So-called "pure trust" scams have been around since the 1950s, preying upon fears of rampant lawsuits, desires for greater privacy, and the lure of not having to pay income taxes. For a modest fee, the purveyors of these irrevocable trusts will set you up with documents that, allegedly, are completely legitimate, are secretly used by "the rich," will protect all of your assets from even the craftiest of creditors, cannot have their bookkeeping records subpoenaed, and best of all, allow you to severely reduce or even eliminate your income tax burden. Their sales pitches are tailored to appeal to "patriot" and "sovereign citizen" tax protestors, but will usually attempt to give an air of legitimacy to their documents in order to attract a wider mainstream audience.
Webpages for organizations selling these sham trusts abound on the Internet. In response, a few websites now carry articles warning readers about these scams and telling you why they're all essentially bogus. Pages like the Militia Watchdog's Special Report #7, the Tax Prophet's Trust Scam Bulletin Board, and Quatloos' Constitutional Trusts & Pure Trusts do an excellent job of describing Pure Trust scams in general. However, due to the sheer volume of bogus Trust offers currently available, it's impossible for any one website to point out the flaws in each of them individually. This webpage of mine is an attempt to address the claims made by one particularly close-knit pair of purveyors of pure trust programs, named "National Trust Services" and "Trust Educational Services."
Letters from National Trust Services used to be signed by "Roy Fritts, trustee" and "Rick Prescott, trustee." In October 1999, that all changed. A letter discussing NTS dated October 25, 1999, and signed only by "Rick Prescott, trustee," was sent with a return address in Carlsbad, California. (Carlsbad is less than 30 miles from San Diego, which is consistent with the San Diego locale of NTS's Basic Trust Academies). This letter proclaimed that NTS was now called "Trust Educational Services" (T.E.S.), and more importantly, went on to state:
"while NTS and its people have been developing and implementing programs based on the principles and values of stewardship, Roy Fritts has chosen another path. That path has left us no choice but to move on without him. For that reason, Mr. Fritts has been removed as a Trustee of National Trust Services." [Bolding mine.]This seemed very odd to me when I read it, because I'd heard that the NTS (now TES) organization was supposed to have been set up in such a way that removal of one of its Trustees is impossible.
Despite this letter's claim that Roy Fritts was kicked off the NTS board of Trustees, a new organization called "National Trust Services" (NTS) headed by Roy Fritts popped up soon afterward. A letter from this new National Trust Services organization dated August 16, 2000, signed by Jackie Edlefsen (t) and Sam Fung (t) [the little (t)'s in parentheses stand for "trustee"], lists their main office as:
National Trust Services. . . with a satellite office at:
1271 Deer Creek Rd.
Selma Oregon 97538
90 E. Gish Rd. #25Note that California is abbreviated "Ca.", not "CA". This is probably not accidental. One common "patriot"/"sovereign citizen" belief is that the two-letter all-caps abbreviations for State names — e.g. CA for California, AZ for Arizona, etc. — are part of a nefarious plot by the Evil Federal Government (and its right-hand lackey, the Evil U.S. Postal Service) to trick you into giving up your God-given sovereignty. I suspect that not using "CA" was a nod to the sovereign/patriot crowd, which Roy Fritts has expressed some interest in.
San Jose Ca. 95112
(Virginia Raines, office manager;
Mitch Walker, trust counselors support person)
Even an outsider to the NTS and TES organizations, such as myself, could easily conclude that some kind of factional power struggle between Roy Fritts and Rick Prescott may have taken place. In fact, Roy Fritts filed suit against Rick Prescott in 1999; transcripts of the case might be available at the Josephine County courthouse in Grant's Pass, Oregon, as case #99CV0422. (However, according to an 11-April-2002 article in the San Diego Union-Tribune, the U.S. Dept. of Justice doesn't know Roy Fritts's whereabouts, so he may have "skipped town" or gone into hiding, which would make it kind of hard to follow through with this lawsuit.)
NTS and TES have had no less than four main websites since they established an Internet presence. Their first website was at http://www.flash.net/~nts1/; this page stopped being updated in 1997 but wasn't taken down until August 1999. Its second website was at http://www.trusts.org; it was taken down some time in early February 2000 and put back up again in early March 2000, and in the process, every place this site used to say "NTS" thereafter said "TES". (As of mid-February 2001, the trusts.org website only displays the message "No web site is configured at this address.") After the NTS/TES split in late 1999, TES's main website became http://www.complextrust.com, which is no longer operational. TES's most recent website is http://www.trusteducationalservices.com/, but that too has been taken down. After the NTS/TES split, the new Roy Fritts NTS organization's website started up its own website at http://www.purecontract.org, which was nearly identical, in both form and content, to how the old trusts.org website used to be prior to February 2000. purecontract.org, like the various TES websites, is also no longer operational. Snapshots of how these websites used to look can be viewed at the Internet Archive Wayback Machine, although the dates listed for some of the snapshots should be taken with a grain of salt.
Given the current complete lack of Internet presense from either organization as of 2002, both NTS and TES may have ceased their operations.
The first way NTS and TES try to set themselves apart is by setting you up as Trustee of a system of Trusts that own all of what used to be your personal property. All the other Pure Trust vendors (or most of them, at least) set up either themselves, or one of your close friends or relatives, as Trustee of their system of Trusts while you become a "managing director" that gets to order the Trustees around (but still has to pay them an annual fee). Besides the ominous thought that these other organizations, should they set themselves up as trustee, could decide to abuse their power by absconding with all your stuff, all such "managing director" arrangements have been ruled to fall under the "Grantor Trust rules" of the IRS, wherein each Trust's income is taxed as though it were the income of the Grantor. NTS/TES's system, at least according to NTS/TES, does not.
The second way NTS and TES project an air of cleanliness is by telling their prospective customers that they'll have to follow all the tax laws when they become Trustees and tell the IRS about all the income their Trusts will earn. NTS's webpage even went so far as to applaud the IRS for cracking down on "abusive trusts" back in 1997. The first time taxes were discussed in the NTS advertising seminar I went through in 1997, the presenter stated that NTS would rather you didn't go through their Trust Academy if your primary interest is the reduction of income taxes. [This may in part be due to a 1967 California appelate court decision, People ex. Rel. Mosk v Lynam (253 Cal App 2d 959, 61 Cal Retr. 800), which held that advertising the benefits of a "pure trust" to avoid income taxes amounted to false and deceptive advertising practices under California Business and Professions Code Section 17500. TES is apparently distancing themselves even further from the income-tax side of the Pure Trust Scam business — on 21-February-2001, I discovered that TES had managed to convince fraudvendors.com to list TES on its webpage of anti-fraud organizations, perhaps as yet another way of seeming above reproach.] The tax advantage of the NTS/TES system, NTS and TES tell us, is that there are legitimate ways to reduce or even eliminate taxes on these Trusts which have been used by "the rich" for many years. NTS and TES even sell training to CPAs in how to prepare income tax returns for their system of Trusts. By using this story, the more law-abiding among NTS/TES's customers are made to feel that they won't have to hide anything to make NTS/TES's system work.
Another way NTS and TES attempt to maintain a spotless image is by engaging in strategic partnerships with other companies. They paired up with ChequeMate, a bookkeeping software and services company, to ensure that the ChequeMate™ system accomodates the trusts they sell. They have software their customers can buy that keeps track of the Minutes in Trustee meetings. They offer, for a fee, to train CPAs to handle the income taxes of their trusts "properly." A letter dated December 22, 1999 states that TES has also aligned themselves "with a new entity, Tax Mediation Services (TMS)," that provides income tax services friendly to their system of Trusts. They distribute a quarterly newsletter to their customers published by "The Fiduciary Education Society," dealing with issues of Trusteeship and the U.S. Constitution. They've even invited Joe Little, the representative of a Cayman Islands investment company called "Fountainhead Global Trust" (named after the Ayn Rand novel The Fountainhead), to speak at their Basic Trust Academy and offer investments "guaranteed" to yield at least a 24% annual return — "an opportunity only available to Trustees." (The Fountainhead Global Trust organization seems to have dried up since I went through the NTS Basic Trust Academy in 1997, though.) Obviously, if so many companies are cooperating with NTS/TES, NTS/TES must be a well-established business with no shady dealings, right?
A milder, but still significant, "legitimizing" activity NTS and TES engage in is offering special "advanced Trust academies" which graduates of their Basic Trust Academy may attend for an additional fee. If NTS/TES makes some of its money off of these activities, so one might reason, it's in NTS/TES's best interest to offer a high-quality Basic Trust Academy that keeps its customers coming back for more.
By far the most prominent way in which NTS and TES make themselves out to be on a better plane than their competitors, though, is by including, free of charge, help from their army of "Trust counselors" for the first year that you're "living In Trust", and free follow-up attendance at any of their future basic Trust program courses. (Starting January 18, 2000, TES also offers a more in-depth course on the day-to-day operation of their Trust system for a $595 fee.) Furthermore, they even say they'll help defend you in court, should any of the Trusts they set up for you come under attack. The costs of these services are rolled in together with the cost of their Basic Trust Academy. They would have to be; in 1997, the NTS/TES Trust Educational Program cost a whopping $9500, and a letter from NTS dated 16-August-2000 claims that NTS has raised this price to $15,500.1
Many people over the 20-odd years that NTS/TES has been in business have fallen for this sales pitch. ... Including myself. I actually bought into this program. In March of 1997, I gave NTS a check for a good-faith deposit of $950, followed on the first day of the Basic Trust Academy by a certified check for the remaining $8550.2 I had believed every one of their arguments. And since NTS told me that most lawyers had little or no training in Trust law, I didn't check it out with a lawyer before I went through their program. I didn't want their arguments to be false. I was too enamored of the idea of taking advantage of this little (according to NTS/TES) "secret of the rich and powerful." I figured I would be immune to lawsuits, untouchable by the government, and never have to pay a dime in taxes again.
I figured wrong.
A Trust is, in a way, a kind of a contract3. It has, among other things, the following four ingredients:
Except in the State of New York, a trust splits ownership of its corpus into legal title, held by the trustees as joint tenants, and equitable title, held by the beneficiaries as tenants in common. Legal title carries with it all the responsibilities normally associated with ownership, whereas equitable title confers all rights to derive benefit and enjoyment from property so owned. (This can also be expressed as, "Full legal title is in the trustees, subject to equitable interests in the beneficiaries.") Thus, trustees may use a piece of property held in trust only insofar as such use benefits the property, or benefits the rest of the trust's corpus; they are not allowed to derive any personal benefit from it. (Obviously, a trustee can derive personal benefit from trust income or corpus if he or she is also one of the trust's beneficiaries. However, if there is only one trustee and one beneficiary, and both are the same person, and there are no "successor" or "contingent" beneficiaries named, legal and equitable title are said to "merge"4 and the trust no longer exists.)
Under New York State law, the concept of legal vs. equitable title does not exist. Trustees of a New York based trust hold full and complete title to all the property in the trust's corpus, but the beneficiaries of a New York based trust have a right to the income and corpus of the trust subject to the trust's terms. The effect of this legal setup is largely the same as it is in States whose courts recognize the distinction between legal and equitable title. Since NTS and TES did most of their business on the West Coast, the New York treatment of trusts isn't really relevant to this discussion, and will be ignored for the rest of this article.
Trusts are often categorized according to the following attributes:
1. Did the grantor explicitly create the trust? If the grantor wrote up a trust contract signed by himself and the trustees, or if the grantor and trustees formed a trust by an explicit verbal agreement (also known as an "oral contract"), and all the necessary ingredients are there for the trust to be real and enforceable, the trust is an express trust. If the grantor didn't complete all the steps necessary to give away his property, and it's thereby ruled that the grantor is really the beneficiary even if he didn't say he was (such as if he gives property to someone else "in trust" but never says who the beneficiaries are, or he creates a trust "for Joe when he turns 25" and Joe drops dead at age 24), the "trust" that arises for the grantor's benefit is called a resulting trust. Finally, in the rare circumstance where someone is wrongfully deprived of property which can't be returned to him/her immediately, the courts can declare the wrongdoer to be merely the trustee for the property and the rightful owner to be the beneficiary; this arrangement is called a constructive trust.
2. Was the trust created by the grantor during his or her lifetime? If so, it's called an inter vivos trust. If, on the other hand, the trust was created after the death of the grantor by a clause in his or her will, it's called a testamentary trust. Testamentary trusts are most often created if a dead person has children to whom he wanted to give his property, but who have not yet reached adulthood.
3. Is the trust revocable by the grantor during his or her lifetime? If so, the grantor has the power to change his mind and take property out of the trust (if, for example, his beneficiaries get all snotty with him). If the trust is irrevocable, the grantor is stuck giving his property to the beneficiaries, but has therefore completely given up legal ownership of this property, which normally keeps it out of the hands of the grantor's future creditors.
4. Is the trustee given any duties other than holding legal title to the corpus? If so, the trust is an active trust; if not, it's a passive trust. Most trusts created inter vivos will be active trusts, as the main reason to entrust property to someone else while you're still alive is so you won't have to keep taking care of it.
5. Is the trust for a charitable purpose, with a public benefit? If so, it's called (unsurprisingly) a charitable trust. Trusts that aren't for charitable purposes, or which are for the benefit of only one or a few designated parties, are called private trusts. Charitable trusts don't have to follow the Rule Against Perpetuities, are never required to specify definite beneficiaries, and are exempt from most taxation.
6. Can the beneficiaries force the trustees to distribute the income or corpus to them at any time? If the trust does not contain language to the contrary, beneficiaries are assumed to have this power (provided they are of legal age and not incompetent). The trust contract may, however, contain a clause preventing its beneficiaries from ordering the trustees around. Such wording is called a spendthrift clause, and trusts containing these clauses are thus sometimes called "spendthrift trusts."
7. Can the trustees decide how much trust income to give to each beneficiary? If a trust has more than one beneficiary, each beneficiary is normally entitled to an equal share of trust income and corpus. However, the trust instrument may give the trustees the power to decide for themselves just how much each beneficiary gets (or doesn't get). Any such trust where beneficial interest may be rearranged at the discretion of the trustees is called a discretionary trust.
8. Can the beneficiaries, if they are all competent to hold legal title to property, force the trust to terminate by a unanimous decision? Normally, they can, and in so doing will take complete title to the entire trust corpus. But if terminating the trust would defeat the grantor's material purpose for creating the trust in the first place, the beneficiaries cannot force it to terminate; such a trust is called an indestructible trust or Claflin trust. A spendthrift clause implicitly makes a trust indestructible.
9. Can the beneficiaries transfer their beneficial interest to another person of their choosing? If the trust is not a discretionary trust, are the identities of the beneficiaries spelled out in the trust document anywhere, or is the beneficial interest a "negotiable security" like a share of corporate stock? If the latter, the trust is usually categorized as a "business trust". Creating a new business trust is illegal in some states, including California, but is legal in Massachusetts, Oregon, Indiana, etc. if fees are paid to the Secretary of State and corporation-like rules are followed. (Federal income tax law treats business trusts exactly as corporations; the beneficiaries are even referred to as "certificate holders.")
The trust contracts that NTS and TES prepare for their customers all describe trusts that are:
A not insubstantial body of statutes and common-law cases has grown up around trusts, in the United States and elsewhere, over the last few centuries. Some trusts are allowed in all jurisdictions; a few, such as the "Massachusetts Business Trust" mentioned above, can be created in some states but not others; and many are either void or illegal everywhere.
The normal "living trust" arrangement so popular in estate planning nowadays is both inter vivos and revocable. It also has the grantor act as trustee and beneficiary during his or her lifetime. After death, the trust becomes irrevocable, and successor trustees and successor beneficiaries named in the trust document take over.
Unfortunately, the courts have ruled that, since the grantor has the power to revoke or amend such a trust at any time, the property in said trust is considered to be part of the estate of the grantor when he dies, and is thus subject to all normal inheritance taxes. The Federal Estate Tax has a top tax bracket of 47%, which is a pretty substantial chunk of change. Fortunately, each estate has a "unified credit" against this tax equal to $555,800 (the amount of tax on an estate worth $1,500,000); and this credit amount will increase to $1,525,800 (the amount of tax on an estate worth $3,500,000) by the year 2009. Unfortunately, it's not uncommon for even middle-class folks to be millionaires by the time they die nowadays.
As if this weren't bad enough, the pay-outs of a life insurance policy are also considered part of the decedent's estate for inheritance-tax purposes. For this reason, Life Insurance trusts — whose corpus consists solely of a life insurance policy payable to the trust's beneficiaries upon the death of the trust's grantor — are generally irrevocable.
But irrevocability has its tax downside, too. Whenever property is placed irrevocably in trust for the benefit of someone other than the grantor, a gift has occurred. The grantor is considered to have made the gift to the beneficiary, even though the gift happens through a trust. Thus, passing on assets via an irrevocable trust instead of a revocable one gets around estate taxes, but incurs gift taxes. The gift tax laws were enacted to plug up loopholes in the estate tax laws, wherein folks who knew they were about to die would give all of their property to their kids and thus avoid the estate tax completely. Thus, gifts are taxed at the same rate as estates, with a unified lifetime tax credit pool of $345,800 (i.e. the amount of gift tax on $1,000,000) per giver/decedent. Furthermore, any of this gift tax credit pool used up during the giver's lifetime is counted against his-or-her unified estate tax credit.
Gifts do have one slight advantage over estates, however. The first $10,000 (adjusted for inflation from a base year of 1997) of gifts made to each recipient each year is exempt from the gift tax and does not eat away at that unified lifetime tax credit pool. So, irrevocable trusts have a slight gift/estate tax advantage over revocable ones. But don't think that making 200 irrevocable trusts, each of which has a corpus of $10,000, will allow you to give two million dollars to the same person without incurring any gift taxes, though. Gift taxes are calculated on a per-beneficiary, rather than per-trust, basis.
And speaking of taxes, by this point you're probably asking, "What if the corpus of a trust consists of, say, a business, or an apartment building, or some shares of preferred stock — you know, something that generates income?" In this case, someone is going to pay tax on that income — either the grantor, the beneficiary, or the Trust itself, depending on the circumstances:
If the grantor of a trust has some kind of control over or enjoyment of the trust's corpus or income — such as if the trust is revocable, or if the corpus "reverts" to the grantor within 10 years, or if the grantor is the beneficiary, or in a few other cases — the grantor is considered to be the "owner" of the trust for income tax purposes. All income in one of these "grantor trusts" is treated as income of the grantor.
If the trust does not qualify as a grantor trust, any Trust income that is distributed to its beneficiaries is treated as part of its beneficiaries' gross income. This is reported to the IRS on form K-1.
If the trust isn't a grantor trust, and some or all of its income isn't distributed to its beneficiaries in the same tax year it was received, this undistributed income is taxed to "the trust itself" as though the trust were a separate entity. This is reported to the IRS on form 1041 or 1041-A. The tax rates for trusts accelerate much more rapidly than they do for individuals or corporations; a trust reaches the 39% tax bracket after the first $8000 or so of its taxable income. These income tax laws strongly discourage a trust from retaining income.
Of course, if you want to keep a non-grantor trust's income tax in the miminum tax bracket, you might be tempted to create several trusts, all with the same beneficiaries, to split the income up into smaller chunks. Unfortunately, Internal Revenue Code section 643(f) says that any two or more such trusts formed with a principal purpose of income tax avoidance are to be treated as a single trust.
Some "Pure Trust" scams set you up with two trusts that are beneficaries of each other, and take advantage of a little 45-day rule in the tax laws to distribute income to one another every year without ever incurring tax on that income. IRC 643(f) effectively closes that loophole. NTS/TES's trust system, however, does not rely on such a scheme for income tax avoidance. Instead, its tax avoidance strategy relies on:
Since the 1999 NTS/TES split, TES has never publically suggested that its customers use tactic number (1); in fact, FAQ #37 on their webpage (before the website was taken down) read:
"Personal expenses that are not incurred in the normal administration and management of the Trust(s) are typically not a deductible expense to the Trust. If the Trust pays for personal expenses that are not legitimate deductions of the Trust, the Trustees could be guilty of commingling funds. In addition, the amount in question could be considered retained income of the Trust and would be taxed at the Trust rate. The answer to this question is a matter of constant research, as the IRS seems to change its position about this issue on a regular basis."However, with respect to tactic number (2) above, the same TES webpage more than once said:
"The Complex Irrevocable Trust may also contribute part or all of its income to a charity and deduct 100% of the contribution from its income"... and since the NTS/TES trust system considered a customer's Charitable Trust to be a "charity", TES still may have been promoting tactic number (2).
The term comes from Supreme Court decisions dating back at least as far as 1924. In Hecht v. Malley, 265 U.S. 144, the collector of internal revenue claimed that three Massachusetts Business Trusts qualified as "associations" under the Revenue Act of 1916, for excise tax purposes. The Supreme Court agreed with the tax collector. In the course of this judicial opinion, the following sentences appear:
Under the Massachusetts decisions these trust instruments are held to create either pure trusts or partnerships, according to the way in which the trustees are to conduct the affairs committed to their charge. If they are the principals and are free from the control of the certificate holders in the management of the property, a trust is created; but if the certificate holders are associated together in the control of the property as principals and the trustees are merely their managing agents, a partnership relation between the certificate holders is created.In other words, there was so much leeway in the way Massachusetts Business Trusts could be drafted that some of them were deemed to be more like a partnership than a trust. To distingush between these partnership-like business trust relationships, and those business trust relationships that weren't at all like partnerships, the latter variety were referred to as "pure" trusts.
The Supreme Court later cited this decision, and used the term "pure trust" again, in Navarro Savings v. Lee, 446 U.S. 458. This case decided that the trustees of a Massachusetts Trust could invoke Federal jurisdiction, regardless of the citizenship status of the trust's beneficiaries. It is in the dissenting opinion of Justice Blackmun that Hecht v. Malley is cited, and where the term "pure trust" appears two additional times. First, it mentions that a Federal District court declared a business trust to be a pure trust rather than a partnership even though the beneficial shareholders had the power to elect trustees at regular meetings and dissolve the trust at any time. Second, it says "The fact that a declaration of trust effectively creates a partnership relation rather than a pure trust has not led the Massachusetts courts to treat the entity as a partnership for all purposes." The term "pure trust" is used in this court opinion in precisely the same way as it was used in Hecht v. Malley: as a label for those Massachusetts Trusts that don't work like partnerships.
What's important to remember here is that "pure trust", as a legal term, only means that a trust doesn't have the business features of a partnership. It does not mean that a trust doesn't refer to statutes in its indenture. It does not mean that a trust is of some mythical, invincible variety, allegedly recognized in the Common Law since before the Constitution was even drafted, which is protected by an unwritten "sacred right to contract". It could, in theory, refer to any non-partnership-like trust — a living trust, a testamentary trust, a QTIP trust, a REIT, a Deed of Trust in a mortgage, anything.
The Fiduciary Society, which was essentially an arm of the old NTS organization (the one which became TES), published a book called The Irrevocable Complex Trust Case Book. It's a hefty 696-page tome, consisting of 77 reprints of court cases (at least one of which is reprinted twice) and several sections of the Internal Revenue Code and Treasury Regulations; in my opinion it's overpriced at the $340 they sell it for. Many of the book's section headers refer to "Pure Trusts" and "Contract Trusts," but almost invariably, the cited cases in that section of the book deal with Massachusetts Business Trusts. (NTS/TES's trusts do not have transferrable beneficial interest, and so are not business trusts; thus, the business trust rulings in these court cases don't say anything one way or the other about how the courts view NTS/TES's trusts.) Furthermore, several quotes in the section headers, which are phrased to look like quotes from the cited cases immediately below them, appear nowhere in the court opinions printed in this very book! Section 3.4 of the Casebook, for example, begins with the words "It (Pure Trust) is established by legal precedent that Pure Trusts are lawful, Valid Business Organizations" in quotation marks and cites Baker v. Stern, 58 ALR 462 (a Wisconsin Supreme Court case from 1927), but nothing resembling the quoted sentence appears anywhere in Baker v. Stern; in fact, the court opinion only states that a business trust "is not invalid as contrary to public policy where such organizations are recognized by statute." (This court opinion also says "The business trust is of comparatively recent origin," and cites other cases going back to 1861 on the subject.) If the court cases in this book are the best evidence we have that the term "pure trust" is used by the courts to mean anything other than a non-partnership-like business trust, then clearly no evidence exists for such a legal usage.
So how did groups like NTS/TES come to use "Pure Trust" to mean the kinds of trusts they promote, which do almost none of the things that these groups claim they do?
That's a bit of a longer story. A good overview of the history of pure trust scams in general appears in the Militia Watchdog's Special Report #7, near the middle of the article, but this article doesn't touch on whence the terminology originated. Mostly because it can't. The groups selling these sham trusts were shady even when they were at the peak of their operations; the origins of these groups are therefore doubly shady and may be forever clouded from public view. At least one organization, National Pure Trust Service of Chicago, Illinois, was in business selling these sham trusts and calling them "pure trusts" since July 1945, so the term dates back to at least that year.
In the 1970s, these sham "pure trusts" became popular within the "patriot" community's tax protest movement. They began to acquire new names laced with sovereign-citizen code words, such as "Constitutional trusts" and "Common law trusts" and, in one rather wordy case, "Organic Sovereign American Liberty Pure Trusts." (Incidentally, the term "common law trust" does appear in Black's Law Dictionary, as a synonym for a Massachusetts Business Trust — but not as anything else.) The name "pure trust" was still attractive, though, because it falsely implied that these sham trusts were "pure" contracts untainted by, and existing outside of, the morass of statutory law.
NTS and TES still occasionally use the term "pure trusts" to refer to the trusts they promote. However, as part of their endeavor to distance themselves from the "patriot" movement and appear more mainstream, they prefer to label the trusts created by their documents as "irrevocable complex trusts."
1. $9500, in the form of a certified check (no personal checks are accepted),
is taken from you and becomes the corpus of "The <your name here>
Educational Trust." This "Trust" has you as its grantor and sole
beneficiary, NTS/TES as the sole Trustee, and a corpus consisting of $9500 of
what used to be your money. The Educational Trust agreement is worded
such that its sole purpose, and the only thing its Trustee (NTS/TES) is allowed
to do, is to pay its $9500 corpus to NTS/TES for the education of the
Beneficiary (you). (This $9500 price tag was only current as of
1997. NTS raised its price to $15,500 on 16-August-2000; I don't know
what TES currently charges for their Basic Trust Academy.) Finishing the
NTS/TES Basic Trust Academy counts as complete fulfillment of this educational
One possible reason NTS/TES may be selling "trust education" rather than the trusts themselves is that a 1968 California supreme court case, People vs. Lynam (261 CA 2d 490), established that promoting a "pure trust" constitutes fraud. Perhaps, NTS/TES may have figured, merely educating someone as to how to set up pure trusts doesn't count as "promoting" pure trusts. But as we shall see below, NTS/TES gives you more than just "educational" services for your $9500.
2. You go to a big banquet hall in some fancy hotel, sign in, get a binder full of forms you'll be filling out over the next three days, and start the first day of your trust seminar by saying a group prayer and the pledge of allegiance.
3. You are lectured about the wonders of living In Trust by charismatic salesmen wearing business suits, and assigned a "counselor" who will occasionally chat with you when no one is lecturing later on.
4. You start filling out the forms that, at the end of the seminar, will be printed up into your actual Trust documents:
5. Your spouse (if you have one) signs over all of her share of your joint-property to you exclusively, in return for a promise of being a joint Beneficiary in the Trust you're about to create. (The trust contract itself, which NTS and TES call the Trust "indenture", divides beneficial interest into 100 "Units of Beneficial Interest", or UBIs. In the language of this imminent Trust, this promise to be a joint Beneficiary is a promise of "50 of the 100 total Units of Beneficial Interest.") Or at least, this is the story I heard when I attended the March 20-22, 1997 program. The first Quitclaim Deed and Bill of Sale included in the forms, both of which are to be signed by your spouse, indicate that your spouse is supposed to be selling you her/his half of your property for "ten dollars and other considerations of value," which doesn't agree with the exchange-for-half-the-UBIs story.
6. You create your first Trust, the Family Trust. At this stage,
you are the Family Trust's grantor, you are also the Family
Trust's sole Beneficiary, and your spouse and NTS/TES are its
co-trustees. Note that all NTS/TES Trusts require at least two
Trustees, so that one person by him/herself cannot constitute a
Majority of the Board of Trustees — this allegedly allows you to
say "we'll have to call a vote of the Board of Trustees on that"
if later one of you is put on trial. The corpus of the
Trust is formed out of all the property you own, which includes all
the property your spouse owned until a moment ago; and since the
grantor and the beneficiary are the same person, this conveyance is
considered a "reorganization of assets" rather than a gift, to avoid
triggering gift taxes.
Here, we stumble across another little discrepancy in the documents presented to you. According to the Trust Minutes you will later sign, you conveyed your property into the Trust in exchange for being its sole Beneficiary (or, to use the language of the Trust indenture, in exchange for "all 100 units of beneficial interest" in the Trust). However, near the beginning of the Trust indenture, and in the Quitclaim Deed and Bill of Sale that you will also later sign, you conveyed your property into the Trust in exchange for "ten dollars and other considerations of value". The ten-dollar transactions may be a holdover from earlier versions of the NTS Trust System wherein the Family Trust more closely resembled a Massachusetts Business Trust (the creation of which is now illegal in California); perhaps NTS or TES intends to clean up this discrepancy at the same time they clean up the discrepancy with the spouse's conveyance.
7. Your spouse and NTS/TES, acting as co-Trustees of your newly formed Family Trust, now create a Charitable Trust (also called a "Private Foundation") with the Family Trust as Grantor and your spouse and yourself as Trustees.
These next three steps are crucial:
8. You now voluntarily give up your Beneficial Interest in the Family Trust, so that you are no longer its beneficiary.
9. To keep the promise that you made to your spouse back in step 5,
the Trustees of the Family Trust (your spouse and NTS/TES) now issue
50 Units of Beneficial Interest to your spouse, who immediately
gives them up. The Trustees then choose new Successor
Beneficiaries, such as your children, and allocate Units of
Beneficial Interest to them. At least one UBI must be
assigned to the Charitable Trust, so that it's "linked" with the
NOTE: In the March 20-22, 1997 Academy, the power to select new beneficiaries when one of the existing beneficiaries relinquishes his or her UBIs is not explicitly given to the Trustees anywhere in the Family Trust Indenture. The Board of Trustees of your Family Trust are, by choosing new beneficiaries and assigning new UBIs here in step 9, exercising a power you haven't actually given them. A clause explicitly granting them this power may have been added to the Family Trust Indenture since March of 1997, but I haven't heard anything about it.
10. Now that you are no longer the Family Trust's Beneficiary, your spouse and NTS/TES hire you onboard the Family Trust's Board of Trustees as a new Trustee.
11. NTS/TES now resigns from the Board of Trustees of the Family Trust, leaving you and your spouse as its only Trustees.
12. The Family Trust (represented by its Board of Trustees) now
creates a Fiduciary Trust, with the Family Trust as Grantor, the
Family Trust as Beneficiary, and you and your spouse as Trustees.
Whatever property that used to be yours, which served a business
purpose (except for high-liability items, which are handled below),
is conveyed from the Family Trust into the Fiduciary Trust to form
The Fiduciary Trust used to be called the "Business Trust" in NTS parlance. However, as the term "business trust" became more and more identified in the legal and tax communities with Massachusetts Business Trusts (which are illegal to create in some states, including California, and can be heavily regulated where they are allowed), NTS realized they had to change its name. At the time I went through the NTS program, they were busily going through their program documents changing every occurrence of "business trust" into "fiduciary trust", and had missed several of these. Their documents still today might contain obsolete references to Business Trusts.
13. To protect the rest of these new Trusts' assets (which, remember, used to be your assets before Step 6 above) from liabilities arising through car accidents, machine accidents, employee lawsuits, etc., your Family Trust now creates one or more Utility Trusts, into which are conveyed the Family Trust's cars, shotguns, guard dogs, etc., as corpus. Naturally, the Family Trust is both Grantor and Beneficiary to each of these new Utility Trusts, and you and your spouse are Trustees. Business equipment or manpower that your Fiduciary Trust needs, but which is now owned by a Utility Trust, can then be "leased" by the Utility Trust to the Fiduciary Trust through a contractual arrangement.
14. Your filled-out forms are taken from you to be turned into completed documents in NTS/TES's word-processor cut-and-paste software. While you wait, you go through a few "role-playing" sessions where NTS/TES shows you how to deal with IRS agents, clerks in the County Recorder's Office, bank tellers, and other potentially onerous bureaucrats. You may also watch that scene from Braveheart where Mel Gibson rallies his Scotsmen to fight for freedom, and/or a video tape (filmed by one of NTS/TES's counselors) about all the Christian good you can be doing with your Charitable Trust.
15. Your newly-printed finished documents are handed back to you in a handsome leatherette binder, with your last name written in pretty calligraphy letters on the white sticker plastered to the binding. You and your spouse then sign them in all the appropriate places. Note that many of them, despite not having been signed by you yet, have already been notarized.
16. Before you go, your counselor hands you a checklist with 12 or 13 items on it, representing things you're supposed to do to complete and record all the transfers. These items include filing your Quitclaim deed(s) with the county recorder's office, getting new pink slips for your automobile(s) in the name of the appropriate Trust, opening bank accounts for the Family Trust and the Fiduciary Trust, having the First Annual Meeting of each Trust's Board of Trustees, etc..
Thus ends the NTS/TES Basic Trust Academy. Now, I'd like to show you why many of the principles on which you've built your new shiny system of trusts are fundamentally flawed.
By the beginning of the 16th century, uses were being used for fraudulent or unjust purposes more often than not. Thus, in 1535, during the reign of Henry VIII, the English Parliament attempted to abolish uses by passing the Statute of Uses. The Statute of Uses failed to completely eliminate uses and trusts, though, because it did not apply to active trusts and only dealt with real property (Real Estate), not personal property (money or chattels). From then onward, due to the legal stigma of something being classified as a "use", everything that used to be called a "use" was now called a "trust", even if it wasn't an active trust.
Not all of the Common Law of England was adopted by the American colonies at
the same time. The courts of equity and chancery, which were the English
courts in which trusts were recognized, got established in the colonies (and
the States which the colonies later became) more slowly than the courts of
law did. Pennsylvania had no court of chancery until 1836, and
Massachusetts didn't have any permanent court of equity until 1877, for
example. State legislatures occassionally gave the common law courts a
few limited powers of equity when the need arose, but never complete equity
jurisdiction. This was just as well, because trusts did not come into
common use in America until the late 1700s. It should also be noted that
even when equity courts had been established in America, the English
system of equity jurisprudence was not adopted in precisely the same
form it had in England.
18200. If the settlor retains the power to revoke the trust in whole or in part, the trust property is subject to the claims of creditors of the settlor to the extent of the power of revocation during the lifetime of the settlor.Chapter 128 of the Oregon Revised Statutes, on the other hand, does not appear to contain a law like this one.
Even in states with such a statute, though, it is more difficult to get at property in a revocable trust than it is to get at your personal property. The onus of proof on the part of a creditor is greater if your property is held in a legitimate Trust, as this property is being set aside for somebody else. A Revocable Living Trust agreement provides a limited degree of asset protection, in much the same way that forming a Corporation does.
Note, though, that even in states without such a statute, the assets of a Living Trust are still exposed to attack by the grantor's creditors if the trust's grantor is also its beneficiary, as we shall see farther below.
Naturally, politicians would therefore have a built-in personal incentive to legally protect these Blind Trusts. But a Blind Trust arrangement hardly qualifies as anything close to the trusts NTS/TES is selling. A politician would have no personal incentive to protect NTS/TES-like Irrevocable Complex Trusts unless he also used this kind of trust. And in fact, not all trust arrangements are protected equally under the law. If any politicians do use any trusts like the ones NTS/TES promotes, it would be very difficult to find out about them, and as far as I know no such Trust arrangement in the hands of a politician has ever come to light.
"... their acknowledgement of [THIS TRUST'S] copyrights and registration (U.S. Patent Office 608 111) 6/28/55"There's a similar clause in the Educational Trust agreement — that's the "Trust" you have to fork over $9500 to at the beginning of NTS's Trust training. It claims that NTS is
"The exclusive licensee of the National Trust Service Mark, Reg. no 608,111 United States Patent Office."
Being the curious sort, I went down to my local patent library and looked this reference up. I first looked for number 608111 among the Patent Listings, just on the off chance that NTS really was referring to a patent. I found that (A) Patent Number 608111 was issued in 1898, not 1955, and (B) it concerned recessed wheel-casters mounted in the legs of a chair.
I had more success when, instead, I looked through the Trade Marks and Service Marks. (Trade and Service Marks are registered in the Patent Office, and used to be published in the same volumes as patents were.) Sure enough, on June 28, 1955, there appeared a Class 100 Service Mark with a publication number of 608,111 (and a later Serial Number of 71-641,949), belonging to an outfit called National Pure Trust Service of Chicago, Illinois. National Pure Trust Service filed to register this Service Mark on February 9, 1953, and claimed to have been using it since around July 1945. The Mark depicted a bald eagle with outstretched wings, perched atop a book which read "U.S. Constitutional Protection for Home - Business - Family - Estate" (said words being disclaimed from the text portion of the Service Mark), with a glory in the background, all surrounded on the bottom by a thick semicircular banner on which was inscribed "* National Pure Trust Service *".
I searched for the current status of this Service Mark on the Federal government's Trademark Applications & Registration Retrieval webpage. Searching on Registration Number 608111 or Serial Number 71641949 yielded the following results:
Serial Number: 71641949So, not only is there no record of this Service Mark ever having been transferred from National Pure Trust Service to National Trust Services, this Service Mark also expired in 1996. But who were/are "National Pure Trust Service", and what relation do they have with NTS/TES? Is National Pure Trust Service merely a business alias for NTS? If so, does that mean NTS has existed for at least 30 years longer than they claim? If not, does National Pure Trust Service even exist anymore? And more importantly, why in heck does NTS claim to be the exclusive licensee of this expired Service Mark in their Trust documents?
Registration Number: 608111
Trademark (words only): NATIONAL PURE TRUST SERVICE U.S. CONSTITUTIONAL PROTECTION FOR HOME BUSINESS FAMILY ESTATE
Current Status: This registration was not renewed and is considered to be expired.
Date of Status: 1996-04-02
Filing Date: 1953-02-09
Current Owners: 1. NATIONAL PURE TRUST SERVICE
Goods and Services: CONSULTATION AND ADVICE IN THE FORMULATION AND MAINTENANCE OF TRUSTS
1996-04-02 - EXPIRED
1975-06-28 - FIRST RENEWAL
I found a partial answer in the Militia Watchdog's Special Report #7. National Pure Trust Service was one of at least three different organizations selling "Pure Trusts", headed by a Colorado man named James R. Walsh. In 1981, Walsh pled guilty to one of five criminal charges for activities intended to defraud the IRS.
TES note: I have not seen the Educational Trust Agreement or the Family Trust Indenture put out by TES since the NTS/TES split in 1999. TES's trust documents may still contain references to this same Service Mark. However, it may be the case that Roy Fritts' new NTS organization is claiming exclusive rights to this (expired) Service Mark, in which case TES may have made an effort to remove any references to it from their documents.
"No State shall ... pass any ... Law impairing the Obligation of Contracts."What NTS and TES don't tell you about this Contract Clause is how the courts have interpreted it. Starting with Ogden v. Saunders (25 U.S. 213) in 1827, the Federal courts have consistently ruled that the Contract Clause only applies to laws passed after a contract is entered into. Laws passed before a contract is signed are assumed to govern that contract. If California passed a law on October 8, 2002, stating that "All Trusts are revocable by their Grantors no matter what the Trust documents say", and you sign an irrevocable Trust agreement in California on October 9, 2002, guess what — your new Trust will be Revocable.
(Note that such a law will probably never be passed, because in California, irrevocable trusts called "deeds of trust" are used as mortgage instruments. But that's neither here nor there.)
Of related interest here is the fact that the creation of new Massachusetts Business Trusts is illegal in some states. Such creation is not illegal because Massachusetts Business Trusts contain any language saying "This business trust shall be governed by the laws of thus-and-such state" or anything to that effect. It is illegal because these states have statutes similar to California's Probate Code section 15205 (passed in 1986), which states:
15205. (a) A trust, other than a charitable trust, is created only if there is a beneficiary. (b) The requirement of subdivision (a) is satisfied if the trust instrument provides for either of the following: (1) A beneficiary or class of beneficiaries that is ascertainable with reasonable certainty or that is sufficiently described so it can be determined that some person meets the description or is within the class. (2) A grant of a power to the trustee or some other person to select the beneficiaries based on a standard or in the discretion of the trustee or other person.It should be noted that, in the form the NTS Family Trust Indenture had when I went through their program in 1997, there were no beneficiaries — not even a class of beneficiaries — mentioned by name in the Family Trust document itself. Beneficiaries can only be identified by whomever is currently holding the non-transferrable units of beneficial interest, or by the most recent beneficial interest assignments in the trust minutes (which are private and can't be shown to outsiders anyway). Nor was there any mention of any power to select Beneficiaries being granted to the Family Trust's Trustees, as I've already noted in my description of Step 9 in the Basic Trust Academy. Although this little sloppy hole in NTS/TES's Family Trust could easily be plugged up by adding a paragraph to it, as it stood at the time the NTS Family Trust was probably void in California by means of this law alone.
The case they cite as "Crocker v. MacCloy, 649 US Sup 39 at 270" is actually cited incorrectly. In the "What Is a Trust?" section of TES's complextrust.com website, this case is cited as "Crocker V. MacCloy, 649 US Supp 39270", which is also incorrect. Formerly, in the "FAQs" section of NTS/TES's trusts.org webpage, http://www.trusts.org/faqa.htm#45, and now again in the same section of NTS's purecontract.org webpage, http://www.purecontract.org/faqa.htm#45, yet another incorrect version of this same citation appears as "Crocker v Malloy, 39 US 270". The court case they are actually referring to is Crocker v. Malley, 249 U.S. 223 (also citable as 39 Sup. Ct. 270, 63 L. Ed. 573, or 2 ALR 1601), which was the 649th case appealed to the U.S. Supreme Court in 1919.
The full Crocker v. Malley court decision can be found at findlaw.com. It's not the lengthiest judicial opinion ever handed down by the U.S. Supreme Court, but it's not exactly light reading either; if you don't want to slog through the entire judicial opinion yourself, the gist of the case is as follows:
A certain section of the Income Tax Act of October 1913 imposed a tax on the net income of corporations, joint-stock companies and associations, and insurance companies. Malley, a collector of internal revenue, tried to assess this tax on the income of a Real Estate Trust formed in Massachusetts by Crocker et al., arguing that it qualified as a joint-stock association. Crocker countered that the beneficiaries of the trust had no controlling power over the board of trustees, and as such the beneficial interest didn't count as "stock". The Federal District court sided with Crocker, the Federal Circuit Court of Appeals reversed the decision, and the U.S. Supreme Court reversed the reversal.
All that this case establishes is that a certain class of trusts does not fall within the definition of "joint-stock associations" as that term was used in the Federal income tax laws of 1913. No sane reading of the court's opinion in this case could imply that trusts are "not subject to legislative restrictions."
The citation listed, 2 CA 524, is also incorrect. Smith v. Morse appears on page 524 of the second volume of California Reports; the proper citation is either 2 C. 524 or 2 Cal. 524. Smith v. Morse was a California Supreme Court case, not a Federal case, and was decided way back in October of 1852. The case arose when the recently-incorporated City of San Francisco had racked up a debt exceeding a million dollars — three times its annual revenue — and its debts were coming due. The City did not have enough liquid assets to pay all its debts off; the Mayor and Aldermen knew that unless they did something drastic, they would have to auction off some of the City-owned real estate. They tried to delay this unpleasant turn of events by passing a law that conveyed a huge bunch of City-owned real estate to a "sinking fund," as collateral for a different debt that did not yet exist. If any private individual or company had attempted such a scheme, it would have been thrown out immediately as a fraudulent conveyance, and the California Supreme Court said so. The Court threw out the law that conveyed the property into the "sinking fund" as Unconstitutional, saying that this law impaired the obligation of the City's contracts with its creditors.
Incidentally, a Trust was mentioned in this court decision: the real estate was conveyed to the commissioners of the sinking fund In Trust. And it was this Trust, in fact, that was ruled void by the court.
Increasingly, modern common law and statutory concepts and terminology tacitly recognize the trust as a legal "entity," consisting of the trust estate and the associated fiduciary relation between the trustee and the beneficiaries. This is increasingly and appropriately reflected both in language (referring, for example, to the duties or liability of a trustee to "the trust") and in doctrine, especially in distinguishing between the trustee personally or as an individual and the trustee in a fiduciary or representative capacity.And as if that weren't enough, even California's Probate Code, which contains all of California's trust statutes that differ from Trust Common Law, contains the following section:
56. "Person" means an individual, corporation, government or governmental subdivision or agency, business trust, estate, trust, partnership, limited liability company, association, or other entity.However, at common law — and thus in every state and for every purpose where there isn't an overriding statute — trusts are not legal persons. Trusts are merely a bifurcation of legal and equitable title between trustees and beneficiaries. A 1975 California appellate court decision, Powers v. Ashton (119 Cal.Rptr. 729), supports this interpretation:
"Thus where a cause of action is prosecuted on behalf of an express trust, the trustee is the real party in interest because he is the one in whom title to the cause is vested. ... Conversely, because an ordinary express trust is not an entity separate from its trustees, action may not be maintained in the name of the trust."The above paragraph is cited in a 1992 California appellate court decision, Saks v. Damon Raike and Co. (6 Cal.Rptr.2d 399), so the non-separate-entity status of trusts in California has not been overturned as of at least 1992. After all, if a trust were considered a legal person, that would mean it could own complete title, both legal and equitable, to its property — and then the "legal owner" of its corpus would be both the trust and its trustees, while the "equitable owner" of its corpus would be both the trust and its beneficiaries, which is nonsense.
The Irrevocable Complex Trust Case Book, which is published by The Fiduciary Society (an arm of NTS/TES), cites a 1922 Texas appelate court case in an attempt to bolster the notion that Trusts are legal entities (i.e. artificial persons). It claims that the case, Burnett v. Smith (240 S.W. 1007), says: "Trust or Trust Estate is a legal entity for most all purposes as are common law Trust." However, this sentence appears nowhere in the actual court opinion, which is printed in its entirety in that very book. The quote appears to be completely fabricated. (This same fabricated citation appears on the Liberty Pure Trust website, which sells sham trusts similar to those of NTS and TES.) Burnett v. Smith deals with a common-law joint stock association (what we now call a Massachusetts Business Trust); the closest any text in this court opinion comes to the sentence above is where it describes the suit as "being against the trustees individually, and not against the association".
NTS's "Asset Management" webpage ( http://www.purecontract.org/assets.htm) — which is identical to the "Asset Management" webpage TES used to have on http://www.trusts.org/assets.htm before the trusts.org website was taken down — likewise contains the following quotation:
"Legal entities recognized by law include living persons, corporations and trusts".(Bogert, Trusts and Trustees p.123)Now, Bogert's Trusts and Trustees is a 23-volume set of books. Each volume contains a page 123. Furthermore, no less than 3 editions of Trusts and Trustees have been published, the most recent of which is the "Second Edition Revised." This makes the above quotation rather hard to pin down. Nevertheless, I looked for it on page 123 of every single one of the 23 volumes in the 2nd Revised Edition. I even looked in section 123, on the off chance that NTS/TES meant §123 instead of p.123. The quotation does not appear in any of these places. There is a chance that NTS/TES may have been referring to an edition of Trusts and Trustees other than the 2nd Revised Edition, but I suspect that the quote is a complete fabrication, just like the Burnett v. Smith quote above.
It is true that the trustees can sue, have creditors, be creditors, and hire employees, in their capacity as trustees of a given trust. It's also true that if person T is a trustee of trust X and trust Y, and T signs a contract as trustee of X which creates a debt to some creditor (e.g. a loan, a purchase with delayed payment, etc.), and T doesn't pony up the dough on time, it is trust X's corpus that is at risk for settling the debt and not T's personal property or trust Y's corpus. [This, by the way, will not protect T's personal property from people who are creditors due to a lawsuit ("tort liability"), nor will it prevent a plaintiff from suing T personally for the actions T allegedly undertook as a Trustee, or from claiming that a transfer into trust was fraudulent, or taking any of a number of other routes to attack the personal assets of T or the corpus of Trust Y.] However, this is not the same as saying that someone can "sign a contract with trust X," or that "trust X can hire employees," or that someone can "sue trust X." When a bank or a court decision says "trust X owns a house," they really mean "person T owns legal title to a house as trustee under the terms of trust X."
This aspect of the trust relationship has important implications for the Fiduciary Trust and the various Utility Trusts that NTS/TES helps you set up, as we shall see below.
One thing I didn't mention in the NTS/TES Basic Trust Academy description above are the different steps you go through if you're single and don't have any friends or family you want to make into a co-trustee. Since all of NTS/TES's trusts require at least two trustees, what they'll do in that circumstance is set you up with another one of your trusts as co-trustee with you for each and every trust. NTS/TES believes this is legitimate since they also believe that trusts are legal persons. What would really happen in such a circumstance is that the Trustees of the Family Trust (for example) would be yourself, and yourself again in your capacity as Trustee of the Fiduciary Trust. This may be a nonsensical arrangement; I sincerely doubt that a trust can "be" a trustee of another trust.
Remember, in both the Fiduciary Trust and the Utility Trust as NTS/TES drafts them, the Grantor is supposed to be another Trust (usually the Family Trust), the Beneficiary is the same Trust that is its Grantor, and the Trustees are the same persons who are Trustees of the Trust that is its Grantor and Beneficiary. But since Trusts aren't persons, when one says that a Trust is a grantor or a beneficiary, one is really saying that the Trustees of the Trust are grantors or beneficiaries in their capacity as trustees of the trust. Take the case of the Family Trust "being" the Grantor and Beneficiary of the Fiduciary Trust. What really happens is that the trustees of the Family Trust convey "legal title to the legal title" of the newly-created Fiduciary Trust's corpus to the Fiduciary Trust's trustees as joint tenants; while the trustees of the Family Trust, who I remind you are the same persons as the trustees of the Fidiciary Trust, hold "equitable title to the legal title" as joint tenants also (trustees never hold title as tenants in common, only as joint tenants). Since the same persons hold both legal and equitable title to the Fiduciary Trust's corpus as joint tenants, the legal and equitable titles merge, and the Fiduciary Trust does not exist. The same situation would occur with the Utility Trusts. (And note that even in California, where "person" is defined to include trusts throughout the entire Probate Code, the California Probate Code does not touch on what is required for being a grantor, a trustee, or a beneficiary. Thus, within California, these requirements come instead from the common law, in which no statutory definition of "person" applies.)
"But wait!" I hear you cry. "Couldn't you get around this little merger-of-title roadblock by appointing one extra person to the Board of Trustees of either the Family Trust or the Fiduciary Trust?" Aside from the fact that doing this would defeat the "magical" NTS/TES formula of making the husband and wife team the only Trustees of all the Trusts in their system, there is the question of whether Trustees can convey Trust property into another Trust at all.
Now, the courts have ruled that equitable title alone to property (where the equitable owner does not have legal title, i.e. is a Beneficiary) can be conveyed into a new trust as its corpus (or "res") — provided the equitable title holder has the right to transfer the equitable interest in this property. (The Beneficiary of a spendthrift trust does not have such an equitable transfer right.) Gilbert's Law Summary on Trusts, §96, says:
The res may consist of an equitable interest; e.g., the interest of a trust beneficiary, if assignable, can be transferred into another trust and held as the res of that second trust for the benefit of others. In such a case, the trustee of the second trust does not have "legal title" to the res; he has "paramount" equitable title, while the beneficiaries of the second trust are said to have "subordinate" equitable title. The equitable interest placed in the second trust may be a present or future interest, and if the latter it can be vested or contingent, as long as local law recognizes the interest as transferable.This state of affairs is sometimes stated in legal references as "There can be a trust within a trust."
But this isn't what the NTS/TES system tries to do when it creates the Fiduciary Trust or any of the Utility Trusts. It tries instead to convey the legal title alone to the property into a new Trust. No legal reference I have ever seen makes any mention of a res consisting solely of a legal (rather than equitable) interest in property, or of "paramount" legal title versus "subordinate" legal title. I suspect that Trustees are not allowed to create new trusts out of their existing Trust's corpus at all, even if they would also be the new trusts' joint "beneficiaries".
However, there is one avenue NTS/TES could use to try and exempt this transfer from gift taxes. Under the gift tax laws, a gift is considered to have occurred only if the donor irrevocably gives up all dominion and control over the property; that is, if the gift is complete. Treas. Reg. 25.2511-2(c) says:
A gift is incomplete in every instance in which a donor reserves the power to revest the beneficial title to the property in himself. A gift is also incomplete if and to the extent that a reserved power gives the donor the power to name new beneficiaries or to change the interests of the beneficiaries as between themselves unless the power is a fiduciary power limited by a fixed or ascertainable standard.5 Thus, if an estate for life is transferred but, by an exercise of a power, the estate may be terminated or cut down by the donor to one of less value, and without restriction upon the extent to which the estate may be so cut down, the transfer constitutes an incomplete gift. If in this example the power was confined to the right to cut down the estate for life to one for a term of five years, the certainty of an estate for not less than that term results in a gift to that extent complete.Since NTS/TES's Trusts are all irrevocable, the grantor has obviously not reserved the power to revest beneficial title in himself. But what about the second test? Since the donor (here, the grantor) becomes a Trustee, do the Trustees have the power to name new beneficiaries or to reallocate beneficial interest, beyond that of some ascertainable standard?
Well, yes and no. The Trustees do choose new Beneficiaries for the Family Trust when the Grantor relinquishes his interest (see step 9 in the NTS/TES Program above). But, in doing so, they are exercising a power not explicitly given to them in the Trust indenture. When, in step 10, the Grantor becomes a Trustee, does he also have the power to choose new Beneficiaries? And even if he does, since this power is apparently limited to the ability to choose new Beneficiaries only if an existing Beneficiary voluntarily relinquishes his or her Beneficial Interest in the Family Trust, does this qualify as an "ascertainable standard" limiting this power?
Yes, it does. And in a way, this is a good thing for the NTS/TES Trust user, even if it does make the change in Beneficiaries qualify the conveyance as a completed gift (and thus trigger a gift tax). For, as we shall see farther down, if such a power is not limited by an ascertainable standard, the Trust will be subject to the Grantor Trust rules for purposes of income tax.
However, according to current Common Law (as presented in Restatement 2nd §157), there are four classes of creditors against whom a spendthrift clause is not effective. These are:
1. Federal and State governments (e.g. for tax claims); 2. Spouses, ex-spouses, and children for support; 3. One who furnishes necessaries of life to the beneficiary; and 4. One who "preserves the interest" of the beneficiary.Furthermore, as Gilbert's law summary on Trusts (Halbach, 1990) states, in §462:
The rule is clear and well settled that the owner of property cannot create a "spendthrift trust" for himself; i.e., the trustor is not permitted to put his own property beyond the reach of his creditors, present or potential, to the extent of his retained interests therein. [Johnson v. Commercial Bank, 588 P.2d 1094 (Or. 1978)]In other words, if the grantor and beneficiary are the same person — creating what's known in the asset protection biz as a "self-settled spendthrift trust" — any spendthrift clause in the trust does not apply. This paragraph is a big Achilles Heel for the NTS/TES Trust program's claims of asset protection, because the Family Trust is both the Grantor and the Beneficiary of the Fiduciary Trust and any initial Utility Trusts. (A subsequent Utility Trust formed when an earlier Utility Trust is under potential attack by creditors is supposed to be created with the earlier Utility Trust as both Grantor and Beneficiary.) Therefore, the spendthrift clauses in the Fiduciary Trust and all Utility Trusts are void and unenforceable.
[T]he trustee (rather than the trust estate) is personally liable for torts committed by the trustee or his agent(s) in the course of administering the trust, with the trustee having a right of indemnification from the trust estate if he was not personally at fault. [Restatement 2nd, §264]This subject is treated in greater depth in §129 of Bogert's Hornbook on Trusts, sixth edition, which talks more about a Trustee's liability for his/her agents, the higher expectations placed on Charitable Trusts, and a few other details — but nowhere is there a magical "escape clause" from personal tort liability, in the phrasing of the Trust instrument or otherwise.
The liability clause in NTS/TES's Trust indentures, which allegedly limits the Trustees' liabilities to only the property held in that Trust, has no effect against lawsuits.
a transfer into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the propertyNote that the mortgagor must not only be a beneficiary of the trust when the trust is first formed, he or she must remain beneficiary. And, as you may recall from my earlier discussion of the NTS/TES Program in this article, you stop being a beneficiary of the Family Trust in step 8. If you've transferred a mortgaged home into NTS/TES's trust system as per their instructions, and the mortgage company later discovers that you are no longer the trust's beneficiary, they have every right to enforce the mortgage's due-on-sale clause, and demand that you immediately pay them all of the remaining principal or they'll foreclose the mortgage.
In other words, if you create your Family Trust, convey your assets into it, and relinquish your Beneficial Interest in it, as NTS/TES instructs you to do, you could lose your home.
This and the gift tax laws may be the reasons why, of all the official, public documents that NTS/TES gives you — trust indentures, quitclaim deeds, notices of Trustee resignation, notices of Trustee appointment, bank affidavits, etc. — none of them announces to the world that a Trust has changed its Beneficiaries. The only documents they give you that mention who the Beneficiaries actually are are (A) the Trust minutes, which are supposedly the "private and inviolate" property of the Trust not to be shown to anyone; (B) the Beneficial Interest certificates, which are the private property of the Beneficiaries and aren't designed for public display anyway; and (C) a confidential disclosure to a bank or lending institution, in case a potential lender wants to know who the Trust's Beneficiaries are. After all, if nobody knows the Grantor is no longer the sole Beneficiary, nobody can throw a gift tax or due-on-sale clause at the Family Trust, can they?
1. when the trust is created, it is certain to vest or terminate no later than 21 years after the death of an individual then alive (the "common law rule"); or 2. the trust either vests or terminates within 90 years after its creation (the "wait and see rule").In states where the USRAPA has not been enacted, the situation is even worse. Under Common Law, the trust does not get to wait and see if it vests or terminates — it must satisfy condition number 1 listed above, at the time it is drafted and signed, to avoid being a Perpetuity.
Note that it's okay for a trust to continue after it has vested. But, after vesting, the beneficiaries are then chiselled in stone and may no longer change. If one of the vested beneficiaries dies, his or her beneficial interest in the trust becomes part of his or her estate.
NTS/TES's Trusts all state that they are for a maximum period of 25 years, but that this 25 year limit may be extended by the Trustees for up to 25 more years, should the Trustees so decide; and the Trustees may continue to extend each of the Trusts in this manner as many times as they see fit. During this time, all Beneficiaries have the option of relinquishing their beneficial interest and allowing the Trustees to pick new Beneficiaries. Such Trusts have been ruled by the courts to be Perpetuities under the common law, and thus invalid in states that have not adopted the USRAPA. (In a USRAPA state, an NTS/TES Trust could get away with perpetually renewing itself for up to 90 years, but would instantly become a Perpetuity when it becomes 90 years and one extra day old.) Of course, since NTS/TES's Fiduciary and Utility Trusts never (according to them) have occasion to change Beneficiaries, and NTS/TES's Family Trust is designed never to distribute anything to its Beneficiaries anyway, TES could theoretically fix this flaw by adding a clause to their Family Trust indenture like "Beneficial interest certificates are no longer transferrable back to the Trust after its first 25 years have elapsed" or some such.
However, even if such a clause were added, this wouldn't allow the Family Trust — or any of NTS/TES's trusts — to last forever. In most states, once the 90 year wait-and-see period has expired, any spendthrift clause in a trust ceases to have any effect, and the trustees no longer have the option of not distributing trust income to the Beneficiaries, and the trust can no longer be indestructible (q.v.). (In the few states where these things do not happen, the result is even worse: The Rule Against Suspension of the Power of Alienation will cause a trust with a spendthrift clause or a trustee's power to retain income operating after the 90-year wait-and-see period to fail, and the entire corpus will revert to the Grantor or the Grantor's estate.)
Note that none of these rules, not even the earlier Common Law Rule Against Perpetuities, made its way into any State's legal system until the early 1800s — so it is entirely possible that Patrick Henry's 1765 "Robert Morris Family Trust" stayed in operation for nearly 200 years, as one of NTS's claims suggested. However, no Trust drafted in this century is allowed to last anywhere near that long.
Under section 674, the grantor is treated as the owner of a portion of trust if the grantor or a nonadverse party has a power, beyond specified limits, to dispose of the beneficial enjoyment of the income or corpus, whether the power is a fiduciary power, a power of appointment, or any other power.Now the Trustees of any of NTS/TES's Trusts, including the Family Trust, do have the power of disposition over the beneficial enjoyment of the Trust's income and corpus. The Trusts empower their Trustees to do just about anything they want to with Trust property, provided it's done ultimately to benefit the beneficiaries. Furthermore, the term "nonadverse party" usually refers to anyone who isn't a beneficiary — Treas. Reg. 1.672(a)-1(a) says in part, "A trustee is not an adverse party merely because of his interest as trustee," so the Trustees are nonadverse parties. (The grantor also happens to be one of the Trustees, but even if he weren't, the section 674 regulation quoted above covers the powers of both the grantor and any nonadverse parties equally.)
The "specified limits" in the section 674 regulation above refers to the exceptions given in IRC sections 674(b), (c), and (d). IRC 674(c) only applies to a board of trustees that does not include the grantor (and can't have more than half its members related to the grantor or subservient to the grantor's wishes), so the exceptions listed there are of no use to any NTS/TES Trust. Likewise, IRC 674(d) only applies to a board of trustees that does not include the grantor or spouse living with the grantor, so it is equally useless to the Family Trust's attempt to avoid falling under the Grantor Trust Rules. IRC 674(b), however, lists eight powers of disposition that may be exercised by any board of trustees, even if the grantor is among the trustees, without causing the trust to fall under the grantor trust rules. Of these eight, only power number 5, the power to distribute corpus to the beneficiaries, is of interest in the NTS/TES trust system as a possible means of escaping the Grantor Trust rules. It is clarified in Treasury Regulation 1.674(b)-1(b)(5)(i) as follows:
If the power is limited by a reasonably definite standard which is set forth in the trust instrument, it may extend to corpus distributions to any beneficiary or beneficiaries or class of beneficiaries (whether income beneficiaries or remaindermen) without causing the grantor to be treated as an owner ... . It is not required that the standard consist of the needs and circumstances of the beneficiary. A clearly measurable standard under which the holder of a power is legally accountable is deemed a reasonably definite standard for this purpose. For instance, a power to distribute corpus for the education, support, maintenance, or health of the beneficiary; for his reasonable support and comfort; or to enable him to maintain his accustomed standard of living; or to meet an emergency, would be limited by a reasonably definite standard. However, a power to distribute corpus for the pleasure, desire, or happiness of a beneficiary is not limited by a reasonably definite standard. The entire context of a provision of a trust instrument granting a power must be considered in determining whether the power is limited by a reasonably definite standard. For example, if a trust instrument provides that the determination of the trustee shall be conclusive with respect to the exercise or nonexercise of a power, the power is not limited by a reasonably definite standard. However, the fact that the governing instrument is phrased in discretionary terms is not in itself an indication that no reasonably definite standard exists.As the NTS/TES Family Trust document now stands, no reasonably definite standard for the distribution of corpus to beneficiaries exists, and the above regulation would not apply. However, since NTS/TES's intent is to have the Family Trust live forever, in flagrant disregard of the Rule Against Perpetutites, there would be no reason why NTS/TES couldn't slip a clause into the Family Trust stating that none of its corpus can be distributed to beneficiaries until the Trust is dissolved.
If, after adding such a clause, the only power of disposition the Trustees would have would be one of making distributions to beneficiaries at the Trust's closure, the Trust would indeed fall outside of the Grantor Trust rules for income tax purposes. However, that's not the only power of disposition the Trustees possess. They are also free to liquidate Trust property or purchase new Trust property. They are free to buy and sell stocks and bonds with/from the Trust's income and corpus. They are free to make as many transactions at fair market value in the name of the Trust as they please. Does the ability to make such sales of Trust property count as a "power of disposition"? I'm not entirely sure, but I'd bet you dollars to donut-holes that it does.
Incidentally, this means that all Utility Trusts also fall under the Grantor Trust rules, as every utility trust has its grantor as its sole beneficiary. However, this is usually not an issue in the NTS/TES program, because NTS/TES created the Utility Trusts only for shielding high-liability assets, not for any income-generating activities.
And remember this: If someone claims a particular deduction on a Federal income tax form, and the IRS questions this deduction, the burden of proof is on the shoulders of whoever is claiming the deduction, not the IRS. Even if the one claiming the deduction is an Irrevocable Complex Trust.
Boyd vs. U.S. dealt with an importing company that had its business records subpoenaed by the Federal government, with the express intent of finding evidence of fraud in these records. The government claimed that their attempt to show fraud was only so that they could apply forfeiture laws to 35 cases of E. A. Boyd & Sons' plate glass, and that therefore their case was really a civil suit and not a criminal prosecution, so the 4th amendment clause against unreasonable searches and seisures and the 5th amendment clause against self-incrimination didn't apply. The Supreme Court declared that the forfeiture-on-fraud laws were criminal laws, and thus that Boyd was entitled to all 4th and 5th amendment protections and didn't have to fork over any of his records to the court. Note that the nature of E. A. Boyd & Sons' business organization was not mentioned anywhere in the Supreme Court Opinion; it was probably a partnership, not a Trust.
Silverthorne Lumber Co. vs. U.S. concerned business records that were illegally seized in connection with criminal allegations against Fred Silverthorne and his father. A lower court had already determined that the seizure was unconstitutional, and had ordered the Federal government to return all seized property, but the government insisted it had the right to keep copies of the documents it had made while they were (illegally) in the government's possession. The Supreme Court ruled that, since the documents were seized illegally to begin with, the copies were also illegal and could not be used as evidence against the Silverthornes in court. Note that Silverthorne Lumber Co. was a corporation, not a Trust.
Both cases deal with documents subpoenaed to support criminal, rather than civil, accusations. Neither of these cases so much as mentions Trusts, and they certainly don't deal with Trusts as distinct from any other kind of organization.
A third court case is sometimes cited by pure trust scammers outside the NTS and TES organizations, as protecting a trust's records from review and subpoena. That case is Smith v. Morse, which I've already discussed in an earlier section. Nowhere in Smith v. Morse is there any mention that Trust records aren't subject to court scrutiny.
The NTS/TES system usually tries to get around this inconvenient tax law by having its Fiduciary Trust carry on all the "trust business", and then distributing its profits to the Family Trust as its Beneficiary. The Family Trust can then turn around and donate this income to the Charitable Trust, and deduct the entire donation, since this income wasn't derived from any business activities of the Family Trust. But, as I've established above, the Fiduciary Trust actually falls under the Grantor Trust Rules, which means that all of its income is treated as the income of its Grantor for income tax purposes — and the Fiduciary Trust's Grantor is the Family Trust! This would mean that any business activities carried on by the Fiduciary Trust would be treated as business activites carried on by the Family Trust, and thus, per IRC 681, would not be allowed any charitable-donations deduction.
The 5% donation rule NTS/TES is referring to is an amount called the "minimum investment return." This is defined in IRC 4942(e) as 5% of: the Charitable Trust's noncharitable assets, minus the amount of debt taken on in acquiring those assets and/or any liens that encumbered the assets when the Charitable Trust acquired them (e.g. mortgages). In other words, if the Chartiable Trust acquires a $300,000 house with a $200,000 mortgage on it, and this house counts as the Charitable Trust's only "noncharitable asset", then the Charitable Trust will have to donate 5% of the equity in the house, or $5000, each year to satisfy the minimum investment return. (Failure to do so will result in a heavy Federal tax and possible State penalties, as will be shown below).
However, "noncharitable assets" are not merely those assets which haven't been donated to the charitable trust, as one of NTS's counselors once claimed to me. They are all assets not used (or held for use) directly in carrying out the foundation's exempt purpose [IRC 4942(e)(1)(A)]. The question then arises: what is an NTS/TES Charitable Trust's "exempt purpose"? The Charitable Trust's indenture says that its express purpose is to allow its Creator(s) to exercise their religious obligation to be a giver. Unfortunately, just "being a giver" is not sufficient to qualify an organization as tax-exempt. After all, even if you gave away all your income to your relatives, you'd still have to pay tax on that income. "Giving" can only qualify for tax-exempt status if the giving is to charities that qualify under IRC 501(c)(3).
But if the purpose of the Charitable Trust is to give to 501(c)(3) organizations, then that means all assets not engaged in being given to (or held for use by) 501(c)(3) organizations would be noncharitable assets! This would include not only income accrued from investing donations made by the Family Trust to the Charitable Trust, but the donations made by the Family Trust themselves — in other words, the entire combined Income and Corpus of the Charitable Trust. Treasury Regulations 53.4942(a)-2(c)(3) and 53.4944-3(a) do in fact bear this interpretation out.
5 percent of the equity in all the Charitable Trust's assets is certainly a much bigger chunk of change to donate every year than NTS/TES might have led you to believe.
IRC 4944 imposes a 5% tax on all investments of a Private Foundation that "jeopardize the carrying out of any of its exempt purposes." This tax increases to a whopping 25% if the jeopardizing investments continue after the end of the tax year. Treasury Regulation 53.4944-1(a)(2)(1) says that "an investment shall be considered to jeopardize the carrying out of the exempt purposes of a private foundation if it is determined that the foundation managers, in making such investment, have failed to exercise ordinary business care and prudence, under the facts and circumstances prevailing at the time of making the investment, in providing for the long- and short-term financial needs of the foundation to carry out its exempt purposes." Investments made by somebody else and then donated to the Private Foundation are not considered jeopardizing. Like the IRC 4942 tax, though, this isn't usually an issue with NTS/TES's Charitable Trusts.
However, IRC 4940 imposes a 1% or 2% investment income tax on all private foundations that don't meet the stringent requirements for an exempt operating foundation as defined in IRC 4940(d)(2). To be an exempt operating foundation, a charitable trust must meet all the requirements for an operating foundation, and must have been in existence for at least ten years prior to the tax year in question, and must have a board of Trustees that is "broadly representative of the general public." (I sincerely doubt that the Trustees of a private trust that makes donations to the charitable trust are broadly representative of the general public.)
IRC 4946(a)(1) subparagraph (A) says that a disqualified person includes "a substantial contributor to the foundation." This would make the Family Trust a disqualified person, as NTS/TES has rightly noted above. However, IRC 4946(a)(1) subparagraph (G) says that a disqualified person also includes "a trust or estate in which persons described in subparagraph (A), (B), (C), or (D) hold more than 35 percent of the beneficial interest."
The Family Trust, which is a "person" described in subparagraph (A), holds 100 percent of the beneficial interest in the Fiduciary Trust, which is a trust or estate. The Family Trust also holds 100 percent of the beneficial interest in each of the initially-created Utility Trusts, which are also trusts or estates. Therefore, the Fiduciary Trust and all initially-created Utility Trusts are disqualified persons.
Using the Charitable Trust as the "family bank" to make loans to other trusts whenever you need them, as some of NTS/TES's counselors suggest you do, is an act of self-dealing. It's both penalizable by the heavy surtaxes levied in IRC 4941, and just plain prohibited by California Probate Code section 16102(a).
There is such a thing as a Land Patent. It's the vehicle used by a State government (or the Federal government in U.S. territories) to grant title to a plot of the government's land to a private party. Subsequently, ownership is conveyed from one private owner to the next by means of Warranty/Grant deeds or Quitclaim deeds. NTS is now making the outrageous claim that normal deeds convey all private title via the Federal Color of Title Act of 1926 (43 USC 1068 et seq.), which only grants limited ownership with no mineral rights, and that this is why things like property taxes and zoning ordinances can be applied to real estate at all.
The Color of Title Act is part of the Public Lands laws of the United States. It refers to limited land patents granted by the Secretary of the Interior only on land owned by the Federal government. It's used when someone has been situated on U.S.-owned public land for so long that it would be unfair just to kick him off of it. It has no applicability whatsoever to land granted by former U.S. land patents or to State land not owned by the U.S..
The Tax Protestor Hall of Fame used to have a webpage devoted to Allodial Title cases, which are Federal and State court cases demonstrating how little is accomplished when private owners (which would include Trustees) file one of these Sovereign Citizen Tax Protestor "Land Patents". (An even larger, although somewhat crammed-together and hard-to-read, collection of case citations against such land patents can be found at http://www.adl.org/mwd/suss8.asp#allodial.) Note that in many of these court cases, the "Sovereign Patriot" crowd attempted to use one of these bogus land patents to get out of making mortgage payments, which often resulted in the seizure of their home.
In the complaint filed in San Diego, the Justice Department alleges that Roderick Prescott, of Solana Beach, California, through businesses named "Trust Educational Services" and "National Trust Services," sold hundreds of sham trust schemes. Prescott and his businesses sold trust packages for as much as $15,500. The complaint also alleges that Prescott's activities have cost the Treasury more than $135 million so far.("Roderick" Prescott is the same Rick Prescott who was involved with both TES and the old pre-1999-split NTS organization. His signature appears on the two 1999 letters I've received from TES, and alongside Roy Fritts's signature on all the earlier letters I received from the old pre-1999-split NTS organization. In all these cases, his signature appeared as "Rick Prescott, trustee," strongly implying that he was a Trustee of both TES and the old NTS.)
The full text of the press release appears on the D.O.J.'s website at http://www.usdoj.gov/opa/pr/2002/April/02_tax_207.htm.
Incidentally, in December of 2002, I myself appeared before an attorney for the U.S. Department of Justice (in the presence of Rick Prescott and his lawyer) to give a deposition in the U.S. v. Prescott case. I had one rather embarrassing moment at first: I guess I haven't watched enough Court TV, because I didn't realize that a deposition had the same legal force as witness testimony at a trial, and that therefore the defendant would be present. In fact, it had been so long since the 1997 NTS Academy, and I'm so bad with names and faces to begin with, that I didn't realize the man sitting across from me was Rick Prescott himself until the U.S. attorney introduced him! Next time I have to give a deposition, I won't be so surprised.
On 3-June-2003, the U.S. Department of Justice made a follow-up press release about the actions it has taken against Rick Prescott:
A federal court in San Diego yesterday permanently barred Roderick Prescott and his business, Trust Educational Services, from selling trust schemes falsely claiming that personal expenses incurred by customers can be paid through a trust in order to obtain tax benefits not available to individuals. Prescott agreed to the court order and is required to give the Justice Department records showing the names of customers who attended his workshops or used his "trust system."It was a short press release, only 3 paragraphs long, but its full text appears at http://www.usdoj.gov/tax/txdv03332.htm, along with a link to the text of the injunction in .pdf format. Of curiosity is the fact that the injunction does not explicitly bar the defendants from claiming that trusts they sell can receive tax deductions for donating their income to charitable trusts also controlled by the first trusts' Trustees.
On 11-February-2004, the U.S. District Court for the District of Oregon in Medford permanently barred Sam Fung from preparing federal tax returns and promoting his "business restructuring plan," which was the scheme he used with NTS/TES customers. The U.S. Department of Justice issued a press release about the Court order at http://www.usdoj.gov/tax/txdv04081.htm. At the time I went through the NTS Basic Trust Academy in 1997, Sam Fung was one of the only two accountants recommended by NTS to do tax returns for their system of Trusts (the other was Robert Baker in Sacramento). I never acquired the services of Sam Fung, but according to the DoJ press release, his "business restructuring plan" was essentially the same strategy as the main two income-tax schemes promoted by NTS: reclassify what would otherwise be personal expenses as deductable trust business expenses, and donate all (or nearly all) of your net taxable income to the allegedly tax-exempt Charitable Trust that you also control.
On 27-May-2004, the U.S. Department of Justice filed a Complaint for Permanent Injunction against Ronald M. Green, a tax-return preparer who did business as "People's Rights Trusted Tax Service" and "Economic Empowerment for All People." Green attended a TES Trust Academy in Lancaster, Pennsylvania and was hired to prepare tax returns on behalf of other TES customers. He stands accused of engaging in and encouraging some of the illegal tax-reduction tactics that the old NTS organization promoted (e.g. claiming personal expenses as trust business deductions). The full text of the complaint is available at http://www.usdoj.gov/tax/GreenComplaint.pdf.
On 3-August-2005, Roy Fritts and Rick Prescott were arrested in Oregon. The next day, a Federal grand jury in San Francisco indicted both of them for two counts each of tax evasion and one count each of conspiracy to defraud the United States, in connection with both NTS and Joe Little's Fountainhead Global Trust. The same grand jury also indicted Sam Fung for aiding and abetting in the preparation of 19 false and fraudulent Federal 1040 and 1041 Forms from 1998 through 2001. The full text of the D.O.J.'s press release about their arrests and indictments appears at http://www.usdoj.gov/usao/can/press/html/2005_08_04_tax_release.html. On 25-August-2005, the Federal District Court in San Francisco released Fritts on a $200,000 bond and, although it is not clear from the record, apparently an ankle braclet as well. The court denied the government's motion to hold Fritts as a flight risk.
If, however, you've already put the NTS/TES trusts into practice, then you may be headed for disaster unless you can back out. In this case, for goodness sake, talk to a lawyer. This is especially important if you are being sued and are making use of the alleged asset protection features of the NTS/TES trusts. The NTS/TES program has enough flexibility that there are many, many, many subtly different ways for its cusmomer/victims to get themselves into hot water unintentionally. Only a lawyer can tell you what specific things you'll need to do to disentangle yourself in your particular instance.
At least one California lawyer who has been in touch with me claims to have dealt with people who have put NTS's trust system into practice and later needed help undoing the damage. Considering how many people have been taken in over the years by NTS/TES (estimates range into the thousands), other lawyers may have dealt with NTS/TES trust victims too. As a good starting place, you might consider looking in your local yellow pages under tax attorneys or, if you can find them, trust attorneys.
1. NTS and TES have been raising the price of their Basic Trust Academies pretty much continually. One correspondent claimed that the NTS program cost $7000 in 1996. I know from my own experience that the program cost $9500 in 1997. In its letter dated 16-August-2000, NTS set the price of its trust academy at $15,500, and a correspondent claimed in early April 2001 that TES's trust academy now costs $15000.
2. According to one source, by April 2001 a rumor had been circulating in some of TES's presentations that I had taken TES's Basic Trust Academy, not NTS's Basic Trust Academy, and that I had gone against TES's alleged advice not to use their trust system for income tax avoidance. The rumor goes on to claim that I then proceeded to engage in a huge "tax write-off" scam without any help or advice from from TES or its counselors. I supposedly went on a one-week fishing trip in the Cayman islands on a rented luxury boat, then donated the fish I had caught to some local poor people, returned to the U.S., and claimed the entire trip as either a tax-deductable trust business expense or as a charitable activity paid for by the tax-exempt Charitable Trust. Of course, as their story goes, the IRS nailed me to the wall and disallowed the tax write-off, and I then turned around and blamed TES for all my troubles, and that's why I went off in a huff and wrote this webpage. Nothing in this rumor is true. I went through NTS's basic trust academy in 1997, over 2 years before TES even existed, and at the time, NTS was still touting all sorts of tax write-offs I could allegedly get by using their system of trusts. I did ask my counselors and NTS for help making their program work, several times; and more often than not, I ended up frustrated when their advice didn't work, or they couldn't answer my questions, or they gave me contradictory answers. And I have never, ever been to the Cayman islands. The last fishing trip I ever took was in the 1970s. Someone else may indeed have gone through TES's program and then gone to the Cayman islands without their advice, and TES may have confused me with that person. But I suspect that this story was instead made up out of whole cloth, as several other claims of NTS and TES have been.
3. Trusts and Contract Law: Technically, trusts do not quite fall under the umbrella of contracts. Modern contract law and trust law evolved side-by-side; much of contract law does apply to trust law, but not all of it. For instance, a contract requires the recipient of goods or services to give something back in exchange for the goods or services, called "consideration". An agreement to exchange 25 cents for a lollipop is an enforceable contract; an agreement to get a lollipop for free is not. In a trust, on the other hand, the Trustees are not required to give consideration to the Grantors in exchange for taking legal title to the property, nor are the Grantors required to give consideration to the Trustees in exchange for the Trustees' services if the Trustees are willing to work for free.
4. The Doctrine of Merger: Merger only comes up rarely in the administration of legitimate trusts. In order for legal and equitable title to merge, both the holders of legal title and the holders of equitable title must be the same person(s), and must hold both titles as the same kind of tenants. Two or more trustees always hold legal title in joint tenancy, but two or more beneficiaries almost always hold equitable title as tenants in common. If only one person holds any kind of title, legal or equitable, that person holds title as the sole tenant (neither joint nor common). Thus, if a trust has 2 or more trustees, title cannot merge; if a trust has 2 or more beneficiaries, title cannot merge; even if the same 2 people are the only trustees and the only beneficiaries of the same trust, title will not merge because of the difference between joint tenancy and tenancy in common (e.g. an owner in common can sell his half interest in the property, but a joint owner cannot). Note that if a trust document says, "The Beneficiary is Joe, unless he gets married, in which case the Beneficiary is Sam", and Joe has not gotten married yet, then both Joe and Sam are considered Beneficiaries for purposes of this rule. In other words, all contingent Beneficiaries count. Note also that just because a beneficiary dies, he won't automatically stop being a beneficiary. Unless the trust document says otherwise, a dead beneficiary's estate has as much of a right to the trust income or corpus as the beneficiary did when he was alive. So in the above example, if Joe becomes sole trustee and Sam dies, title would still not merge because both Sam's Estate and Joe would then be considered the trust's beneficiaries.
5. Completed Gifts and Vesting: Note that a gift can be complete even if a trust has not vested yet. A fiduciary power to rearrange beneficial interest which is limited by a standard (such as rules in the trust indenture as to how and when beneficial interest is to be redetermined) will not make a gift incomplete, but it will usually mean that the trust is unvested until such power expires. Thus, an irrevocable trust in which the beneficiary is "B, unless B becomes a fireman, in which case the beneficiary is C" constitutes a completed gift of the trust's corpus, unless the grantor retains other appropriate powers over the corpus. In this example, beneficial interest in the trust is not vested until B either dies or becomes a fireman, and yet the gift of the trust corpus is considered to be complete anyway. It is entirely possible that a trust can be considered a completed gift and trigger a gift tax, and then 90 years later, the same trust can be rendered void (and title in its corpus returned to its grantor or its grantor's estate) for violating the Rule Against Perpetuities!
Legal-looking disclaimer: The information in this document is presented without any warranty, express or implied. Void where prohibited. Do not use without adult supervision. Not to be taken internally. Do not taunt Happy Fun Ball. Oh, and this document is sure as heck not to be considered legal advice of any kind. Nope. Un-uh. No sir. Go sue somebody else, if that's why you're reading this. Nope, the only kind of "advice" this document is here to give you is "Don't trust NTS or TES any farther than you can throw Roy Fritts or Rick Prescott."
Got a problem with any of this? Think NTS or TES is pure as the driven snow? Then contact me at: firstname.lastname@example.org so you can give ME your $9500 or $15000 or $15,500 instead. You'll be just as well off (i.e. you won't get anything of value for your money), and you won't have any of the headaches of trying to make their sham system work.
Go back to Roger M. Wilcox's home page.