The so-called “Pure Trust”— also known as the “Constitutional Trust” or the “Common Law Trust” amongst its many other names — is neither a pure nor a legitimate trust. It is a scam that continues to be perpetrated for upwards of fifty years now. It is promoted as asset protection against creditors and income tax freedom from the IRS. Unfortunately, the opposite is true. The California courts and the IRS have been combating these trusts for years (see People vs. Lynam, 261 Cal App 2d 490 (1968) & IRS Notice 97-24@ www.irs.gov). Now let’s unravel some of the mystery.
According to Pure Trust promoters, American/English common-law allows the creation of separate legal entities into which anyone can irrevocably transfer their property for management and protection by others. As the entity “is created” under the English common law (and not any state’s own statute), the Pure Trust is allegedly independent of any state’s sovereign law. It’s not subject to any state law nor answerable to legal enforcement under state statutory laws. The promoters argue that the United States Constitution and certain US Supreme Court cases validate Pure Trusts. As anyone with formal legal training recognizes, however, the proof is a very misleading and purely argumentative. There is no true legal support for the Pure Trusts as they are drafted.
Promoters often use guile and charm to deceive people wanting to believe all the “good things” about Pure Trusts. Not attorneys themselves, they justify avoiding licensed attorneys because attorneys only prepare ordinary ‘statutory trusts’ under state law. Attorneys either do not understand Pure Trusts or they do not wish to let you in on their inside secret. Like the story of the Emperor’s New Clothes, however, many people simply are unwilling to admit to themselves that they do not see what in fact does not exist when it comes to the lack of legal substance; yes, ladies and gentlemen, the Emperor really is exposed when it comes to Pure Trusts.
So what is the truth? The truth is that these “trusts” are shams that can get you into a great deal of trouble with the IRS; they otherwise create a great legal mess. These trusts will NOT provide you with any legitimate asset protection against your creditors. Moreover, as these trusts are not drafted by attorneys, they are technically deficient in how they operate. So, even if they potentially provided asset protection and tax minimization, the internal flaws of these trusts make them hard, if not impossible, to administer. All that glitters is not gold. Make sure you secure your future wisely, rather than buying into something that really is too good to be true.
Editor’s Note: Dennis A. Fordham is an attorney licensed to practice law in California and New York. He concentrates his practice in the areas of estate planning and aspects of elder law. His office is at 55 1st Street, Lakeport, California. He can be reached by e-mail at firstname.lastname@example.org or by phone at 707-263-3235.
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