Sham Trusts

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What Is a Sham Trust?

In order for any trust to be valid, it must meet trust requirements stated by law. For example, the trust must have a settlor (creator), a beneficiary, a third party trustee, and property that is placed "in trust."  Besides these requirements, another important requirement is that the purpose of the trust cannot be illegal or contrary to public policy. A sham trust either fails to meet these requirements or was created in such a way as to deceive people.

Sham trusts are usually aimed at dodging tax requirements or IRS audits. However, there are many different types of sham trusts. It is a good idea to understand how they operate so that you can avoid falling victim to a sham trust or a trust scam. 

What Are Some Examples of Sham Trusts?

Sham trusts can take many different forms. Some of the more widely circulating shams include:

Most of these sham trusts are domestic trusts, meaning that they are located and operate within the United States. However, foreign sham trusts are also very common. Foreign sham trusts may involve a complex network of foreign trusts, business entities, and offshore bank accounts. Sham trusts operating outside of the US usually seek to evade tax and IRS requirements through out-of-country operations.

What Are the Legal Consequences of Sham Trusts?

For a person or entity that is operating a sham trust, they may face serious consequences if they are caught. These may include criminal charges such as tax fraud, tax evasion, falsifying documents, and various other types of white-collar crimes. Criminal penalties often include jail time and/or monetary fines.

The taxpayer who contributes resources to a sham trust may also face legal consequences for their involvement. In most cases, the taxpayer will be required to forfeit any deductions or tax benefits they may have gained from the sham trust. However, the person usually will not face any criminal charges if they were unaware that the trust was fraudulent, and if they did not knowingly participate in the sham.

How Can I Recognize a Sham Trust?

You should be wary of any trust arrangement that claims to:

Also, beware of trust agreements involving overseas companies or foreign entities. As mentioned above, many sham trusts are operated outside of the country and can present tax reporting issues.

Do I Need a Lawyer for Legal Issues Involving Sham Trusts?

If you have been the victim of a sham trust, you may wish to consult with an estate attorney immediately.  Your lawyer can help you file a report against the entity that created or operated the sham trust.  It may also be possible to file a civil lawsuit against the entity for any losses that may have been caused to you.  The laws governing trusts are sometimes complex, but an experienced lawyer can help explain the regulations in your area. 

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Last Modified: 02-24-2015 09:31 AM PST

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