Cameron Miranda
A Pure Common Law Trust is a type of irrevocable trust, where the trustees are the legal owners of the assets held in the trust. They are responsible for managing the trust's assets and affairs according to the settlor's wishes and are also liable to pay any taxes due. While there are resources available that claim to explain how to set up a Pure Common Law Trust, it is important to note that some of these sources have been criticized for providing no legal advice or information on how to actually establish such a trust. Furthermore, some experts argue that the Constitutional Common Law Trust is a form of tax fraud and does not work.
| Characteristics | Values |
|---|---|
| Type of trust | Pure Contractual Trust, Irrevocable Trust, Pure Equity Trust |
| Formation | Agreement between owners of property or business and a trustee or group of trustees |
| Trustee's role | Manage assets according to settlor's wishes, manage trust on a day-to-day basis, pay any tax due |
| Trustee's restrictions | Cannot mismanage trust assets including bank accounts, stocks, bonds, retirement accounts, pensions |
| Trustee's duties | Duty of loyalty, duty to report information and accounting, make required trust distributions, duty to invest prudently |
| Legal status | Individuals can sue or be sued for violating terms, but must do so in their own name |
| Taxation | No separate tax ID number required, income taxed directly to grantor of trust |
| Legality | Disputed, some sources claim it is tax fraud |
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What You'll Learn
Pure trusts can protect your assets, provide liability protection, and reduce taxes
Pure trusts, also known as common-law trusts, are a valuable tool for protecting your assets, providing liability protection, and reducing taxes.
Firstly, pure trusts can protect your assets by placing them outside the reach of creditors and lawsuits. This is particularly useful if you are concerned about your assets being seized as part of a lawsuit settlement or court judgment. For example, if you are sued by a contractor who was injured on your property, a pure trust could protect your assets from being attached to satisfy any court judgment.
Secondly, pure trusts can provide liability protection by shielding your assets from creditors' claims. This is achieved by transferring ownership of the assets to the trust, thereby removing them from your personal ownership. As a result, creditors cannot access the assets held in the trust, providing you with a layer of protection.
Thirdly, pure trusts can help reduce taxes, specifically federal estate taxes. By transferring assets to an irrevocable trust, the trustmaker relinquishes ownership and control over the assets, resulting in those assets not being subject to taxation as part of their estate. This strategy can save significant tax dollars and is often a key component of comprehensive estate planning.
It is important to note that while pure trusts offer these benefits, they may not be suitable for everyone. For example, individuals who wish to maintain access to their assets may find the irrevocable nature of pure trusts restrictive. Additionally, the tax implications of establishing a pure trust can be complex, and it is crucial to seek professional advice to ensure compliance with regulations.
In conclusion, pure trusts are a powerful tool for protecting assets, providing liability protection, and reducing tax obligations. However, careful consideration and expert guidance are necessary to maximize the benefits and ensure compliance with legal and tax requirements.
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Common law trusts are created without public officials
A common law trust is formed based on judicial precedents and operates under state-specific regulations. It is created without the involvement of public officials, and the individuals of the trust are eligible to legally sue or be sued for violating the terms of the common law trust. However, any legal action must be undertaken in their own name.
Common law trusts are often contrasted with statutory trusts, which are created under a specific state statute. Statutory trusts are considered separate entities from the trusts parties, and legal action can be initiated in the name of the trust itself. Statutory trusts are often regarded as a type of business organisation and are popular for businesses and investments due to their legal protections, separate entity status, and tax benefits.
In contrast, common law trusts provide more flexibility but may lack the same legal protections as statutory trusts. For example, common law trusts do not offer the same bankruptcy protections as statutory trusts. Additionally, trustees of common law trusts may be personally liable for trust debts, whereas beneficiaries and trustees of statutory trusts are not.
When deciding between a common law trust and a statutory trust, individuals and businesses should carefully evaluate their legal and tax implications. While common law trusts are created without public officials, they are still subject to state-specific regulations and must abide by the common law principles of certainty.
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Trustees are the legal owners of the assets held in a trust
A trust is a legal entity with separate and distinct rights, similar to a person or corporation. In a trust, a party known as a trustor gives another party, a trustee, the right to hold title to and manage property or assets for the benefit of a third party, the beneficiary. Trustees are the legal owners of the assets held in a trust on behalf of the trust and its beneficiaries. The beneficiaries are the beneficial or equitable owners of the trust property. Trustees have a fiduciary duty to manage the trust and may be held to a high standard of care in their dealings to enforce their behaviour.
The trustee is given legal title to the trust property, but in accepting title, the trustee owes a number of fiduciary duties to the beneficiaries. The primary duties owed are those of loyalty, prudence, and impartiality. Trustees may be liable if assets are not properly invested. They may also be liable to beneficiaries even when the trust has made a profit but consent has not been given. Trustees are subject to ancillary duties in support of the primary duties, including openness, transparency, record-keeping, accounting, and disclosure.
A trustor creates a trust with the help of an attorney. The trustor's assets are transferred to a trustee. This trustee holds on to the assets for the beneficiary or beneficiaries. The rules of a trust depend on the terms on which it was built. A trust can be used to determine how a person's money should be managed and distributed while that person is alive or after their death. A trust is one way to provide for an underage beneficiary. Once the beneficiary is deemed capable of managing their assets, they will receive possession of the assets held in trust.
A Totten trust, also known as a payable-on-death account, is created during the lifetime of the trustor, who also acts as the trustee. It's generally used for bank accounts, and physical property cannot be put into it. The big advantage is that assets in the trust avoid probate upon the trustor's death. Often called a "poor man's trust", this variety does not require a written document and often costs nothing to set up. It can be established simply by having the title on the account include identifying language such as "In Trust For", "Payable on Death To", or "As Trustee For".
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Common law trusts are irrevocable
Irrevocable trusts are more complex arrangements than revocable trusts and may have current and future tax implications. They cannot be changed or cancelled without a court order or the beneficiary's permission. Once an irrevocable trust is established, the grantor cannot control or change the assets once they have been transferred into the trust, unless the beneficiary gives them permission to do so.
Under an irrevocable trust, legal ownership of the trust is held by a trustee, and the grantor gives up certain rights to the trust. The terms of an irrevocable trust are set in stone the minute the agreement is signed. Except under exceedingly rare circumstances, no changes may be made to an irrevocable trust. Any alterations require 100% consent from all beneficiaries or a court order.
The main reason to select an irrevocable trust structure is taxes. Irrevocable trusts remove the grantor's taxable estate assets, meaning they are not subject to estate tax upon death.
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Pure trusts are considered tax fraud by the IRS
A grantor trust is a term used to describe any trust over which the grantor or other owner retains the power to control or direct the trust's income or assets. If a grantor retains certain powers over or benefits from a trust, the income will be taxed directly to the grantor, and the trust will be disregarded as a separate tax entity. The grantor is treated as the owner and is therefore taxable on any income generated by the trust.
The IRS has implemented a national coordinated strategy to address abusive trust schemes, warning taxpayers to avoid schemes that advertise bogus tax benefits. Civil sanctions for abusive trust schemes can include a fraud penalty of up to 75% of the underpayment of tax attributable to the fraud, in addition to the taxes owed. Criminal convictions may result in fines of up to $250,000 and/or up to five years in prison for each offense.
While there are resources available that claim to provide information on how to set up a pure common law trust, it is important to note that these structures are considered fraudulent by the IRS and participating in such schemes can result in significant civil and criminal penalties.
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Frequently asked questions
A pure common law trust is a type of irrevocable trust, where the assets are acquired by a certificate exchange of beneficial interest. The trustees are the legal owners of the assets and their role is to manage the trust and its assets according to the settlor's wishes.
Proponents of the pure trust structure claim it can help protect your assets, provide liability protection, reduce taxes, and increase privacy.
A pure contractual trust is set up under an irrevocable contractual agreement, known as a Declaration of Trust. This is a private contractual arrangement between the trust creator and the trustee(s).
Trustees have a duty of loyalty to the beneficiaries and must follow the terms of the trust. They are responsible for managing the trust's assets and cannot neglect these, for example, through mismanagement of bank accounts, stocks, bonds, etc.
There are various books and online resources available that provide further information and templates on how to set up a pure common law trust. However, it is important to note that some sources claim that the pure trust structure is "absolute tax fraud" and does not work.
