Quick answer: A trust is a real, legitimate legal arrangement governed by state law, and there are many valid types used for asset protection, estate planning, and charitable giving. But a “common law trust,” “pure trust,” or “constitutional trust” marketed as a way to make your tax obligation disappear is a different thing entirely. The IRS explicitly identifies these as abusive trust tax evasion schemes, courts have repeatedly rejected them, and participating can lead to civil penalties or criminal prosecution. If someone is pitching a trust as a way to eliminate taxes, that is your signal to walk away.
Updated 07/17/2026. By Jake Claver. Educational content, not investment advice.
The phrase “common law trust” gets used two very different ways, and the gap between them is where people get hurt. On one side is legitimate trust and estate planning, which is ordinary, legal, and widely used. On the other side is a marketing pitch that borrows trust language to sell a tax-evasion structure. Telling them apart is the entire point of this article.
What a legitimate trust actually is
A trust is a legal arrangement in which one party (the trustee) holds and manages assets for the benefit of others (the beneficiaries), under terms set by the person who created it. As the IRS puts it in its trust questions and answers, a trust is “an entity created and governed under the state law in which it was formed,” and its federal taxation is controlled by the Internal Revenue Code. Legitimate trusts are everywhere in estate planning. They can protect assets from creditors, pass wealth across generations, support charitable goals, and, within the rules, defer or reduce certain tax exposure. What they do not do is make taxes vanish.
What “common law” and “pure trust” schemes claim
The abusive version is sold on promises. According to the IRS’s overview of abusive trust tax evasion schemes, these arrangements are typically promoted with claims like reducing or eliminating income subject to tax, deducting personal expenses paid by the trust, cutting or erasing self-employment taxes, and reducing or eliminating gift and estate taxes. The names vary: pure trust, constitutional trust, common law trust, unincorporated business organization. The pitch is always some version of the same thing, which is that moving assets into the structure makes your tax bill disappear.
Why these arrangements fail
They fail because a name does not change economic reality. The IRS’s page on special types of trusts is blunt on two points. First, on the label itself: “‘common law trusts’ no longer exist since all states now have statutes relating to the creation and operation of trusts.” There is no separate “common law” track that sits outside state trust statutes. Second, on the structure: a pure or constitutional trust gives the appearance that the taxpayer gave up control, while in reality the same person still runs the business day to day and controls the income stream. Courts have held that this income remains taxable to the taxpayer under doctrines including lack of economic substance (the sham theory), assignment of income, and grantor-trust rules. Whatever the arrangement is called, the taxation still has to comply with the Internal Revenue Code.
The consequences are not symmetric
There is a real and important line between legally reducing taxes and illegally evading them. Legal tax mitigation happens inside the rules. Evasion does not, and the downside scales with the dollars involved. For a small filer, getting this wrong can mean an audit, back taxes, interest, and penalties. At much larger sums, the exposure is not just a fine, it is potential criminal prosecution. The IRS states plainly that taxpayers who participate in these schemes are not shielded from civil and criminal sanctions. The promoter who sold you the structure does not serve your sentence.
What legitimate planning uses instead
There are many well-established trust types, and reputable advisors work with the legitimate ones. A short, non-exhaustive list:
- Asset protection trusts for shielding assets from future creditors within the law.
- Dynasty trusts for multi-generational wealth transfer.
- Spendthrift trusts to protect a beneficiary from their own creditors or spending.
- Charitable remainder trusts for charitable giving that carries defined tax benefits.
Each of these is a tool matched to a specific goal, whether that is creditor protection, estate transfer, or charitable intent. None of them promises to erase your tax obligation. They are structured to reduce or defer exposure within the rules that actually exist, and they are documented, reported, and defensible.
Why this matters
Wanting a simpler or lighter tax system is a reasonable policy view, and plenty of people share it. But a policy preference does not change what is legal today. The practical takeaway is a bright line: any structure sold on the promise that your taxes will disappear entirely is a red flag, regardless of the paperwork wrapped around it. Legitimate tax planning is real, it is boring, and it operates in the open. Before setting up any trust, talk to a qualified estate attorney and a CPA who will put their name on the filing, not a promoter selling a shortcut around the tax code.
Common questions
Is a common law trust legal?
Trusts themselves are legal and governed by state law, but the IRS says “common law trusts” as a distinct category no longer exist, because every state now has statutes governing how trusts are created and operated. When “common law trust” is used to market a tax-elimination scheme, the IRS treats that arrangement as abusive.
Can a trust legally eliminate my taxes?
No. Legitimate trusts can reduce or defer certain taxes within the Internal Revenue Code, but no legal trust makes your tax obligation disappear. Any pitch promising total tax elimination is a warning sign of an abusive scheme.
What is a pure trust or constitutional trust?
These are names used in abusive schemes for arrangements that appear to transfer control of a business while the taxpayer keeps running it and receiving the income. The IRS states such arrangements provide no tax relief, and courts have found the income remains taxable to the taxpayer.
What happens if I use an abusive trust scheme?
The IRS says participants are not shielded from civil and criminal sanctions. Consequences can range from audits, back taxes, interest, and penalties to, for larger amounts of evaded tax, criminal prosecution.
What are legitimate alternatives?
Established, lawful trust types include asset protection trusts, dynasty trusts, spendthrift trusts, and charitable remainder trusts. Each serves a specific legal goal and should be set up with a qualified estate attorney and CPA rather than a promoter.
This content is educational only. It is not tax, legal, or investment advice. Check primary sources and speak with a qualified professional before making financial decisions.
