According to the IRS, a “Pure Trust” is a tax evasion scheme. Often sold as a method for asset protection, a Pure Trust involves the transfer of an ongoing business to a trust. While it gives the appearance that the taxpayer has given up control of the business, the terms provide that the taxpayer, operating as a trustee or a sham entity, still runs the day-to-day activities and controls the business’s income stream.
Alas, the courts have held that the Pure Trust should be disregarded, and the business income is taxable to the taxpayer.
So if it doesn’t provide tax relief, does a Pure Trust do anything else? Probably not. In Texas, if a settlor (the person funding the trust) retains the legal title and the equitable interests in himself as sole trustee and sole beneficiary, then a trust is not created. This is known as Merger.
Other types of trusts that may be scams:
Constitutional Trusts, Unincorporated Business Organization, Business Trusts (these are “Pure Trusts” by another name)
Equipment or Service trusts (formed to hold equipment that is rented or leased to the business trust, usually at inflated prices)
Family Residence Trusts ( transfers family residence to a trust, which deducts depreciation and upkeep; these are often collapsed by the courts)
Charitable Trust (trust claims to be a charitable organization, but has not qualified as such and does not have an IRS exemption letter)
Asset Protection Trust (these are often valid, but cannot be used as protection against federal income or employment taxes)
For more information, see Abusive Trust Tax Evasion Schemes – Facts (Section III)
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The information contained in this article is general information only and does not constitute legal advice.