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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:
- Family residence trust sham: This happens when a homeowner-taxpayer turns over their home to a trust, which then takes invalid deductions for various maintenance expenses. This may lead to the taxpayer being liable for taxes to cover the improper deductions.
- Business trust sham: This type of sham trust makes it appear like the taxpayer has given control of their business to a trust. In reality, the taxpayer is still in control of the business, and may be held liable for the business taxes. Also called a “constitutional trust,” “pure trust,” or “unincorporated business organization trust.”
- Charitable trust sham: This is where an organization poses as a charitable organization and accepts donations or monetary contributions. The organization may then claim deductions for the contributions, although they are not entitled to do so. The contributor may be taxed on their contribution if the deductions are discovered to be wrongfully claimed.
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:
- Eliminate or reduce the percentage of income that is taxable
- Offer deductions in relations to expenses paid by the trust
- Eliminate or reduce self-employment taxes
- Eliminate or reduce estate or gift taxes
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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