Trusts are valuable tools in estate planning, helping individuals protect and transfer assets, sometimes in a tax-efficient manner. However, the complexity of certain trusts—often involving multiple parties, specialized legal terms, and nuanced tax regulations—can make them difficult for the average person to fully understand. Therefore, it’s crucial to beware of trust scams and learn how to identify and avoid them.
Unfortunately, scammers take advantage of this complexity, promoting misleading or fraudulent trust schemes that promise unrealistic tax benefits or asset protection. The Internal Revenue Service (IRS) has recently issued warnings about two prevalent types of trust scams: § 643(b)1 trusts and so-called pure trusts or constitutional trusts.2 Falling victim to these scams can result in severe civil and criminal penalties, making it essential to work with a qualified estate planning attorney in Greenwood Village when establishing a trust.
Trust Scams on the Rise
According to the IRS, in recent years, there has been a “proliferation of abusive trust tax evasion schemes”3 targeting wealthy individuals, small-business owners, and professionals such as doctors and lawyers. It is recommended for individuals to beware of trust scams and they should focus on how to identify and avoid them to safeguard your legacy.
These schemes falsely promise benefits such as:
- Elimination or significant reduction of taxes
- Reduction in income subject to taxation
- Provision of improper depreciation deductions
- Increase (step-up) the tax basis of assets without justification4
One common strategy in these scams involves creating a series of layered trusts to give the illusion that the taxpayer does not control the assets when, in reality, they do.5 These structures often involve transferring assets between trusts through rental agreements, service fees, and complex financial arrangements to obscure the true ownership. Despite appearing legitimate, these scams will fail IRS scrutiny. Always remain vigilant to avoid trust scams. Specifically, beware of trust scams: how to identify and avoid them is key to avoiding financial pitfalls.
Types of Trust Scams to Watch Out For
The Pure Trust Scam
Pure trust scams often involve transferring a business or other assets to a so-called pure or constitutional trust, making it appear as though the owner has relinquished control. In reality, the trustmaker still manages daily operations and income, falsely claiming tax exemption. Scammers often use legal-sounding language and misinterpret tax laws to create the illusion of legitimacy.6 In understanding how to identify and avoid them, it is crucial to know about specific scams. Beware of trust scams: how to identify and avoid them like these can save you from falling into legal trouble.
A famous example is actor Wesley Snipes, who fell victim to a variant of the pure trust scam involving the “861 argument”—a discredited interpretation of the Internal Revenue Code (IRC) § 861 that falsely asserts domestic income is non-taxable. As a result, Snipes faced criminal charges for tax evasion, including prison time and substantial financial penalties.
§ 643(b) Trust Scams
Scammers repackage old trust frauds under new names, such as complex trusts, patriot trusts, or § 643(b) trusts. These schemes falsely claim that income allocated to the trust’s corpus (principal) is not taxable, despite the IRS clearly stating otherwise. The IRS memorandum from 2023 explicitly rejects the notion that simply labeling income as part of the corpus exempts it from taxation.7 Avoid these § 643(b) scams: how to identify and avoid them is important for anyone dealing with estate planning.
Red Flags: How to Spot a Trust Scam
To protect yourself, watch for the following red flags:
– Exaggerated Claims: Be wary of promises to eliminate taxes entirely.
– Secret Loopholes: Trusts cannot bypass established tax laws. Beware of trust scams that use wild language suggesting they are not subject to tax law
– Urgency and Pressure Tactics: Scammers may push you to act quickly.
– Complex Structures: Layers of confusing trusts can signal fraud.
– Lack of Transparency: Scammers may avoid clear explanations.
– Misuse of Legal Terms: Terms like “common law” or “constitutional trust” may be used misleadingly.
Protect Yourself: Work with a Qualified Attorney
The best way to avoid trust scams is to work with a reputable estate planning attorney in Colorado who understands both the legal intricacies and potential pitfalls of trust creation. Never rush into agreements that sound too good to be true and always verify the credentials of anyone offering trust-related services. To avoid trust scams, understanding how to identify and avoid them is essential.
If you’re considering setting up a trust or have questions about existing trusts, contact us for a complimentary initial planning meeting. We’ll ensure your estate plan is both effective and legally sound, protecting your assets and your peace of mind. In summary, it is crucial to beware of trust scams: how to identify and avoid them is essential for safeguarding your financial future.
- I.R.S. Chief Couns. Mem. AM 2023-006 (Aug. 18, 2023), https://www.irs.gov/pub/lanoa/am-2023-006-508v.pdf. ↩︎
- Abusive trust tax evasion schemes – Facts (Section III), IRS (Mar. 29, 2024), https://www.irs.gov/businesses/small-businesses-self-employed/abusive-trust-tax-evasion-schemes-facts-section-iii. ↩︎
- Abusive trust tax evasion schemes – Facts (Section I), IRS (Mar. 29, 2024), https://www.irs.gov/businesses/small-businesses-self-employed/abusive-trust-tax-evasion-schemes-facts-section-i ↩︎
- Id. ↩︎
- Id. ↩︎
- Id. ↩︎
- I.R.S. Chief Couns. Mem. AM 2023-006, supra note 1. ↩︎
