One might think that Julius Caesar, General of the Roman armies would have been unassailable, but in those trying times, assassination and seizure were a way of life. In 51 B.C. prior to departing for the campaign in Gaul, he entrusted all his property under the terms of a contract to a Roman Senator to hold for him until he returned. If he failed to return, this assured that his family would be taken care of and provided for. Upon his triumphant return he became Emperor and incorporated the use of the Trust into Roman Law.
Later, Trusts were brought to England by the Roman expansion, and from there to the United States. While some states have passed specific legislation authorizing the use of trusts, the lack of such legal 'permission' doesn't mean that Trusts are prohibited. It's possible to use some form of Trust in all 50 states, subject to fine tuning imposed by the courts. Here's why.
A Trust is essentially a legal contract between the parties forming the trust and the Trustee. Article 1, Section 10 of the U.S. Constitution states that no state shall pass any law which impairs the Obligation of Contracts. Article IV., Section 1. goes on to say that 'Full Faith and Credit shall be given in each State to the Public Acts, Records, and judicial Proceedings of every other State'. Section 2 of the same Article states that 'The Citizens of each State shall be entitled to all Privileges and Immunities of Citizens in the several States.'
The English Common Law under which America's early settlers were bound was based upon hundreds of years of court rulings rather than on a written constitution. Common law was incorporated into the Constitution under Amendment VII. of the Constitution as provided for under Article V. It states that, in suits at common law, no fact tried by a jury shall be reexamined in any Court of the United States, other than according to the rules of common law.
Absent of a specific prohibition in the laws of a State, there's no legal reason Trusts shouldn't be used. But, beware. There are as many forms of trusts as there are lawyers to draw them up. You want to be sure to get the right form of Trust to serve your purpose. For this month, let's focus on Trusts that can protect assets primarily by concealment.
COMMON LAW PROVIDES FOR PERSONAL PROPERTY TRUSTS.
Bank accounts, vehicles, boats, motorhomes, equipment, jewelry, collectibles can all be placed into a Common Law Trust. All it requires is a written contract between the Creator who places the property into Trust and the Trustee in who's name it is to be held for the Trust. In general, law doesn't provide for any specific Trust language so long as the Trust Agreement or Declaration of Trust is legally binding.
Once the Declaration of Trust has been drawn up, a list of property can be attached to it to include the assets you might wish to be held in Trust by the Trustee for your benefit. There are some practical considerations as to what you may or may not want to be held by a Trust. What might some of them be?
Legal title to valuables should almost certainly be held by the Trustee to protect them from seizure in the event a legal judgment were to be levied against possessions owned personally. Storing them in a vault held in the Trustee's name for which you have the key isn't a bad idea. It is possible to include in your Common Law Trust provisions for passing on assets to various successor Beneficiaries in the event of your untimely demise in much the same way that a Living Trust accomplishes this, thereby avoiding probate.
You could retain the Power of Direction over the Trust, making all decisions as to how the assets were managed. You'd want to also include the names of successor Trustees in the event the original Trustee should disappear, become incapacitated or refuse to take direction from you as to the disposition of the assets.
Another category of property you might want held by the Trustee would be hazardous equipment and/or vehicles operated by teenagers or 90 year olds.
If each item were to be held in a separate Trust, then, in the event some law suit were to be initiated against the owner of that property, your Trustee might lose, but only the assets of that particular trust would be placed at risk. Things I might include would be chain saws, guns, riding lawn mowers, and motor cycles.
You'll want to confer with your insurance representative to confirm that holding title in a Trustee's name for the Trust doesn't create problems or higher costs. Usually, once you explain it all, you can avoid future problems which might crop up. From time to time, a copy of the Trust will be requested. I've found it expeditious to provide a 'pro forma' copy with 'pro forma' names filled in as beneficiary rather than the actual beneficiaries.
WHAT ABOUT USING TRUSTS FOR OPERATING A BUSINESS?
As a matter of fact, the first recorded uses of Common Law Trusts in America were as Massachusetts Business Trusts. Business Trusts in America were initially formed as a way to raise capital without personal liability rather than to use a corporation. Even now, many stock mutual funds are formed as common law business trusts. These became so effective that the Sherman Anti Trust Act was passed to limit their use. Even so, Business Trusts offer many advantages.
Unlike Partnerships and Corporations, pursuant to the Constitutional references previously cited, Business Trusts can operate in all the States. They can be domiciled in one state, formed under the laws of a different state or under Common Law, and do business in yet another state virtually unfettered by bureaucratic red tape. They afford their owners privacy and liability protection in much the same way that Personal Property Trusts do.
Business Trusts can be operated by their Trustees or by Managers. They can be formed in such a way that all earnings can flow through to the owners if desired, or be retained by the Trust as a separate tax payer. When a Trust qualifies as a separate tax payer, it pays income taxes at much higher tax rates than a corporation. It can avoid this by deliberately incorporating features which will cause it to be taxed as a C corporation at much lower rates if desired. All these decisions should be made with the assistance of a qualified tax consultant for the best results.
By operating as a Business Trust, you avoid the expense and paperwork of forming a corporation. Partnership risks, corporate formalities, maintaining corporate records and paying salaries to Officers and Directors can be eliminated. Since there's less paperwork, there's less chance to make mistakes that could lead to personal liability stemming from business operations and disputes.
To set up a Business Trust, all you need is a Declaration of Trust between at least two people. This Trust Agreement should incorporate the things you want to accomplish, the various controls and safeguards, and division of income and profits. There are no legal requirements as to specific language in your agreement. Spouses make ideal people to set up such a Trust to run a Mom and Pop business while avoiding liability.
WHAT ABOUT REAL ESTATE?
The Massachusetts Business Trust migrated to Illinois in 1892 when Chicago Title Company formed what is now called the 'Illinois Type Land Trust'. This is still a Common Law Trust in Illinois shaped by thousands of legal decisions over the years, but a few states including Florida, Virginia, North Dakota, Hawaii, Indiana and California have drafted statutes incorporating many Illinois Land Trust features with their own. In short, here's how a land trust works:
Suppose you were buying a parcel of real estate and wanted to conceal your ownership of it. You'd contract to purchase it in the name of a Trustee of a Land Trust. This could be an institution such as a Trust Company or Bank, or it could be an individual whom you trust. The deed would be recorded in the name of the Trustee on behalf of the Trust itself. You would retain the power to direct the Trustee's actions which might include signing loans, leases, conveyances, etc. Even though title would be held by the Trustee, as the Beneficiary, you would be entitled to all the rents, avails and proceeds earned by the trust property, reporting them on your personal Form 1040.
Like the personal property Trust previously described, your Declaration of Trust could provide for the passing of the property to your heirs who could be named as Successor Beneficiaries while avoiding probate expenses and delays. Alternatively, you could list as the successor another Trust. This could be designed to specifically optimize your Estate Tax strategies.
It's important to thoroughly comprehend the fundamentals of Trusts and to become familiar with the ways in which they can be used prior to getting into the more complex and rewarding strategies which are so effective in reducing taxes on estates. Once you make the decision to start using Trusts, you'll find a world of asset protection and tax strategies unfolding beyond anything which you may have imagined.
