This is one of the most consistent and pervasive scams around. It just never seems to die. These people consistently talk about how their pure trusts can save you tax dollars and how all the wealthy families of America use them. Yet, they never seem to be able to offer proof or copies of the trusts that are used.

The promoters will, on occasion, show you a letter from the IRS saying that a pure trust does not pay taxes. What the promoter fails to tell you is that the letter does not mean that no taxes are due. Only that the trust does not pay them. The taxes are still due and simply pass through to the settlor of the trust. This is not so very different from a limited partnership arrangement. The partnership only files an information return and it does not pay taxes. This, again, does not mean that taxes are not due. Only that the taxes that are payable pass through to the partnership owners and they pay the tax.

Many times the pure trusts are part of a wider set up that includes multiple trusts and structure. Each structure has various levels of fees and charges and then passes income to the next level. Finally at the last level all income has been exhausted in overhead and the promoters claim no tax is due. Whereas this sounds very good it is just not true. The IRS will collapse the structure, or look at substance over form and in the end taxes are due.

We had one potential client who called us on this structure. He had used the promoter as his trustee. He then put a considerable amount of money in the various trusts the promoter had formed for him. In the end he lost big time. The promoter decided that he needed a “loan” of $350,000 and “borrowed” the money from one of the trusts. Now the settlor not only had tax trouble, he had to try to collect on the loan that the trustee had made to himself.