Some computer geek once told my that you can use a legal trust to hide money and income from the government. The advantages being you didn’t have to pay taxes on it, and they couldn’t even confiscate when you were in legal trouble. He said something about making some obscure person in another country the executer….
Does this make any sense to anyone? Is there some truth to this strategy?
It’s even better than that! If you use one of these trusts to hide income, the government will provide you with free room and board for several years! Set one up today!
Oh yea, i think he threw in that the Kennedy boys used trusts whenever they got in trouble for molesting babysitters and what not… Any truth to this?
In her book 9 Steps to Financial Freedom Suze Orman describes using revocable living trusts to help shelter assets against estate taxes. However, I would advise you to consult a financial advice professional before proceeding.
Zev Steinhardt
In a word, no.
Quatloos.com will tell you everything you need to know about the various trust and offshore frauds. There are thousands of these scams, and they change their names constantly.
These scams are not the same things as the types of legal trusts recommended by Suze Orman and other financial advisors.
Additionally, loopholes in the Tax Code could be closed retroactively. They are basically seen as attempts to defraud the U.S. Government. While I don’t know how well they stand up to legal challenge, that’s a big money fight for the defendant. This Forbes article should describe more, but my browser won’t open it :mad:
zev, I know that a revocable living trust can be used to hold your money/assets and bypass the probate process in the event of your death, but I’m not aware of any way to use one to shield your money from estate taxes.
My wife is on my butt to set up a RLT for us, so that if we die, our money would just immediately go to our designated heirs instead of being tied up for months in probate. Also, probate records are available to the public, so you’ll have every shyster lawyer in town knocking on your heirs’ doors. That’s the benefit I know of from a RLT.
Now you can use another type of trust to donate money to your heirs, at the rate of $10,000 per year (each) I think. You can put money in there each year, and in the event of your death, it would go straight to your heirs. The problem with this is that it has to be in their name, so while you’re still living, you have no control over it. Another problem is that $10,000 per year (times N) isn’t enough to shield any serious money from the tax man. Yet another problem is the fact that our savings are intended for us, to be used in retirement. In case we die before then, I’d like to be able to pass it on without the tax man taxing it yet again, at a very high marginal rate, but I don’t know of any way to do that.
The amount you can pass on tax-free has risen recently (or will rise soon?) from $1.2 million to $2 million, so this helps in our case. The recent stock market crash of tech stocks has also “helped” that situation.
As far as “confiscation” goes, I believe he was referring to so-called “Cook Island Trusts.” The idea is that somebody in the Cook Islands is the trustee, and they’ll give you your money as you request it, unless you do so “under duress.” i.e., if a court orders you to turn over money, the trustee will not honor your request. The theory is that you cannot be held in contempt of court for not turning over your money if it is impossible for you to do so. I suspect that in practice, many judges would jail you for contempt anyway.
>> Can you use legal trusts to cheat the government?
Hmmm, that’s an oxymoron. If it’s legal you’re not cheating, by definition.
At any rate, trusts are a very useful tool which cannot be explained in a few words but you can find any number of books where you can learn about them.
I would point out that trusts originate in English Equity Law and they do not exist in other countries with different legal systems.
Whoooooo doggie! Everyone forgot to give the standard disclaimer of “I don’t know what the heck I’m talking about! Go get some real advice!” Because… reading these replies it’s clear that we have not yet had an expert check in. Not that we have one now, by any means, but I do know just enough to know that so far, we’re lacking an expert.
CurtC, you don’t need to use a trust to transfer (gift) $10k per year to an heir. A family member may gift another family member up to $10k per year without incurring gift or estate tax (in NY). Example – If you think you’re going to have an estate of $300,000 when you die, then when you die Uncle Sam will take no less than half (and probably more) = net is $150,000 going to the heir. HOWEVER, since you’re a savvy financial player, you instead choose to gift $10k per year to an heir every year for the 30 years before you die. Net is $300,000 going to the heir. See the difference?
I think the salient fact that has yet to surface in this thread is that when you give money to a trust, you relinquish control of the money. That’s one of the fundamental characteristics of a trust, that you have put something valuable (money, land, fine art, intellectual property, etc.) under the trust of someone else (known as the trustee(s)). For all intents and purposes, the donor relinquishes control of the asset when they donate it to a trust.
A trust must be created with a specific intent (spelled out in excruciating detail) and beneficiary (“FBO”, “For the Benefit Of”). If the intent is “to shield my assets from estate taxes when I die”, this is illegal and no legitimate financial advisor will construct it for you. (The penalty for creating a bogus trust is to have all the assets seized and the donors and fiduciaries sued mercilessly. Anyone who’s in the (legitimate) business of creating/advising trusts won’t do it for you.)
Now here’s the trick you’ve all been waiting for! You may construct a trust “…to provide for the long term health, welfare, education, and medical care of my child.” Hmmm…… sounds suspiciously similar to just handing over the dough, no?
Actually, it’s not… and that’s the only reason the gov’t lets you get away with it. For example… under the trust described above, the beneficiary could not use the money for a lavish vacation (most people’s “welfare” doesn’t require a month in the Caribbean). Nor could they use the money for a second home, the education of their own children (the grandchildren of the grantor), charitable donations, etc. The money can only be used for exactly what is spelled out in the trust agreement (and even these are legally regulated).
And before you think “I’ll just name myself as trustee, and do what I want!” Good luck. As previously stated, anyone creating a trust will also (probably) be dealing with a legitimate financial advisor. This advisor will have a healthy respect for their own job, and won’t jeopardize it by flouting fiduciary law (look it up) just for you. A typical family trust will have a family member or two as trustees, but also an outside lawyer and/or financial advisor (to make sure all the legal nuances are followed). The trustees have a legal duty, not to the donor but to the trust instrument. They can be sued (by the gov’t, the donor, the beneficiary) if they in any way deviate from the terms and conditions of the trust.
And now, back to the “trick” that makes it all worthwhile….
(Keeping the numbers very simple) Let’s say you will die with an estate of $1million and have 1 child (and no spouse or other heir). When you die, Uncle Sam gets 50% (roughly, estate tax). Of your original $1mm, you have successfully passed on $500k.
OR, when your child is born you set up a trust (as described above), and before you die you eventually put in $500k (you don’t have to fund the trust all at once). That leaves you with $500k net when you die (remember, the other $500k is no longer yours, you gave it away when you put it in trust), so when you die the tax man gets $250k, and $250k goes to the child directly. What happened to that other $500k sitting in trust?
Well… your adult child now wants an MBA from Wharton, and a PhD from MIT - $200k (education). They also purchase a modest home - $200k (welfare). Later in life they contract an expensive illness that costs $100k to cure (health). These are all costs for which they themselves would be out of pocket, except in this case they’re not becuase the money comes from the trust.
So the child was the beneficiary of, or “received the benefit of”, $500k of your money (via the trust), plus the $250k from outright inheritance, or $750k in total out of your $1mm to start.
Recall that the straight ‘inheritance tax’ approach would net the child a total benefit of only $500k.
These type of estate planning instruments usually don’t provide any benefit for the general masses. Really, how many of us will have an estate of $1million when we die?
The OP stated “…they couldn’t even confiscate (the money) when you were in legal trouble.” Remember what you’ve learned – that money isn’t yours any more! No, of course they can’t confiscate it (seize would be a better word). But remember, YOU can’t “confiscate” it either, even if you wanted to.
Lastly, to heed my own advice - I don’t know what the heck I’m talking about! Go get some real advice!
(Now watch some expert come in an rip my answer to shreds…)
Oh yeah, as CurtC pointed out, the limit you can pass tax-free has risen (is rising?) to $2million.
So… please add an extra zero to the end of all my numbers in the previous post (so my examples exceed this $2mm limit).