1975, June, Pg. 1286. Flash Pure Equity Trust Enjoined.

4 Colo.Law. 1286

Colorado Lawyer

1975.

1975, June, Pg. 1286.

Flash Pure Equity Trust Enjoined

1286Vol. 4, No. 6, Pg. 1286Flash Pure Equity Trust EnjoinedFor several years, a group of individuals has been selling to Colorado residents a plan which purportedly would greatly reduce or entirely eliminate tax liability. The plan is designed to teach prospective customers how they can establish and implement a so-called "constitutional trust, also referred to as a "pure equity trust. The cost of instruction involves fees ranging from a minimum of $1,750 up to a maximum of 4 percent of the assets placed in the trust.

All of an individual's assets are to be conveyed to the trust, including future income from personal services. In exchange for such assets, the grantor receives "units of beneficial interest in the trust. Such units are then divided among family members. Some units may also be given to a charitable foundation also created by the grantor. The trust is irrevocable, but it may be terminated by vote of the trustees. The grantor and his wife are often the trustees, and the grantor is appointed by the trustees to be the trust manager.

Income tax savings would supposedly be available by splitting the income of the grantor of the trust among various family members and by claiming as deductions various trust administration expenses and distributions, including such items as a management fee to the grantor, the cost of the grantor's home, medical expenses for the grantor and his family, and travel and entertainment expenses incident to the transaction of trust business. Private foundations and charitable trusts were also often employed as a part of the tax plan. There were also assertions made that such a plan would greatly reduce or eliminate death taxes and probate expenses. Other nontax benefits were also attributed to the use of the trust plan.

The Internal Revenue Service has consistently indicated its position that none of the claimed tax benefits would be allowed. Many income tax returns filed on behalf of pure equity trusts are currently under audit examination in Colorado and elsewhere. In all such cases, the Internal Revenue Service has disallowed the tax benefits. The Internal Revenue Service relies upon various tax decisions, some of which have involved trusts or foundations bearing a marked resemblance to the...