Research More

Unfortunately, many people who do any kind of research do so very quickly. They do not take the time to pay attention to nuance and context. As one scholar pointed out:

"It is easy for attorneys to become confused and disagree on the impact of a feature when a different outcome can occur when it is used in different legal contexts."

Therefore, to assist our clients in their due diligence and any of their trusted professional relationships (attorneys and CPAs) we have provided the following information. This is not an exhaustive collection of concerns that arise in the area of Trusts for clients and professionals, but it does help to clear up many misconceptions and unwarranted concerns which too often do not apply to our Trusts.

Interesting Facts

A contract in the form of a Spendthrift Trust Organization, does not owe its existence to any act of the legislature. The authority for its creation is the common law right of the parties to enter into a contract which the Constitution recognizes. According to American law, the government cannot regulate or impose a tax upon a right. Our "right to contract" according to the Constitution of the United States, Article I, §10 is "unimpairable". That means that it is not within the power of the government or even a judge to change one word of a Contract of Trust. Once the property is transferred into a Spendthrift Trust Organization, it is subject to its own indenture, which governs and, protects the property held by it. The government can ONLY regulate and tax entities it creates: "no state shall pass any bill of attainder, ex post facto law, or law impairing the obligation of contracts."
A Spendthrift Trust Organization has the income tax requirement to pay only the tax on the income money that the corpus or endowments of the trust earns unless deemed to be paid to the corpus according to the terms and conditions of the trust. If set up properly, all capitalizations or endowments of the trust are nontaxable. Like corporations, Revocable Living Trusts are statutory and are subject to legislative control and taxation. A Revocable Living Trust is required to file a 1041 Form each year. While the income in a corporation is taxable and the endowments to a Revocable Living Trust are taxable, capitalizations or endowments to a Spendthrift Trust are not.
In Weeks v. Sibley DC 269£, 155, Edwards V. Commissioner. 41512£, 532 10th Cir. (1969) and Philips v. Blanchard 37 Mass 510, the courts ruled that a Spendthrift Trust Organization is not illegal even if formed for the express purpose of reducing or deferring taxes. Edison California Stores, Inc. v McColgan. 30 Cal 26472.183 P2d 16. ruled that persons may adopt any lawful means for the lessening of the burden of income taxes; The Department of the Treasury, IRS Handbook for Special Agents § 412, Tax Avoidance Distinguished from Evasion states; “Avoidance of Taxes is not a criminal offence. Any attempt to reduce, avoid, minimize, or alleviate taxes by legitimate means is permissible”. Pursuant to Narragansett Mut. F. Ins. Co. v. Burnhamun 51 r1371, 154 a 909, It is not an evasion of legal responsibility to take what advantage may accrue from the choice of any particular form of organization permitted by law.
A Spendthrift Trust Organization is not considered a taxable "Association" pursuant to tax law. Black's Law Dictionary defines Association as follows: "What is designated as a trust or a partnership may be classified as an association [only] if it clearly possesses [all] corporate attributes. Corporate attributes include: [1] centralized management, [2] continuity of existence, [3] free transferability of interest, [4] limited liability."
A Spendthrift Trust Organization is not an "association" or an “unincorporated association," because it does not possess the same attributes of a corporation, such as continuity of existence and free transferability of [beneficial] interest. Further, unlike a corporation, a Spendthrift Trust Organization is not an "artificial entity" nor does it owe its existence to the charter power of the State.
A Spendthrift Trust Organization is also not an alter ego or a nominee for any trustee or beneficiary because no one individual holds both legal and equitable title and beneficial interest.
Another major advantage to operating a Spendthrift Trust Organization as a business is that, because it is not a creature of the legislature, it is not subject to the myriad of strangling legislative controls, rules and regulations that are applicable to corporations and other legislative entities. The Supreme Court case Eliot v. Freeman 220 US 178 ruled that a Spendthrift Trust Organization is not subject to legislative control. The Supreme Court holds that the trust relationship comes under the realm of equity based on common law and is not subject to legislative restrictions as are corporations and other organizations created by legislative authority.

Protected from Turnover Orders

Burns v. Miller, Hiersche, Martens & Hayward, P.C. 948 S.W.2d 317 (Tex. App—Dallas 1997 writ denied)

The Trial Court ordered beneficiary to turn over property to a receiver for use in paying a creditor. The Trial Court included all disbursements from Spendthrift Trusts within the scope of the turnover order.

The Appellate Court reversed holding that beneficiary’s interest in Spendthrift Trust assets is exempt property under the turnover statute (Civ. Prac. & Rem. Code §31.002). The creditor pointed out that once the trustee pays or delivers the trust assets to the beneficiary they are no longer exempt. Trust Code § 112.035 (a). However, the turnover statute provides that a court may not enter or enforce an order that requires the turnover of “the proceeds of, or the disbursement of, property exempt under any statute.” Civ. Prac. & Rem. Code § 31.002(f). “Thus, even when property is no longer exempt under any other statute, if it represents proceeds or disbursements of exempt property, it is not subject to a turnover order.” Burns at 323.

Conclusion: Distributions from Spendthrift Trusts are protected from turnover orders even though the property is in the possession of a beneficiary.

In re BancorpSouth Bank 2014 Tex. App. LEXIS 4052

The Trial Court entered into a withholding order attempting to circumvent the spendthrift provisions of the trust.

The Appellate Court concluded that that the Trial Court abused its discretion and granted writ of mandamus. The Appellate Court stated that:

- Although beneficial interests in trusts are generally assignable, attempts to assign such interests are invalid when they are subject to a spendthrift provision in the trust.
- Neither the corpus, the accrued income which has not been paid to the beneficiary or the future income to be paid to a beneficiary of a spendthrift trust are subject to the claims of the creditors of the beneficiary while those amounts are in the hands of the trustee.
- Orders under Tex. Fam. Code Ann. §§ 154.007 and 8.101 are creatures of specific statutes that create an exception to the general limitation on garnishment of current wages. There is no similar statute permitting a trial court to redirect payments from a spendthrift trust to a spouse or former spouse.

Conclusion: A court cannot order the trustee of a spendthrift trust to make distributions for the purpose of spousal support.

Attorney Opinion Letters

Each Sprendthrift Trust contains multiple attorneys' opinion letters. The attorney's opinion letter is a formal piece of advice of an expression of judgment. It's based on a professional's expert knowledge.

Whether you want to avoid costly litigation or correctly navigate your way through a current lawsuit, you and your business must make the right choices. To make sound choices, it’s important to understand how the law applies to your circumstances.

When it comes to running a business, knowing how the law applies can make a big difference. An opinion letter can offer a specialized opinion, helping you stay on the right, and lawful, path for all your business endeavors.

ATTORNEY OPINION LETTER (2019_07_09 18_58_13 UTC).pdf

Brush Up on the Internal Revenue Code and Forms

As stated throughout this site, the Spendthrift Trust complies with TITLE 26, Subtitle A, CHAPTER 1, Subchapter J, PART I, Subpart A, Sec 643, STATUTE (3) and (4) and (7)(b) of the Internal Revenue Code. This states the following: "Items of gross income constituting extraordinary dividends or taxable stock dividends which the fiduciary, acting in good faith, determines to be allocable to corpus under the terms of the governing instrument and applicable local law shall not be considered income."

Not all types of income received by the Trust share this exemption. Ordinary income from property leases and the like are taxable. But the trustee holds the powers to determine whether to generate such taxable income or not. We DO NOT promote that all forms of income to the Trust are non-taxable. You may research this on your own by going to the IRS.gov website and looking up Form 1041, and Instructions for Form 1041 to see what exemptions and exceptions exist on the Forms.

Our Spendthrift Trust contains the necessary forms to submit along with your Form 1041 to "allocate to the corpus" Capital Gains, Extraordinary Dividends, and Taxable Stock Dividends to exempt them from income according to the IRC.

Spendthrift Trust - IRC Section 643.pdf

Income Declaration Forms.pdf

Abusive Trust Schemes

The following document is a United States Attorney Bulletin from July 2001. Beginning on Page 19 of the Bulletin (Page 15 of 62 in the pdf) you will find the article entitled Prosecution of Abusive Trust Cases. This article outlines many cases and case laws that DO NOT describe our recommended use of the Xenith Financial Spendthrift Trust. A cursory reading of the article (7 pages) will reveal that by our recommendations our Trust is valid when used properly.

This article even notes this when it says:

"At the outset, it is important to recognize that not all trusts are abusive. Legal trusts are frequently used in estate planning, to facilitate charitable transfers of property, and/or to hold property for minors and incompetents. No legal trust arrangement, however, reduces or eliminates all income tax except for certain trusts whose income is specifically exempted from tax by statute…Either the trust, the beneficiary, or the grantor, as applicable, must pay the tax on the income realized by the trust, including the income generated by property held in trust…"

First we hold that our Spendthrift Trust is Irrevocable, Non-grantor, Complex, and Discretionary and not organized for the purpose of avoided taxes, but for those purposes and asset protection and probate avoidance. Also, secondarily we hold that our Spendthrift Trust may provide for certain types of income to be "specifically exempted from tax by statute" while other types are taxable or tax-deferred. This is the reference to extraordinary dividends or taxable stock dividends that shall not be treated as income according to Section 643 of Title 26 of the IRC. Not all types of income received by the trust share an exemption or tax-deferral. So, it would be inaccurate to make a claim that all income of the Trust is non-taxable.

We also hold that our Spendthrift Trust is only tax-deferred for those purposes, indicating that down the line the taxes may become due depending on how the trust is managed and assets are distributed. Just as the article indicates that "either the trust, the beneficiary, or the grantor, as applicable, must pay the tax on the income realized by the trust."

Lastly, the thrust of prosecution according to this article centers around income that is subject to tax and trustees improperly administering trusts to evade those taxes. This is not what we teach or recommend. Please note, we encourage trustees to identify properly exempt sources of income (as with Section 643) and legally avoid taxes now and defer them to future generations. In all other circumstances we encourage trustees to pay taxes, and 1099 individuals when necessary to comply with the Internal Revenue Code. Many of the examples of trusts described in this article have little in common with our Irrevocable, Non-Grantor, Complex, Discretionary, Spendthrift Trust.

USAB - Trust Schemes 200107.pdf

Does Our Spendthrift Trust Lack Economic Substance?

If a trust lacks economic substance apart from tax considerations, a court will treat the trust as a “sham” and disregard it for Federal tax purposes. In such cases, the trust may then be treated as a mere alter ego of the taxpayer—and its income and activities will be attributed to the taxpayer for Federal tax purposes; even capital gains and losses, extraordinary dividends and taxable stock dividends will be treated as income.

Generally speaking, courts have held that “a transaction will be characterized as a sham if ‘it is not motivated by any economic purpose outside of tax considerations’ (the business purpose test), and if it ‘is without economic substance because no real potential for profit exists’ (the economic substance test).” The Tax Code, in other words, elevates substance over form, asking not what the surface of a transaction suggests but what the economic realities of the transaction show. See Comm’r v. Court Holding Co., 324 U.S. 331, 334 (1945).

Because even the most “patriotic” citizens do not have a “duty to increase [their] taxes,” Helvering v. Gregory, 69 F.2d 809, 810 (2d Cir. 1934), it “is entirely legal and legitimate” to minimize taxes through permissible means, Estate of Kluener v. Comm’r, 154 F.3d 630, 634 (6th Cir. 1998). But if a transaction or entity has no “valid, non-tax business purpose,” id., nominally uses another person or entity “as a conduit through which to pass title,” Court Holding Co., 324 U.S. at 334, or “br[ings] about no real change in the economic relation of the [taxpayers] to the income in question,” Comm’r v. Tower, 327 U.S. 280, 291 (1946), the IRS may find that the transaction or entity lacks economic substance and disregard it for tax purposes, see Coltec Indus., Inc. v. United States, 454 F.3d 1340, 1354 (Fed. Cir. 2006) (characterizing the economic-substance doctrine as “a judicial tool for effectuating the underlying Congressional purpose that, despite literal compliance with the statute, tax benefits not be afforded based on transactions lacking in economic substance”).

In deciding whether to disregard a trust for Federal tax purposes, the Tax Court considers four factors to determine whether the trust lacks economic substance: (1) whether the taxpayer’s relationship to the property transferred to the trust materially changed after the trust’s creation; (2) whether the trust has an independent trustee; (3) whether an economic interest passed to other trust beneficiaries; and (4) whether the taxpayer feels bound by the restrictions imposed by the trust agreement or the law of trusts. Whether a trust lacks economic substance is ultimately a question of fact.

We argue that our Spendthrift Trust when properly formed and administered 1) materially changes the taxpayer's relationship to the property transferred as all property is held in title by the trust and controlled by the powers and restrictions of the trustee according to the governing document, 2) an economic interest is passed to other trust beneficiaries namely estate tax protection, asset protection for turn over, and sprendthrift provisions, and 3) the taxpayer is bound by the restrictions imposed by the trust agreement and must comply with the governing document as trustee.

The third fact is dependent on the trustees attitude and behavior and not by the governing document. With these facts, we argue that our Spendthrift Trust has economic substance and is not an alter ego or a nominee for any trustee or beneficiary because no one individual holds both legal and equitable title and beneficial interest. Generally speaking it is more than difficult to claim that an Irrevocable, Non-grantor, Complex, Discretionary, Spendthrift Trust when properly administered lacks economic substance and the burden of fact lies with the plaintiff (prosecutor). So while the use our Spendthrift Trust may, indeed, present tax-planning opportunities—clients must always be careful not to run afoul of the “sham trust” doctrine and abuse tax law.

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