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CHAPTER 10

While the IRS does recognize a number of legal trust arrange- ments, they are usually formed for estate-planning purposes, charita- ble giving, and for holding assets for beneficiaries. There is an independent trustee who manages the trust, holds legal title to trust assets, and exercises independent control. Then, any income received by the trust is taxable to the trust, beneficiary, or taxpayer, unless the Internal Revenue Code specially exempts the trust.

These are some of the types of trusts that you should stay away from because they are being used to promote fraudulent trust scams:

  • Asset Management Company: Here the promoter encourages the par- ticipant to form an AMC, where one of the promoter’s staff is the recorded trustee. However, after the trust is formed, the participant replaces the staff member as trustee. The goal is to make it look like the participant isn’t managing his or her own business and to start the layering process.

  • Business Trust: A business owner transfers the business into the trust. The trust then distributes payments to “unit holders” or other trusts so that it looks like there is limited taxable income.

  • Equipment and/or Service Trust: This trust holds equipment that is “rented or leased” and may provide services to the business trust, usually at much higher rates. The business trust, in turn, reduces its income by claiming deductions for the payment of services to the equipment and/or service trust.

  • Family Residence Trust: In this trust, the family residence and all furnishings are transferred to the trust. The trust, claiming to be a rental business, then “rents” the residence to the owner, who becomes the caretaker of the property.

  • Charitable Trust: This trust claims to be a charitable organization that has had income and assets transferred to it. This “charitable organi- zation” then pays for personal, educational, and recreational expenses. The payments are then claimed as charitable deductions.

  • Final Trust: Named because it is usually the last trust the assets flow through to after going through several other trusts; the final trust is usually established in a foreign country that will impose little to no tax on trusts. A final trust has many arrangements that allow money to come from other trusts. The money then is available or distributed to the original owner.

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