JeepDriver
Self confessed gun snob
From Small Arms Review, as posted on AR15.com
The Legal Side
By Bob J. Howell, Esq.
Several years ago, the author was approached by a friend in the NFA community. His local Sheriff had stopped signing off on any NFA transfers, despite promises to the contrary when he was merely a candidate for the office. This friend, being in the NFA business, was concerned about the effect this would have on his customers. Sure he could tell them to go the corporate route, but he wondered if there was another way. As an estate planning attorney for the last 15 years the author has had the opportunity to assist clients with the disposition of a wide variety of personal assets, including NFA items. Having established a number of Revocable Trusts for past clients with NFA assets, the author told him about the benefits that a Revocable Trust could offer and began doing Trusts for his customers. Word began to circulate about this new way of doing things. In an effort to better answer the flood of questions received on the topic, the author submitted an article for the Legal Side in the March 2007 issue of Small Arms Review, outlining the general concepts behind the use of the Revocable Trust for NFA ownership. From that article the number of individuals using Revocable Trusts for NFA ownership has skyrocketed and whenever a radical change occurs, more questions necessarily follow. This article is a compilation of some of the questions the author has received about the use of the Revocable Trust with respect to NFA ownership and is presented in an effort to further help the NFA community understand the use of this powerful tool. As always, check your local laws as they may vary.
Q: What is a Revocable Trust?
A Revocable Trust is a legal entity established under state law. A Revocable Trust can own both real and personal property in its own name and as such is no different than a Corporation holding NFA items. The Code of Federal Regulations (27 C.F.R. Part 179), Section 179.11 specifically defines a Person (i.e. someone who is authorized to purchase NFA) to include Trusts as well as Corporations.
Q: Does the Trust require a separate tax I.D. number?
Unlike a Corporation, a Revocable Trust does not need a separate tax ID number (as long as you are the trustee of your own trust).
Q: Does a Revocable Trust require individual tax returns?
With a Revocable Trust, if you are acting as your own trustee, there are no separate tax returns. A Revocable Trust is transparent for income tax purposes. Any gains or losses are reported on your own individual returns and no separate tax returns (or the fees associated with their preparation) are necessary. If you use a Corporation to hold title to NFA items, most CPAs will generally advise you to file a federal tax return for the corporation, even if the Corporation has no income. Many states also have their own State Corporate tax return that needs to be filed as well.
Q: Can I make changes to my Trust?
The Grantor of the properly drafted Revocable Trust has the power to amend and/or revoke the Trust (hence the name “Revocable Trust”) and the power to add or remove the assets at will. The Grantor of a Revocable Trust should be mindful of the effect that various events in their life may have on their trust and its operation. The death of a beneficiary or successor Trustee, the birth of child, and a recent divorce are some of the things to keep in mind for possible amendments to your Trust.
Q: What happens if I move to another state?
Most states follow some form of the Uniform Trust Code which provides that if your Revocable Trust was valid in your state of residence when created, it will be legal in your new state. However, I still advise all clients to have an estate planning attorney in their new state review the trust document to see if any changes are necessary or advisable. Generally it is easier to move with a Revocable Trust than it is to move with a corporation.
Q: Will a Revocable Trust prevent creditors from reaching my NFA items?
A Revocable Trust will not generally provide any more protection from creditors than owning the assets individually. I say generally since the assets are held in the name of the trust and not your individual name so a creditor may have trouble finding them or may be unaware of the existence or potential value of NFA assets. A smart litigator may be able to find and reach the trust assets or at least the proceeds from their sale. However, if you hold NFA items in a corporation and someone is injured while you or your friends are shooting them you can probably count on being sued individually regardless of how the NFA assets are held.
Q: Can a Trust save money over Corporate NFA ownership?
In addition to the initial set up costs, most states have some sort of Corporate annual fee or tax (in Florida the fee for filing the Corporate Annual Report is presently $150.00). This fee, which is subject to increase as the state sees fit, must be paid every year to keep the corporation active. This can get expensive in the long run and failure to pay the annual fee will result in the corporation being administratively dissolved. If this happens and the corporation owns NFA items then you have a serious legal problem. Reinstating the administratively dissolved corporation, if possible, is generally expensive (in Florida the filing fee alone is $550.00). After the initial cost of establishing a Revocable Trust there are generally no annual maintenance or filing fees. In addition the Revocable Trust can also save money by not having to pay for the preparation of state or federal tax returns which may be required when using a corporate entity.
Q: What happens to the NFA items in the trust when I die?
A Revocable Trust can provide for the disposition of the NFA assets at the Grantors death, either by liquidating the items and distributing the cash or by distributing the trust assets directly to the named beneficiaries (provided ownership is legal in the beneficiaries jurisdiction and they are not a disqualified person). If the NFA items are individually held or held in a corporation, then they will be subject to the time and expense of Probate at the death of the individual.
Q: What happens to the NFA items in the trust if I become incapacitated?
If your Revocable Trust has been properly prepared it may include the ability for the Successor Trustee to manage the assets for your benefit during your incapacity allowing the Successor to sell any assets necessary for the care, support and comfort of the Grantor. With assets owned individually or in a corporation, it may be necessary to appoint a guardian to reach your assets upon your incapacity.
Q: What do I need to Submit with a Transfer to a Trust?
There has been much discussion, and well intentioned although uninformed advice, about this on various internet discussion boards. While some have gotten away with sending less, the Author has always advised his clients to attach a photocopy of the entire trust agreement (including the Schedule “A”) to the Form 4 or Form 1 being submitted. In the past some have sent in a “Certificate of Trust” in place of the full trust agreement and received their transfers back approved. The current policy of the NFA branch is to require a copy of the full trust agreement. There are no fingerprints or photos required with a Trust (or a corporation or LLC for that matter) and no LEO signoff is required.
Q: Do I need to transfer any NFA items I already own individually to my trust?
Transferring NFA items you already have into your trust is just that, a transfer, and as such it requires a Form 4 and the $200.00 transfer tax. While it is not required to transfer NFA items you already own individually into your trust, doing so will allow you to reap the benefits available under Trust ownership for all the assets.
Q: How do I fill out the Form 1 or 4 when there is a trust involved?
You must fill out the Form listing the Trust as the Maker or Transferee (i.e. John Doe Revocable Firearms Trust, John Doe, Trustee) and sign the Form in your capacity as Trustee (i.e John Doe, Trustee).
Q: Do I need to amend the Trust everytime I buy or sell and NFA item?
Again, there has been a lot of rumor about this on the internet as well. It is not necessary to amend your Revocable Trust each time you add or remove an asset and you are not required to list each item on your Schedule “A”. The approved Form 1 or Form 4 are the proof of ownership of the NFA item in the Trust.
Q: What should I name by Revocable Trust?
You can name your trust anything you want. However the author generally suggests something along the lines of “The John Doe NFA Trust” of “The John Doe Firearms Trust”. Anyone who has been in the hobby for a while has a story of running into a law enforcement official who does not understand the legality of ownership of NFA items. Oftentimes showing them your Form 4 or 1 is all you need to settle the problem. If the name of your trust on the form contains your own name it oftentimes makes it easier for the other party to understand that you are in compliance.
Q: Should I prepare my own Trust?
As the old saying goes, you get what you pay for. There is no substitute for competent legal advice, particularly when dealing with Revocable Trusts. It is quite possible to draft a document yourself that will establish a valid Trust. However legally creating it and properly creating it can be two different things. Usually, it is your heirs that find out after your death that there was a problem in your Revocable Trust. The author has personally reviewed a number of trusts created using various fill in the blank forms or over the counter software where there were serious flaws present in the construction of the document or in the disposition of the assets that would not have come to light until the Grantor’s death, when it is too late to fix. Also, don’t think that because a transfer goes through with your Revocable Trust that the it must be O.K. While the attorneys at the BATFE do review your Trust to see if it is a legally established entity, they are not examining it to see if it properly takes care of your beneficiaries, provides for your incapacity, has sufficient provisions for appointment of Successor Trustees, and so forth. For these reasons it is advisable to have an experienced estate planning attorney prepare your Trust. That way you can be assured that it is correctly prepared, executed in accordance with the requirements under your state law and provides for the distribution of the assets in accordance with your wishes at your death.
For further questions call or email
Bob J. Howell, Esq.
8551 W. Sunrise Boulevard, Ste 207
Plantation, FL 33322
(954) 424-8889
bjhowell@att.net
The Legal Side
By Bob J. Howell, Esq.
Several years ago, the author was approached by a friend in the NFA community. His local Sheriff had stopped signing off on any NFA transfers, despite promises to the contrary when he was merely a candidate for the office. This friend, being in the NFA business, was concerned about the effect this would have on his customers. Sure he could tell them to go the corporate route, but he wondered if there was another way. As an estate planning attorney for the last 15 years the author has had the opportunity to assist clients with the disposition of a wide variety of personal assets, including NFA items. Having established a number of Revocable Trusts for past clients with NFA assets, the author told him about the benefits that a Revocable Trust could offer and began doing Trusts for his customers. Word began to circulate about this new way of doing things. In an effort to better answer the flood of questions received on the topic, the author submitted an article for the Legal Side in the March 2007 issue of Small Arms Review, outlining the general concepts behind the use of the Revocable Trust for NFA ownership. From that article the number of individuals using Revocable Trusts for NFA ownership has skyrocketed and whenever a radical change occurs, more questions necessarily follow. This article is a compilation of some of the questions the author has received about the use of the Revocable Trust with respect to NFA ownership and is presented in an effort to further help the NFA community understand the use of this powerful tool. As always, check your local laws as they may vary.
Q: What is a Revocable Trust?
A Revocable Trust is a legal entity established under state law. A Revocable Trust can own both real and personal property in its own name and as such is no different than a Corporation holding NFA items. The Code of Federal Regulations (27 C.F.R. Part 179), Section 179.11 specifically defines a Person (i.e. someone who is authorized to purchase NFA) to include Trusts as well as Corporations.
Q: Does the Trust require a separate tax I.D. number?
Unlike a Corporation, a Revocable Trust does not need a separate tax ID number (as long as you are the trustee of your own trust).
Q: Does a Revocable Trust require individual tax returns?
With a Revocable Trust, if you are acting as your own trustee, there are no separate tax returns. A Revocable Trust is transparent for income tax purposes. Any gains or losses are reported on your own individual returns and no separate tax returns (or the fees associated with their preparation) are necessary. If you use a Corporation to hold title to NFA items, most CPAs will generally advise you to file a federal tax return for the corporation, even if the Corporation has no income. Many states also have their own State Corporate tax return that needs to be filed as well.
Q: Can I make changes to my Trust?
The Grantor of the properly drafted Revocable Trust has the power to amend and/or revoke the Trust (hence the name “Revocable Trust”) and the power to add or remove the assets at will. The Grantor of a Revocable Trust should be mindful of the effect that various events in their life may have on their trust and its operation. The death of a beneficiary or successor Trustee, the birth of child, and a recent divorce are some of the things to keep in mind for possible amendments to your Trust.
Q: What happens if I move to another state?
Most states follow some form of the Uniform Trust Code which provides that if your Revocable Trust was valid in your state of residence when created, it will be legal in your new state. However, I still advise all clients to have an estate planning attorney in their new state review the trust document to see if any changes are necessary or advisable. Generally it is easier to move with a Revocable Trust than it is to move with a corporation.
Q: Will a Revocable Trust prevent creditors from reaching my NFA items?
A Revocable Trust will not generally provide any more protection from creditors than owning the assets individually. I say generally since the assets are held in the name of the trust and not your individual name so a creditor may have trouble finding them or may be unaware of the existence or potential value of NFA assets. A smart litigator may be able to find and reach the trust assets or at least the proceeds from their sale. However, if you hold NFA items in a corporation and someone is injured while you or your friends are shooting them you can probably count on being sued individually regardless of how the NFA assets are held.
Q: Can a Trust save money over Corporate NFA ownership?
In addition to the initial set up costs, most states have some sort of Corporate annual fee or tax (in Florida the fee for filing the Corporate Annual Report is presently $150.00). This fee, which is subject to increase as the state sees fit, must be paid every year to keep the corporation active. This can get expensive in the long run and failure to pay the annual fee will result in the corporation being administratively dissolved. If this happens and the corporation owns NFA items then you have a serious legal problem. Reinstating the administratively dissolved corporation, if possible, is generally expensive (in Florida the filing fee alone is $550.00). After the initial cost of establishing a Revocable Trust there are generally no annual maintenance or filing fees. In addition the Revocable Trust can also save money by not having to pay for the preparation of state or federal tax returns which may be required when using a corporate entity.
Q: What happens to the NFA items in the trust when I die?
A Revocable Trust can provide for the disposition of the NFA assets at the Grantors death, either by liquidating the items and distributing the cash or by distributing the trust assets directly to the named beneficiaries (provided ownership is legal in the beneficiaries jurisdiction and they are not a disqualified person). If the NFA items are individually held or held in a corporation, then they will be subject to the time and expense of Probate at the death of the individual.
Q: What happens to the NFA items in the trust if I become incapacitated?
If your Revocable Trust has been properly prepared it may include the ability for the Successor Trustee to manage the assets for your benefit during your incapacity allowing the Successor to sell any assets necessary for the care, support and comfort of the Grantor. With assets owned individually or in a corporation, it may be necessary to appoint a guardian to reach your assets upon your incapacity.
Q: What do I need to Submit with a Transfer to a Trust?
There has been much discussion, and well intentioned although uninformed advice, about this on various internet discussion boards. While some have gotten away with sending less, the Author has always advised his clients to attach a photocopy of the entire trust agreement (including the Schedule “A”) to the Form 4 or Form 1 being submitted. In the past some have sent in a “Certificate of Trust” in place of the full trust agreement and received their transfers back approved. The current policy of the NFA branch is to require a copy of the full trust agreement. There are no fingerprints or photos required with a Trust (or a corporation or LLC for that matter) and no LEO signoff is required.
Q: Do I need to transfer any NFA items I already own individually to my trust?
Transferring NFA items you already have into your trust is just that, a transfer, and as such it requires a Form 4 and the $200.00 transfer tax. While it is not required to transfer NFA items you already own individually into your trust, doing so will allow you to reap the benefits available under Trust ownership for all the assets.
Q: How do I fill out the Form 1 or 4 when there is a trust involved?
You must fill out the Form listing the Trust as the Maker or Transferee (i.e. John Doe Revocable Firearms Trust, John Doe, Trustee) and sign the Form in your capacity as Trustee (i.e John Doe, Trustee).
Q: Do I need to amend the Trust everytime I buy or sell and NFA item?
Again, there has been a lot of rumor about this on the internet as well. It is not necessary to amend your Revocable Trust each time you add or remove an asset and you are not required to list each item on your Schedule “A”. The approved Form 1 or Form 4 are the proof of ownership of the NFA item in the Trust.
Q: What should I name by Revocable Trust?
You can name your trust anything you want. However the author generally suggests something along the lines of “The John Doe NFA Trust” of “The John Doe Firearms Trust”. Anyone who has been in the hobby for a while has a story of running into a law enforcement official who does not understand the legality of ownership of NFA items. Oftentimes showing them your Form 4 or 1 is all you need to settle the problem. If the name of your trust on the form contains your own name it oftentimes makes it easier for the other party to understand that you are in compliance.
Q: Should I prepare my own Trust?
As the old saying goes, you get what you pay for. There is no substitute for competent legal advice, particularly when dealing with Revocable Trusts. It is quite possible to draft a document yourself that will establish a valid Trust. However legally creating it and properly creating it can be two different things. Usually, it is your heirs that find out after your death that there was a problem in your Revocable Trust. The author has personally reviewed a number of trusts created using various fill in the blank forms or over the counter software where there were serious flaws present in the construction of the document or in the disposition of the assets that would not have come to light until the Grantor’s death, when it is too late to fix. Also, don’t think that because a transfer goes through with your Revocable Trust that the it must be O.K. While the attorneys at the BATFE do review your Trust to see if it is a legally established entity, they are not examining it to see if it properly takes care of your beneficiaries, provides for your incapacity, has sufficient provisions for appointment of Successor Trustees, and so forth. For these reasons it is advisable to have an experienced estate planning attorney prepare your Trust. That way you can be assured that it is correctly prepared, executed in accordance with the requirements under your state law and provides for the distribution of the assets in accordance with your wishes at your death.
For further questions call or email
Bob J. Howell, Esq.
8551 W. Sunrise Boulevard, Ste 207
Plantation, FL 33322
(954) 424-8889
bjhowell@att.net