Do You Trust Your Trust?

Trusts certainly have their place in estate, wealth management and retirement planning but consumers need to be aware that not all trusts are created equal.

The Tax Court has held that several trusts were not legit trust vehicles and ordered that they be disregarded for Federal income tax purposes. If the taxpayers sought professional advice from a trust organization, how could this have happened?

In Vlach v. C.I.R. (T.C. 2013) 105 T.C.M. (CCH) 1690, the taxpayers were a married couple and the husband had a medical practice. Dr. Vlach was concerned about protection of his business assets and decided to purchase a trust package from a trust firm representative who presented at a seminar he attended.


Unfortunately, the representative had been involved in abusive trust promotions and practices. Dr. Vlach and his wife only became aware there was a problem with their own trusts after receiving tax deficiency notices from the IRS.

Although the Vlatches insisted the trusts were not created for purposes of tax avoidance and contended that the trusts were created for purposes of asset protection, the Tax Court disagreed. The Court stated that “Evidence of such tax-avoidance objectives is reflected in the operation of the trusts.” (Emphasis added). The Court further stated that the trusts “…were shams, lacking economic substance, and are to be disregarded for Federal income tax purposes.”

Does this mean all trusts are potentially bad? Of course not! The lesson to be learned from this case is to do a little due diligence when deciding who you want to hire to draft your trust. Be cautious about purchasing a “trust package” from an organization or firm you are unfamiliar with.

It is important that you find a suitable attorney or firm who can handle your needs (especially if you have a complicated estate). There are many great trust attorneys and firms that can help you!