“Common Law” Trust Provides No Shield Against Lawsuit

AUGUST 14, 2000 VOLUME 8, NUMBER 7

Nancy Bracken, an 82-year-old widow living in Tennessee, thought she had found an excellent investment for her life savings. Richard Earl, managing director of something called Financial Services Company, convinced her that she could make good money by helping to finance a treasure-hunting operation in Florida.

Between July and October of 1993, Ms. Bracken delivered a total of $110,000 to Mr. Earl for investment in FSC’s treasure-hunting venture. She received promissory notes, and they carried a 10% interest rate. She even received payments during the first year, including seven payments of $400 and one payment of $13,200. When no further payments were forthcoming after October, 1994, she contacted a lawyer and, ultimately, brought a lawsuit.

In his defense, Mr. Earl claimed that he was not personally liable. He was only an employee of Financial Services Company, he insisted, and not its owner. He pointed to the documents indicating that Financial Services Company was actually an Arizona trust, established by John Michael Crim and Robert H. Kilgore in 1992. The trust named two other individuals, Dana T. Houtz and Steven E. Duke, as trustees, and Mr. Earl claimed he was hired by them to be the managing director.

The lawyer for Ms. Bracken disagreed. He introduced evidence that the trust was really Mr. Earl’s alter ego, apparently constructed for the express purpose of insulating Mr. Earl from claims like Ms. Bracken’s. In fact, Mr. Earl had absolute control over the trust, was its only employee, answered to no one else, and could not even name the “trustees”.

The Tennessee trial judge found Mr. Earl personally responsible for repayment of the money to Nancy Bracken. On appeal, the Tennessee Court of Appeals agreed. The appellate judges found “no substance to this so-called trust, beyond a means for defendant to attempt to protect himself from liability when investing other people’s money in risky ventures.” Bracken v. Earl, 8/7/2000.

Mr. Earl illustrates several things frequently seen in cases of exploitation of the elderly. First, of course, is the attempt to assure the elderly victim that the investment is reasonable, but that returns will be uncommonly high. Another common element is the use of multi-state entities; in this case, the “trust” was created in Arizona, the “investment” collected in Tennessee, and the “treasure hunting” alleged to be in Florida.

Another element involved in the Bracken case is the use of a so-called “common law trust.” Unscrupulous individuals claim that the trusts are somehow protected by common law principles, and therefore immunize participants from civil liability and even federal income taxes. Ms. Bracken’s case is proof that they are wrong.

“Common law” trusts are sometimes also known as “Constitutional” or “Pure” trusts. They are heavily promoted (including on the internet) as tax avoidance devices, and sometimes also as a way of insulating assets from liability. They are not only ineffective, but also high-priority targets by the Internal Revenue Service, which views them (correctly) as abusive arrangements. The IRS has a perfect record of defeating claims that such trusts are somehow insulated from tax liability.