Trusts, Fraud Risks, and Tax Guide
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This document provides a risk management guide on trusts, trust fraud, and taxes. It was presented by Celtic Wind Investment and discusses key terms related to trusts such as grantor, trustee, beneficiary, property, creator, donor, founder, settlor, and trustor. The document aims to help people understand and manage risks associated with trusts.
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Trusts, Fraud Risks, and Tax Guide
- 1. Trusts ,Trust Fraud, and Taxes: A Risk Management Guide A Business Intelligence Report By Celtic Wind Investment Presented by: Nicola Chin and Michael Belgeri
Editor's Notes
- Historically a Trust structure has never existed to avoid taxes. If someone tells you otherwise, its too good to be true. The IRS has recently undertaken a national coordinated strategy to address fraudulent trust schemes. We support that effort with this presentation concerning legitimate trusts, a review of the fraud concerns of the IRS and the relevant tax issues specific to property concerning foreign investors and capital gain that are of concern to investors both domestic and foreign which can be managed with proper risk assessment and management behavior.We begin with a look at how the need for trust structures evolved from the needs of the soldier knights and Land lords of the Crusades to today’s IRS code.
- Now lets review the basic terminology within any Expressed trust. Trusts are chartered in terms of parties (grantor, trustee, beneficiary) and their legal role pertaining to the trust property. Trust documents can have any of these titles: Agreement, declaration, deed, indenture, instrument, will/testament, or no title at all.
- The Grantor may have different names. Every express trust has one or more grantors who contribute the property to the trustee and state the terms of the trust. The grantor is deemed BY IRS CODE AS a substantial contributor/disqualified person with respect to the trust, (under IRC 507(d)(2)(A)). Other names for the grantor include: creator, donor, founder, settlor, Trustor.
- The trustee receives the property and hold it for the benefit of one or more beneficiaries. The trustee is the legal owner of the property but must use it for the benefit of the beneficiaries. As a fiduciary, he owes the beneficiaries duties of loyalty and care. The trustee may be an individual or organization. Many Trust companies and banks specialize in acting as trustees in addition to conducting banking and loan business. Unless the trustee is also the grantor and/or beneficiary, he is not a taxable party, except for whatever personal or corporate personality he receives in the fulfillment of his duties. The grantor and trustee ordinarily may be the same person, and may create the trust by declaring that he holds certain property in trust. According to the IRS, (IRS Restatement § 349(a). The sole trustee and sole beneficiary may not be identical, because the purpose of a trust is to separate the legal and equitable interests. (IRS Restatement § 115). But, Florida Statute 689.071 overrules this particular IRS restatement in the case of the Florida Land Trust. Consult your attorney for what would be your best asset protection model.The trustee passes the tax bills on to the beneficiary. He is not responsible for paying them. Although, by direction of the beneficiary he may be given the duty to pay them out of the proceeds of the trust.
- While the Trustee is the action figure, the central player in the ‘trust’ is, of course the beneficiary because he, she, or it is, in the ancient Norman French, “cestui que a qui” which translates to “The person to whom” the contract is made. In the situation of the Florida Land Trust, He, she or it is the beneficial interest holder of the property and liable for the taxes.The cestui que use and trust were rooted in medieval law, and became a legal method to avoid the feudal incident-taxes-to the king, while leaving the land for the use of another, usually a local monastery, who paid no taxes to the king because it was a ‘charitable institution’. Even the IRS know the history of tax avoidance implied by Trusts--Note the clear definition of the Charitable Trust under IRS codes clearly prohibits profits and separates beneficiaries from their wealth.The IRS provides accommodation of the beneficial interest party both for tax and profit purposes. The Land Trust Beneficiary is said to have the "use" of the Land Trust property. However, when a mortgage is involved-- in the event of the Short Sale of that property, Land Trust owners are still the mortgage debtor to the lender and the Land Trust will not prevent impact on the owners Credit Report.
- By definition, a trust is a legal relationship with regard to property. Thus, a trust does not exist without property. (Am. Jur. 2d "Trusts" § 47. ) The property may be given a nominal value e.g., $1 as you will see noted in public records. As a practical formation process a Florida Land Trust is not created for a specified property until a seller accepts an offer to purchase from the buyer. The Title’s trail of ownership will move from the Grantor, or buyer, to the Trust and Trustee control via Warranty Deed to the Trustee immediately following closing.
- Successful investors and property owners plan for their exit strategy. There are three points of view one can take as an exit strategy based on the circumstances of ownership, mortgage and equity, either simply selling the property at an advantageous time, becoming incapacitated due to a health issue or death, or as in the current market, dramatic loss of equity value.Since “you can’t take it with you” the Trust has been known for thousands of years as a tool for passing the wealth of property on to someone who matters. The last and key distinction, for tax purposes, of trusts that we will examine is whether your exit strategy should call for a revocable or an irrevocable trust. If you have control of your trust, it is revocable and you will pay taxes; If you have no control, cannot profit from it, it is irrevocable. If it is a charitable Trust and you die, the property is going to go to charity not your heirs but to that IRS recognized charity you have designated. This is not a course on philanthropy. We are not talking about charitable trusts in this presentation. Our concern is with those exiting property ownership, the taxes that may be applicable and the useful IRS codes that can reduce or eliminate certain taxes at the point of exit.