Constitutional Trusts have been utilized by the very wealthy for hundreds of years. It is believed by Worthington Group that the very wealthy along with governmental agencies have perpetrated the image that one must be very wealthy in order to take advantage of Constitutional Trusts this is of course a falsehood.
We have heard in repeated conversations, that "all trusts are the same", and there is no need to understand the workings of trusts, this is why attorneys are hired. Nothing could be further from the truth. Attorneys who attend law school and graduate, generally have not been trained in the area of Common Law, and/or Constitutional Trusts. Most trusts formed by attorneys today are statutory in nature.
Additionally, even if they were aware and trained in this area, it would adversely effect their income. The reason being, Constitutional Trusts do not require the assistance of attorneys at ones death as there is no probate function required at ones death. (The reason being, the trust who owns the assets did not die the person did). Most attorneys glean a large part of their income from probate work. Also, the need of a will is negated, as Constitutional Trusts use Death Minutes which take the place of wills.
Domestic Trust Creation:
First and foremost, a Domestic Trust is created expressly to protect ones assets, and must be a Non-Grantor Trust formed under Common-Law and the Constitutional Right of Contract. The United States Constitution, Article I, Section X, states: " No state shall, pass any bill of attainder, ex post facto law, or law impairing the obligation of contracts" (Ex post facto law is defined as 'done or made afterward', from the thing done afterward'). Such a Trust is often referred to as a "Common-Law Trust", because "it finds its basis in the Law of Contract, and does not depend upon any statute for its existence." This raises the distinction between "Statutory Trust" (i.e: those dependent upon a specific statute for their creation) and "Common-Law Trust" .
Defining Statutory:
Black’s Law Dictionary 6th edition defines Statutory Law as: " The body of law created by acts of the legislature in contrast to Constitutional Law and law generated by decisions of courts and administrative bodies" .
Statutory is the right to be a corporation and to exercise corporate powers, which is derived from the state. Be reminded however, the power which creates also has the power to destroy. The state has the right to limit the period of existence of its creature the corporation; to provide conditions precedent or subsequent by laws existing at the time of its creation, or by laws subsequently passed to destroy its existence, for such reasons as may seem to the legislature sufficient.
The Unincorporated Organization (Domestic Trust) is NOT a creature of the state or of statute. It owes its existence to Common-Law and Constitutional Right of Contract.
Constitutional vs. Statutory Trusts
Common Law relates to those customs and rules of antiquity which are in but not necessarily limited to, court cases which set precedent in their decisions, rather than language of legislated enactments. The difference between common law right, and statutory privilege is that in common law, one is FREE to do anything except what is prohibited or unlawful, and in a statutory position, one MUST look carefully to 'statute' for what is required and/or expected.
Statutory Trusts derive their existence from, and are governed and regulated by statutes by which it must conform to.
Constitutional Trusts are created and operate under the Law of Contract established through the United States Constitution. The essential elements of the Law of Contract are absent in the creation of Statutory Trusts, but are present in Constitutional Trusts.
These essential elements are:
1) Two or more parties at 'arms length' (not blood related);
2) An offer by one of the parties, and acceptance by the other party;
3) Consideration in the form of money or money's value;
4) All confirmed 'tied together' by a meeting of the minds or the understanding of the two involved parties;
5) Trust Contract is signed willingly by both parties
Second, in order to have valid contract there must be:
(1) a valid offer and acceptance of valuable consideration;
(2) two or more parties involved;
(3) parties who are of legal age with competent understanding;
(4) a termination date.
Therefore, upon the initial creation of the trust, the owner of assets must convey specific assets into the trust in exchange for consideration of the "Capital Units" of the trust. In this way THE TRUST HAS NO GRANTOR! Instead, properly is exchanged in consideration of Capital Units.
Third, there can be no division of ownership (title) in the trust assets. Traditional Trusts are normally established with the trustee holding legal title to the trust corpus (assets) and the beneficiary holding equitable title in the form of shares of beneficial interest. Due to changes in tax laws, and in order to achieve the desired benefits, all evidence of ownership by the trustee is referred to as Fee Simple.
This kind of ownership enables the trustee to manage and dispose of the Trust Assets in whatever manner, as long as it is in keeping with the terms specified by the trust document. Further, the Trust must be under the administration of independent third party trustee/s. The Trust being irrevocable, is managed by the trustee who may appoint officers/agents/managers/etc to handle the day to day aspects of trust management.
Fourth, the Unincorporated Organization (Domestic Trust) has no "beneficiaries" (archaist que trust) in the traditional sense and, therefore no "shares of beneficial interest". The Trust has only non-voting Capital Units, which do not grant to the beneficiary any rights or controls of the actions of the trustee, or the activities of the Trust. The beneficiary is in the position of simply receiving distributions made from the Trust by Trustee, as a result of either the operations or the sale of Trust Assets.
Fifth, it is imperative, that Trusts avoid those "corporate attributes" which would cause it to be treated and taxed like a corporation under statutory provisions regulating corporations.
Attributes of Corporations by:
(1) Associates
(2) Objective to carry on business and divide the gains there from
(3) Continuity of life
(4) Centralization of management
(5) Liability for corporate debts limited to corporate property
(6) Free transferability of interests
If the Trust possesses any three (3) of these attributes, it will be treated as a corporation, however, as long as a Trust is established to operate a business, and does not have the "attributes" of a corporation it will not be treated or taxed like a corporation. Trusts and Estates are treated as separate entities distinct from their grantors, decedents, and beneficiaries. Gross income attributable to property owned by a Trust or an Estate may be taxable to the grantor, decedent, the beneficiaries or the Trust or the Estate itself.
The term "association" refers to an organization whose characteristics require it to be classified for purposes of taxation as a corporation rather than as another type of organization such as partnership or a trust. (The Unincorporated Organization, ‘Domestic Trust’) is considered by Internal Revenue Service as an Association, and being such it has the same tax situation as a Corporation.
Characteristics of Corporations are distinguished by:
(1) Their Associates
(2) Their Objective to carry on business and divide the gains there from
(3) The Continuity of life
(4) Their Centralization of management
(5) Their Liability for corporate debts limited to corporate property
(6) The Free transferability of interests
"An Organization will be treated as an Association if the corporate characteristics are such that the Organization more nearly resembles a Corporation than a Partnership or Trust". Morrissey et al. v Commissioner, 1935) 296 U.S. 344.
The term "corporation" is not limited to the artificial entity usually known as a Corporation, it includes also an Association, a Trust classed as an association because of its nature, or its activities, a Joint-Stock Company and an Insurance Company.
Basic comparisons between Statutory and Constitutional Trusts are varied, some are displayed in the below charts.
| Statutory Trust | Constitutional Common Law Trusts |
| 1) Merely holds property till death | 1) Owns property in 'fee simple' |
| 2) Is usually a revocable trust | 2) Is always irrevocable trust |
| 3) Has a statutory termination date | 3)Cannot be terminated by statute can be renewed each 20 years |
| 4) Protects and conserves property only | 4) Can operate as any business |
| 5) Arises from statutory provision/regulations |
5) Arises from
the law of contract i.e. |
| 6) Legal and equity title is split | 6) Legal and equity title not split |
| 7) Consideration not involved | 7) Consideration is involved |
| 8) Exercise of a privilege | 8) Exercise of a right |
The following three court cities affirm the use and validity of Constitutional Trusts, Contracts, and Constitutional Contract Rights.
In Burnett v Smith, 240 SW 1004 (1922) the court stated:
" A Pure Contract Trust is established by contract, and any law or procedure in its operation, denying or obstructing contract rights, impairs contract obligation and is therefore violative of the United States Constitution". [Emphasis added]
and; In Berry v McCourt, 204 NE 2d 235(1965) the court stated: A Pure Contract Trust is a contractual relationship in Trust form"
and; In Crocker v MacCoy, 649 U.S. Supp 39 at 270, the court stated: "A Trust organization created under the United States Constitutional right of contract cannot be abridged". [Emphasis added]
Privacy and Fiscal Secrecy is a benchmark associated with Constitutional Trusts. It is far from being 'illegal' it is the complete opposite, and acts as a means which enable citizens to exercise their lawful right to complete autonomy.
KINDS OF TRUSTS AND DEFINITIONS WITH COURT CASE CITING’S
Trust: "An estate, legal title to which is vested in Trustee, while equitable title is still held by individuals who have no contractual relations among themselves." Krensky v DeStwante, 82 N.E.2d, 168, 171; 335 Ill. App. 435.
Express or Implied: "For the purposes of Internal Revenue Code Sections relating to taxation of distributions from a Trust, a 'guardianship is a Trust', insofar as distributions of income are concerned". Brooke v United States, Dist. Ct, Mont., 292 F. Supp. 571, 577.
Law Governing Trusts: "a) Ordinarily in constructing a Trust in personality, the law of the creator's domicile controls the effect of a trust instrument. In reality it is determined by the laws of the State in which the property is located. With respect to determination of what law governs the construction of a Trust, the question is not the meaning of words as used, rather their legal effect" Corpus Juris Secundum; 90 Section 160, What Laws Govern Trusts; Robinson v Chance, C.A. Pa., 213 F.2d 834.
Beneficiaries: "A trust is a separate and distinct entity from its beneficiaries for income tax purposes". Brigham v United States, Dict. Ct. Mass., F. Supp. 625, 626.
Removal of Trust To Another State By Trustee: "After a trust has been set up in one State, the mere removal of the Trustee to another State, even though Trustee takes the assets with him will not alter the original allocation of the trust, or the law governing it's interpretation and administration" Del-Wilmington Trust Co. v Wilmington Trust Co. supra, 186 A 903, 21 Del Ch 188.
Taxes and Assignments: "Trustees have been given broad discretion to pay taxes claimed by a State so long as in the Trustee's judgment, that taxes are valid, or that the costs and risks of litigation outweigh the advantage is not wholly unreasonable." United States v Mason, 93 S. Ct. 2202 (1973), 412 U.S. 391, L. Ed. 2d. 22.
"Ordinarily, it is the duty of a Trustee to pay all taxes assessed on the Trust/Estate, provided means of payment are at his command. However, trustee is not required to pay taxes on property where the Trust Instrument provides no funds for payment of such." Legge v County, 4 A 2d. 465, 176.
Trustee: "A person acting as a 'trustee' does not become a separate entity like a corporation, but continues to be the same natural person as he/she is in an individual capacity" N.Y., Kross v Mave, 97 N.Y.S. 2d 415, 198 Misc. and;
"A trust company authorized by law to act as a 'trustee', may execute such Trusts in the same manner and through the same agencies that may be resorted to by a natural person, except that a natural person may not act pro se (representing self), while corporation must act through a natural person" Ind-Groninger v Fletcher Trust Co, 41 N.E.2d 220 Ind. 202.
Oath Filed By Trustee: "Statutory requirements as to the filing of an 'oath' by a 'trustee' are founded on the necessity of having some formal record of the 'trustees' assumption of duties and some formal qualification by 'trustees' and an inadvertent failure to file a positive 'oath' may be cured" N.Y. in re Jones Estate, 238 N.Y.S. 753, 136 Misc. (Trust indenture may wave trustee oath)
Income Assignment: "The assignment of income rules do not apply to a taxpayer who holds property in a Constructive Trust for another. In one case, a taxpayer was held to be taxable on the sale of stock because he failed to prove that he held the stock in a Constructive Trust for another". Buggie v Commissioner, 32 BTA 581 (1935).
Family Trusts: A Family Trust is an arrangement under which a taxpayer sets up a Trust to which he transfers his lifetime services and all his property. The taxpayer and his family have all their living expenses and other costs paid by the Trust and have broad powers over the corpus and income of the Trust. The courts and the Service have consistently held that "income earned by family trusts, from the taxpayer's services, or from property transferred by the taxpayer to the Trust is taxable to the taxpayer under the assignment of income doctrine". Revenue Rule 75-257, 1975-2 CB 251; Vnuk v Commissioner, 621 F.2d 1318 (8th Cir. 1980); Raemer v Commissioner, TC Memo 1981-138, 41 TCM 1149; Baumgartner v Commissioner, TC Memo 1981-77, 41 TCM 944; Wolf v U.S., D.Kan. August 29, 1980-81-1 US TC 9327; Mirenda v Commissioner, TC Memo 1980-252, 40 TCM 666. This rule applies to assignments of wages, retirement benefits, real estate commissions, dividends and interest income. Corcorian v Commissioner, TC Memo 1980-546, 41 TCM 508.
"The taxpayer is not considered a bonafide agent of the Trust as long as the taxpayer and not the Trust controls and directs the services for which the Trust receives income".. Wesenberg v Commissioner, 69 TC 1005 (1978); Amsler v Commissioner, TC Memo 1986-185, 51 TCM 1978. Miller v Commissioner, TC Memo 1988-543, 56 TCM 728; Damm v Commissioner, TC Memo 1977-194, 36 TCM 793.
Grantor Trusts: The Code provides that "when a Grantor of a Trust has certain powers over, or a versionary interest in the Trust, all Trust income, deductions, and credits are attributable to the Grantor". (Internal Revenue Code § 671 - § 679).
Many cases involving assignments of income to Family Trusts have also held the grantor taxable under the Grantor Trust rules. Vercio v Commissioner, 73 TC 1246 (1980); Schultz v Commissioner, 686 F.2d 490 (7th Cir. 1982); Cloes v Commissioner, TC Memo 1981-726, 43 TCM 154; Hicks v Commissioner, TC Memo 1982-200, 43 TCM 1081; Hanson v Commissioner, 696 F.2d 1232 (9th Cir. 1983).
"A taxpayer may report income then attempt to deduct payments made to a Trust that pays his expenses, however, the payments are not deductible since such a Trust has no charitable attributes or any other attributes for which a deduction is allowed". O'Donnell v Commissioner, TC Memo 1986-14, 51 TCM 266.
Trust Questions and Answers:
1. Can banks be used by a trust?
Yes: A Trust can have a bank account in its name. IRS can gain access to domestic bank records regardless of what name the account is under. However, they cannot gain access to trust information if they are seeking information specific to a named beneficiary, manager or other person.
2. Should the Conveyor have a beneficial interest?
No: If the Conveyor maintains a beneficial interest and is also the Trustee, the Trust comes under IRC §671-§679, a Grantor Trust. Basically, this means that the Trust and the individual are considered one person and there is no difference between the individual and the Trust.
3. Can a trust borrow money?
Yes: The Trust is authorized to borrow money. It is a separate entity. However, until credit is established for the Trust, the Trustee may be asked co-sign for the Trust.
4. Can assets be added to a trust by conveyance?
Yes: Any asset can be added at any time by anyone with the approval of the Trustee.
5. Can the trust sell assets it owns?
Yes: The Trustee can sell Trust assets at any time as long as it is done in the name of the Trust, and what is received from the sale is equal to or exceeds in value the asset sold.
6. Who can question or challenge a Trust?
The original Trustors are the only ones who can question the operation of the Trust.
7. Can any business be owned by and in the Trust?
Yes: The Trust can own any lawful business. The business does not necessarily have to have the same name as the Trust. All licenses, etc., for example, could be listed as ACME Trust, Acme Resources, etc. dba Aggregate Gravel Company (dba means "doing business as"). The word trust is not necessary in the name chosen, the entity is still a trust. A Trust can also own corporate stock and assets and be a member of an LLC.
8. Should there be more than one Trust constructed?
Possibly: When there are business or substantial assets a Total Asset Protection Package is recommended. Every individual has different circumstances/needs therefore one Trust could possibly be adequate.
9. Can the IRS or anyone break the Trust contract?
Sometimes: The only individuals who can break the Trust contract are the Conveyor or Trustees. This is done through their actions of not honoring the Trust contract and treating Trust assets as though they belong to the conveyor. As long as the trustee maintains control as fiduciary the trust contract is safe.
10. Does the Trust have to be recorded?
No: The Trust does not have to be recorded. The advantage to having it recorded is, if your original Trust gets lost or destroyed, the County Recorder can give you a certified copy. The disadvantage is that the Trust, its terms and property become public knowledge; the world is put on notice that you have conveyed your assets to Trust.
It is better to have a duplicate copy kept in a safe place in the event the original is lost or destroyed.
11. If a Trust is recorded, does the County Recorder need to be notified each time property is added?
No: Once a Trust is recorded, the County Recorder does not need to be notified that property has either been exchanged, sold or added to trust, other than the normal recording of real estate deeds.
12. Is there a limit on property I must own in order to create a Trust?
NO: There is no minimum or maximum amount of property that can be held in a Trust.
13. How many Trustees are allowed?
There can be any number of Trustee(s) from one to several. Just remember the Trustees, whatever their number, must be unanimous or at least a majority in their decisions or it could end up with a stalemate that must be adjudicated by a court of competent jurisdiction.
14. Can a person assign salary or commissions to a Trust?
Yes: You can transfer all or part of the salary or commission to a Trust in order to get the money under the protection of the Trust. However, the IRS takes the position that the individual is still responsible for taxes due on the salary or commission. The Trust cannot report or pay any taxes on an individual's salary or commission. In order to lawfully assign earnings to the Trust you must have the Trustee contract with the payor/company etc. to pay the Trust. You can however fund the trust from earning of your employment.
15. Can the IRS seize property or bank accounts which are in a Trust?
No: Not for any liability of the Trustee, Officers or Beneficiaries. If a Trust tax return was filed and the IRS challenged the Trust and the Trustee did not argue the point, then the IRS will try to take the position that the person and the Trust are one and the same for collection purposes. (This is why it is so important not to co-mingle a$$ets especially personal and trust money. Trust a$$ets must be treated as what they are, Trust Property).
Research Worthington Group 94, 97, 2002 Write Protected
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