Trusts And Taxes
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This document provides a risk management guide on trusts, trust fraud, and taxes. It introduces various types of legitimate trusts recognized by the IRS, discusses IRS concerns with tax and trust fraud schemes, and reviews acceptable paths to property purchase and protection. It also itemizes key tax issues professionals need to know to prepare domestic and foreign investors for acquiring and accumulating property through trusts.
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Trusts And Taxes
- 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
- 2. Introduce and discuss the variety of legitimate Trusts recognized by the Internal Revenue Service Develop an awareness of Internal Revenue Concerns with Tax and Trust Fraud Schemes Review the acceptable paths to property purchase and protection. Itemize the key tax issues Licensed professionals must know to prepare Florida Domestic and Alien Investors for the acquisition and accumulation of property.
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.
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- The IRS accepts that State law creates legal interests and rights while federal tax law designates what interests or rights, so created, shall be taxed. They are the modern day Sheriff of Nottingham and Florida statute 689.071 is a sort of Robin Hood Charter.There is no uniform or model law of trusts adopted by all US Commonwealths and States, although a few uniform laws relating to certain aspects of trusts have been widely adopted and often the courts of one state will turn to rulings in another state for direction. Often we have found that the IRS will also adapt and modify their rules for taxes because of particular state laws to the benefit of all tax payers foreign and domestic. Florida’s Land Trust and Limited Liability structures are two of those areas. State laws often differ from a general Internal Revenue Service Rules and definitions, so it is necessary to refer to Florida statutes regularly to maintain a professional understanding of what is unique about property ownership here.When it comes to Trusts and professional guidance, it is best to deal with attorneys and accountants who are both experienced and credentialed through continuing education in Florida laws and current IRS guidelines regarding trusts. With today’s Internet as a resource even their viewpoints and opinions can be reviewed through the search engines.
- Many reasons have been given for the Trust convention “beneficial use” as a legal device. It goes all the way back to the time of the Crusades the papal appointees to crown princes of Europe devised for British Land lords and the Papacy something called “cestui que use” Trusts of enfeoffment.During the Crusades, and other wars on the Continent, land lords, barons and knights might be gone for 4, 5 10 years. Who knew if they would ever come home. Remember all those “Robin Hood” movies. Robin, Crusader under King Richard Lionheart kept having run--ins with the bad guy-- the Sheriff of Nottingham who was stealing lands and collecting taxes for the usurper King, Richard’s brother John. Think of the IRS as a sort of Sheriff of Nottingham.But it wasn’t only the Soldiers who needed Trusts to protect their land. Others might be absent because of business adventures, like discovering the new world, or religious pilgrimages. There was no assurance they would ever return home. They needed a legal way to hold on to their property for their heirs. Cestui qui, or beneficial useTrusts came into being in Germany, France, Spain and Britain and through them their colonies in the US and Florida to hold the land for the owners while they were gone. The beneficialuse trust allowed owners to leave a trusted friend or relative with the sort of powers, discretions and they hoped, the duties necessary to protect, work and prosper the property. Today, this power would be called the "power of attorney". Often times the land lords gave that ‘trusteeship to an unbiased and educated authority, their local monastery. Religious orders such as Franciscans, Cistercians, Benedictines and other mendicant orders took vows of poverty, yet retained and properly maintained the use of donated property. Cestui que use allowed them the benefits of land without legal ownership. The point of this brief cultural lesson is to show you how historic, ingrained, important, and central to the fabric of Western society the protection and negotiation positioning of property trust law derives.
- To understand the value in asset protection of “Trusts” we begin with a set of definitions, one literal and one legal. The word ‘trust’ literally means a written agreement, a contract. The organizational definition for trust defines it as an agreement for the beneficial use of a property between parties. The Internal Revenue Service had to compartmentalize the definition—to the IRS, for federal tax purposes,Trusts are one of the major forms of tax worthy organizations along with corporations, partnerships, and governmental units.
- The IRS code defines two distinct types of Trusts.In 1959 the IRS defined a trust generally “as a fiduciary relationship with respect to property, subjecting the person by whom the title to the property is held to equitable duties to deal with the property for the benefit of another person…” Later, because of a trust fraud lawsuit in 2007 the IRS issued an additional definition, this time defining a “charitable trust” slightly different from the trust definition of 1959:Reg. 301.7701-4(a) defines a charitable trust as “an arrangement created either by will or inter vivos,”… that means living,… “declaration whereby trustees take title to property for the purpose of protecting and conserving it for the beneficiaries under the ordinary rules applied in chancery or probate courts . . . Generally speaking, an arrangement will be treated as a trust under the Internal Revenue Code if it can be shown that the purpose of the arrangement is to vest in trustees responsibility for the protection and conservation of property for beneficiaries who cannot share in the discharge of this responsibility and, therefore, are not associates in a joint enterprise for the conduct of business for profit. “Remember that this IRS regulation is spelling out ‘charitable trusts’ in this definition not other trust organizations. Later in this presentation you will see a tax fraud scheme for property that causes this definition. This regulation emphasizes the non-business character of the more commonly known Trust activity like you see at the end of programming on Public Television.. However, both definitions emphasize a relationship among several parties …
- IRS code sorts out several more important distinctions with trusts you should know. There is the Express Trust and an Implied Trust. The court system creates “implied Trusts” to satisfy inequities during probate settlements. A Judge appointing a Trustee during the probate of a will or bankruptcy is an ‘implied’ trust. An investor setting up a Land Trust is an example of an Expressed Trust. We are only concerned here with the express side of the Trust world. Express Trusts, in most cases are further divided into Active or Passive. In an active trust the Trustee does something; in a passive trust, the Trustee does nothing.When that probate court judge appoints a trustee for the property, the trustee might have to pay the taxes on the land. The trustee for the property is “active” for the court, an implied trust. That’s in contrastto a Land Trust whereby the trustee is the holder and executor of the legal title, with duties of communications and conveyance when called upon by the beneficiary of the passive, but expressed trust. In either case, the IRS still gets to tax somebody on April 15th. By IRS Code an organization is classified as a business entity (corporation or partnership) rather than a trust for tax purposes if it conducts business for the profit of its owner. Reg. 301.7701-4(a). The holding of stocks and bonds and the passive rental of real estate are not considered the conduct of business for this purpose. Certain states’ laws, like Florida, created express, passive trust entities that have dynamicaspects of the active trust and the functionality of the passive trust. A Florida Land trust has such a design.That Trustee who is active under a court order has liability because he is responsible to the court for what he does. Since 2002, The Trustee who is active under a Land Trust in Florida has “passive” benefit. He is not liable for the actions of the Trust property. Even more unique to the Florida Land Trust, since 2008, the Trust beneficiary is not liable for the actions of the Trust property. Yet the beneficiary still owes taxes on April 15th.(Read more: http://chestofbooks.com/real-estate/Real-Property-Interests-Law/Sec-109-Active-and-passive-trusts.html#ixzz1ixl918Nr)