat Investor]

The Pure Trust is what Wesley Snipes got caught up in.

https://morristrust.com/news-resourc...rust-argument/

Using legitimate tax reduction strategies is perfectly legal; however, in the endless search for a tax break some people fall for outlandish claims relating to “tax-free” Trusts made by “tax protesters” that could land them in jail instead of saving them money. Actor Wesley Snipes is a perfect example of an innocent victim of bad advice – at least that’s what his defense counsel claimed at his trial several years ago. Whether he was a willing participant in a tax evasion scheme or an innocent victim of a persuasive shyster we may never know. We can, however, learn some valuable lessons from his very public tax evasion trial.

Award winning actor Wesley Snipes made close to $40 million between 1999 and 2004, yet paid absolutely nothing in income tax during that time period. In fact, he didn’t even file income tax returns for the years in question. Eventually, Uncle Sam caught on and filed criminal tax evasion charges against Snipes. Snipes and his co-conspirators, an accountant and an anti-tax ideologue, argued that a technicality in the Internal Revenue Code allowed him to escape taxation of his earnings. More importantly, the actor’s defense team argued that Snipes should not be found guilty because he relied on the advice of those co-conspirators. The jury bought his defense, finding him not guilty of the most serious charges. Although Snipes avoided a potential 16 year prison sentence, he did eventually have to serve some time in a federal prison and owed a small fortune in back taxes, penalties, and interest....

The “Pure Trust” Scam
One of the most common tactics used by tax protesters is the “Pure Trust” argument. Also known as a “Constitutional Trust” or “Common Law Trust,” proponents of these Trusts argue that income earned by the Trust does not incur income tax and assets held by the Trust are not subject to gift and estate taxation. They are often touted as “Asset Protection Trusts” with promises of complete privacy and tax avoidance. Unfortunately, unsuspecting taxpayers fall victim to these tactics all the time – often with devastating financial consequences down the road.
There are many websites abound with explicit, or implied, claims that a Trust can be created which will shelter your assets from the Internal Revenue Service, effectively avoiding all taxation on the assets held by the Trust. The websites claim not only will of your assets be held tax-free, but they will also be out of the reach of creditors, divorcing spouses, and even the bankruptcy court, according to proponents of these “Pure Trusts.” The reality, however, is that there is no such thing as a “Pure Trust.” Sadly, many hard working, otherwise law abiding taxpayers only find this out after they have lost the assets that were supposed to be protected and/or have been hit with a huge bill from the Internal Revenue Service for back taxes.

I agree this sounds like the same thing.

[The White Coat Investor]

More on the Pure Trust:

https://www.justice.gov/archive/tax/txdv06403.html

Dennis Poseley, a former resident of Phoenix, Ariz. and co-founder of IFC, was sentenced to 84 months of imprisonment and fined $175,000 after being convicted on charges of conspiracy to defraud the government and willful failure to file tax returns;

Patricia Ensign, a former resident of Phoenix, Ariz. and co-founder of IFC, was sentenced to 18 months of imprisonment and fined $100,000 after being convicted on charges of willful failure to file tax returns;

David Trepas, a former resident of Scottsdale, Ariz. and consultant for IFC, was sentenced to 60 months of imprisonment after being convicted on charges of conspiracy to defraud the government and willful failure to file tax returns;

Rachel McElhinney, a resident of Scottsdale, Ariz. and consultant for IFC, was sentenced to 16 months of imprisonment after being convicted on charges of willful failure to file tax returns;

Keith Priest, a former resident of Tempe, Arizona and a "trustee" for IFC, was sentenced to 18 months of imprisonment after being convicted on charges of willful failure to file tax returns.

“People who promote tax evasion schemes will be prosecuted, convicted and sentenced to substantial prison terms,” said Eileen J. O’Connor, Assistant Attorney General for the Justice Department’s Tax Division. “The Department of Justice is working vigorously to stop tax scammers who harm the federal Treasury and all honest taxpayers.”

“Promoting abusive trusts and tax schemes for the purpose of committing tax evasion isn’t tax planning; it’s criminal activity,” said Nancy Jardini, Chief of IRS Criminal Investigations. “Public confidence in our system of taxation is vital; therefore, we will continue our enforcement efforts to halt fraudulent tax schemes and hold the promoters of these schemes accountable for their actions.”

On Sept. 8, 2005, after a six-week trial, a jury convicted the defendants of tax crimes in connection with their promotion of a tax evasion scheme through IFC, a consulting company based in Tempe, Ariz. The defendants advanced their scheme through several avenues, including domestic and offshore seminars, a promotional website, and an interactive telephone conference line.

According to evidence the government presented at trial, from 1996 through early 2003, the defendants received $4.7 million in fees from their sale of 2,000 "pure trusts," falsely claiming that their customers could lawfully avoid income taxes by placing their income and assets into a trust. Evidence introduced at trial showed that IFC's trusts enabled customers to retain the use and control of any income and assets they placed into their respective trusts, while making it difficult for the IRS to track the true ownership of assets or income assigned to the "trusts." Trial evidence also showed that IFC was a prominent vendor with the “Institute of Global Prosperity” (IGP). At offshore seminars hosted by IGP, defendant Dennis Poseley promoted IFC's trust schemes to thousands of people.

[The White Coat Investor]

No, I think writing it all out is a good idea.

I'm wondering if these are the guys selling this to you:

https://peotrust.com/

Here's one of their presentations:

https://peotrust.com/files/Trust-Pre...-01.02.19b.pdf

At any rate, let's look through each of your steps and see if it seems questionable.


Private Trust Step 1: The grantor is not just the creator of the trust. A grantor is also the person who funds the trust. They "grant" the assets into the trust.

What Is a Grantor?

A grantor is an individual or other entity that creates a trust (i.e., the individual whose assets are put into the trust)

https://www.investopedia.com/terms/g/grantor.asp

So, if this third party person who puts $10 is the grantor but then you put all your stuff in there too, you are also the grantor.

What you are describing sounds very sketchy. I would get a second opinion from a completely unrelated estate planning attorney in your state on that step.

Private Trust Step 2: The trustee doesn't buy stuff. The trust does. The trustee is just the agent. So, if this trust bought all your valuable stuff (maybe this is how you're getting around being the grantor by selling the trust your stuff) I'm curious what the trust is using to buy it since it only has $10. The usual option is a promissory note. But when you sell assets to a trust, you don't sell it at cost basis. You sell it at fair market value. That's a huge red flag to me that you've been told otherwise, so again, I would get a second opinion on this step from an unrelated estate planning attorney in your state. There are also laws about how little interest the promissory note can pay. It's about 1.8-1.9% right now.

Private Trust Step 3: This all sounds kind of weird too. A trust can easily pay for all the usual living expenses of a beneficiary. There's no reason that food and clothing can't be paid for out of a trust. That doesn't make any sense.

https://www.foxrothschild.com/public...an-in-a-trust#

Trusts frequently provide that income and/or principal can be paid to a beneficiary in the Trustee’s discretion for the beneficiary's health, education, maintenance, and support. This standard, also known as an "ascertainable standard", is commonly included in a trust provision

What encompasses health and education is fairly clear. However, our clients frequently ask us for guidance on what sort of distributions can be made for maintenance and support. As with many areas of the law, there is not a great deal of guidance out there. It is generally agreed that maintenance and support include accustomed living expenses such as mortgage payments, property taxes, insurance payments, utility payments, vacations, and the like. Whether the standard includes items of a more luxurious nature gets into a gray area.

It's awfully hard to argue that food and clothing wouldn't be included in maintenance and support.

Private Trust Step 4: Line 15a of Form 1041 refers to miscellaneous deductions generally subject to a 2% of income floor. If you read the instructions for that line:

https://www.irs.gov/pub/irs-pdf/f1041.pdf

https://www.irs.gov/pub/irs-pdf/i1041.pdf

Starting on page 25, you'll find a list of deductible expenses. These include:

• Trust administrative costs
• Ownership costs
• Appraisal fees
• Investment advisory fees
• Bond premiums
• Casualty and theft losses
• Amortization, depletion, depreciation

Note what is not listed. There is not a deduction for "whatever is leftover" or "extraordinary dividend allocating to the corpus of the trust".

That sounds extremely sketchy to me and again I would get a second opinion on that from an unaffiliated accountant experienced in trust taxation.

Incidentally, the instructions for Form 1041 include this warning (bolding mine):

Abusive Trust Arrangements Certain trust arrangements claim to reduce or eliminate federal taxes in ways that are not permitted under the law. Abusive trust arrangements typically are promoted by the promise of tax benefits with no meaningful change in the taxpayer's control over or benefit from the taxpayer's income or assets. The promised benefits may include reduction or elimination of income subject to tax; deductions for personal expenses paid by the trust; depreciation deductions of an owner's personal residence and furnishings; a stepped-up basis for property transferred to the trust; the reduction or elimination of self-employment taxes; and the reduction or elimination of gift and estate taxes. These promised benefits are inconsistent with the tax rules applicable to trust arrangements. Abusive trust arrangements often use trusts to hide the true ownership ofassets and income or to disguise the substance of transactions. These arrangements frequently involve more than one trust, each holding different assets of the taxpayer (for example, the taxpayer's business, business equipment, home, automobile, etc.). Some trusts may hold interests in other trusts, purport to involve charities, or are foreign trusts. Funds may flow from one trust to another trust by way of rental agreements, fees for services, purchase agreements, and distributions. Some of the abusive trust arrangements that have been identified include unincorporated business trusts (or organizations), equipment or service trusts, family residence trusts, charitable trusts, and final trusts. In each of these trusts, the original owner of the assets nominally subject to the trust effectively retains the authority to cause financial benefits of the trust to be directly or indirectly returned or made available to the owner. For example, the trustee may be the promoter, a relative, or a friend of the owner who simply carries out the directions of the owner whether or not permitted by the terms of the trust. When trusts are used for legitimate business, family, or estate planning purposes, either the trust, the beneficiary, or the transferor of assets to the trust will pay the tax on income generated by the trust property. Trusts can't be used to transform a taxpayer's personal, living, or educational expenses into deductible items, and can't seek to avoid tax liability by ignoring either the true ownership of income and assets or the true substance of transactions. Therefore, the tax results promised by the promoters of abusive trust arrangements are not allowable under the law, and the participants in and promoters of these arrangements may be subject to civil or criminal penalties in appropriate cases. For more details, including the legal principles that control the proper tax treatment of these abusive trust arrangements, see Notice 97-24, 1997-1 C.B. 409. For additional information about abusive tax arrangements, visit the IRS website at IRS.gov and type “Abusive Trusts” in the search box.

All right, enough about the private trust. Let's move on to the business trust.

Business Trust Step 1: Sounds legit.

Business Trust Step 2: Okay, again I assume for a legitimate promissory note. A trust can certainly buy stuff from a business.

Business Trust Step 3: Payment amounts must be reasonable, but I agree, one trust can lease equipment to another trust or a business for a fair price. That lease payment is a deduction for the business or trust making it, and it is passive income for the trust receiving it.

Business Trust Step 4: A trust can certainly own 95% of a business. To get it in there it must be either gifted to the trust or sold to the trust of course at fair market value.

Business Trust Step 5: I agree that a business pays taxes only on its profits.

Business Trust Step 6: Okay, that seems legit to me.

Business Trust Step 7: Something is not right here. Either this irrevocable private trust is a grantor trust, and the tax from its income is paid by the grantor OR it is not a grantor trust and the trust pays the taxes itself at trust tax rates or it can pass it to the beneficiary to pay at their own tax rate. But it certainly doesn't make the trustee pay the taxes. There is no such thing as a personal 1041, so I assume you mean a 1040. I don't know why it would make a 1099 payment to you as the trustee (payment for trustee services?) but if it did, I agree that would be taxable income to you to be reported on your own 1040.


It sounds to me like the big tax savings ploy here is just paying more to lease something than it is actually worth and making the business appear to be making less profit than it actually is. If indeed you are paying fair market value, then you're not saving anything in taxes. You're just moving them around. Private Trust Step 4 is seriously sketchy too. You can't just add income to the trust and not pay taxes on it.

Also, keep in mind that any promissory notes now owned by you personally or by the business (because that's how the trusts paid for the assets) are not in the trust. They receive no asset protection from your personal creditors or your business's creditors.

Who sold you this trust and have you gotten a second opinion on the legality of any of this?

[Nysoz]

This sounds overly complicated. I'll just pay the taxes in retirement. Or if you really want to avoid US taxes, just move to Puerto Rico.

[abds]

If it sounds illegal it's probably illegal.