Trusts 101 for physicians part 3: Avoiding tax fraud

As we approach Tax Day, we take a look at abusive trusts and tax scams doctors should avoid, as part three of our look at what physicians need to know about trusts.

We started part one of our crash course on the use of trusts by physicians as asset protection and estate planning tools with a review of the most basic trust terms that should be part of every doctor’s trust vocabulary. In part two we discussed the basic rules that are most generally applicable to the taxation of trusts. With Tax Day right around the corner, it’s one of the two busiest selling seasons of the year for both legal tax avoidance planning and abusive, illegal tax evasion scams, many of which involve trusts. As such, before we move to the legitimate use of trusts, we provide one final warning about how bad actors may abuse them, and how that may have both civil and criminal repercussions for those who buy their plans.As always, while we can provide some general rules that apply to the widest range of tax law issues, this can never replace personal tax and legal advice specific to your facts.

I’ve previously covered some of the common frivolous arguments that involve the taxation of trust structures. In particular, if you see a plan involving a tool with the phrases including any of the following names, run and get a review of any actions you may already have taken by a third-party CPA or tax lawyer right away. I have personally seen these scams being markets in the last 60 days in various physicians’ finance groups on social media platforms including Facebook. Note that there are many variations of this garbage, abusive, criminal tax evasion planning sold under different names as my friend, attorney Jay Adkisson recently pointed out in Forbes.

1. Pure Trust
2. Complex Trust
3. Admiralty Trust
4. Constitutional Trust
5. Patriot Trust
6. Sovereign Trust
7. Corporation Sole

Promoters of these highly illegal structures sell taxpayers on the lie they can opt-out of paying income taxes for a variety of reasons that contradict the plain language of the U.S. tax code including on religious or moral grounds by invoking the First Amendment, that only employees of the federal government should be subject to federal income tax, and that only foreign-source income is taxable, among dozens of other spurious arguments.

Some of these scams target a specific demographic and prey on our current economic and political tensions by target largely boomer aged, political conservatives. We took a look at these issues and provided specific tips on protecting yourself from this form of political affinity fraud in a previous article; if you are considering planning that emphasizes these issues either explicitly in its materials or implicitly through the opinions and conversations person selling it, be very careful.

Some Specific Red Flags to Watch Out For

• They are often promoted by salespeople who lack professional credentials, e.g. a currently licensed attorney or CPA.
• Scammers often request that you sign a nondisclosure agreement to help provide you with "secrecy." The agreement is actually there for them, not you, and is structured to discourage you from telling others (including your advisers) how you've been conned.
• They say that only really smart and connected people like the (insert VIP here - billionaires, politicians, Rothschilds, Illuminati, etc.) know about it, and in fact, they did the same planning for ‘Bill Gates’ or drop some other big, unverifiable, name.
• They say the tax system is "voluntary" in some cases.
• They imply that you can be permanently absolved of the burden of filing and paying personal income taxes through certain structures, usually trusts.
• They violate the old "rule of three," that I was taught many years ago. If you put it in tax free, grow it tax free, and take it out tax free, it's probably fraud.
• They rely on silly religious objections to being taxed, or bizarrely interpreted constitutional arguments as to why you don't have to pay taxes.

I hope this provides a defensive knowledge base through which to filter any tax-based planning you are currently using or considering, including those involving trusts.We will continue our look at trusts next month, including the many legal and predictable ways to use them to protect your wealth.

Ike Devji, JD, has practiced law exclusively in the areas of asset protection, risk management and wealth preservation for the last 16 years. He helps protect a national client base with more than $5 billion in personal assets, including several thousand physicians. He is a contributing author to multiple books for physicians and a frequent medical conference speaker and CME presenter.