As published in Steve Leimberg’s Estate Planning Newsletter on May 3, 2016.
Reproduced courtesy of Leimberg Information Services, Inc. (LISI) at https://www.leimbergservices.com.
“New regulations on gun trusts issued by the Bureau of Alcohol, Tobacco, Firearms, and Explosives change the rules concerning the purchase of firearms by gun trusts. Those interested in acquiring Title II firearms via a gun trust should consider doing so prior to July 15, 2016. Because of this rule change, there is an increased demand for gun trusts. This commentary seeks to serve the reader by providing some gun trust drafting tips.”
Mary Vandenack and Nicholas Meier provide members with their gun trust drafting tips.
Mary E. Vandenack is founding and managing partner of Vandenack Weaver LLC in Omaha, Nebraska. Mary is a highly regarded practitioner in the areas of tax, high net worth estate planning, asset protection planning, business succession planning, tax dispute resolution, and tax-exempt entities. Mary’s practice serves businesses and business owners, executives, real estate investors, health care providers and tax exempt organizations. Mary is a member of the American Bar Association Real Property Trust and Estate Section where she serves as Vice Chair of the Small Firms committee and serves on several other committees, Taxation Section, and Business Section. Mary a frequent writer and speaker on tax, asset protection planning, and estate planning topics including improving delivery of legal services and increased access to the under-served.
Nicholas D. Meier is an associate of Vandenack Weaver LLC in Omaha, Nebraska. Nick practices in the areas of tax, trusts and estate and business succession planning.
Before we get to their commentary, members should note that a new 60 Second Planner by Steve Oshins was recently posted to the LISI homepage. In his commentary, Steve reports on Duckett v. Enomoto (No. CV-14-01771-PHX-NVW, April 18, 2016), where the U.S. District Court for the District of Arizona held that a federal tax lien attached to the interest of a beneficiary in a discretionary support trust created by his mother. The decision can be found at https://tinyurl.com/jmvrg37 and members should click this link to listen to Steve’s podcast
Now, here is Mary and Nicholas’ commentary:
New regulations on gun trusts issued by the Bureau of Alcohol, Tobacco, Firearms, and Explosives (BATFE) change the rules concerning purchase of firearms by gun trusts. Those interested in acquiring Title II firearms via a gun trust should consider doing so prior to July 15, 2016.
On January 15, 2016, final rules[i] were issued by the BATFE. Once these rules become effective, all “responsible persons” of a trust will be required to notify the Chief Law Enforcement Officer (CLEO) by sending a copy of a completed Form 4, submit to background checks, and submit fingerprint cards and photos. The “responsible person” for a trust is the individual or individuals who have the power and authority to direct the management and policies of the trust and has the authority to receive, possess, ship, transport or deliver the firearm for or on behalf of the trust.
Generally, a “responsible person” will include the settor(s), any trustee, and any trust protector of a trust owning covered firearms Beneficiaries will not be responsible parties; however, upon being appointed a trustee, the beneficiary would come within the definition. The rule change is anticipated to become effective July 15, 2016. The rule change is not retroactive and will not affect firearms governed by the National Firearms Act (NFA)[ii] purchased by a trust prior to the effective date of the change.
Because of this rule change, there is an increased demand for gun trusts. This commentary seeks to serve the reader by providing some gun trust drafting tips.
What Is a Gun Trust?
Gun trusts are a legal means of owning firearms and can provide benefits that have various advantages over individual ownership. Gun trusts are created for the receiving, owning and possessing of firearms.
Gun trusts are most often used for firearms that are covered by Title II of the Gun Control Act of 1968 (GCA).[iii] Title II firearms include machine guns, suppressors, short-barreled rifles, short-barreled shotguns, destructive devices (grenades, mortars, rocket launchers, large projectiles), and “any other item” as defined by the NFA.[iv]
The gun trust is specifically designed to own, possess, manage, and dispose of firearms. Generally, gun trusts are revocable trusts which allow the settlor to add, remove, or change trustees and add or remove beneficiaries; however, if asset and creditor protection are of importance, then an irrevocable trust can be considered. If a trust protector is named in the gun trust, the trust protector may also be given the ability to add, remove or change trustees and add or remove beneficiaries. The use of a trust protector facilitates post-death management of the gun trust.
A gun trust can also be used as a probate avoidance vehicle for Title I firearms. The risk of using the same trust to cover both Title II and Title I firearms is that a drafter could unwittingly subject the Title I firearms to rules that would otherwise apply only to Title II firearms. In drafting the gun trust, the drafter should state that the purpose of the trust is to own, possess, manage, and dispose of NFA firearms.
Benefits of a Gun Trust
If a Title II firearm is owned individually, such a firearm can only be used and possessed by the registered owner or in the presence of the registered owner. If used or possessed (which in certain circumstances can include simple access and control of the firearm) by a nonregistered owner, the person in possession risks criminal liability. A gun trust allows for multiple persons to possess and use the firearms. A gun trust is also useful as part of an estate plan to transfer firearms at the death or incapacity of the settlor and avoid probate.
Under current law, an individual buying a Title II firearm must obtain the signature of a local CLEO and submit a photograph and fingerprint card along with an application form. A trust, under current rules, does not require the signature of the CLEO, photographs or fingerprint cards.
Gun trusts can provide procedural safeguards to trustees and beneficiaries from accidental violations of applicable laws. The trust should prohibit NFA violations. The trust should also include details that provide guidance to the trustee and beneficiaries that assist them in avoiding unintentional violations of the NFA rules. The diligent drafter will provide the gun trust settlor a separate letter outlining what the trust accomplishes and providing additional details to assist the settlor and trustees from committing unintentional violations of the applicable rules.
What a Gun Trust Is Not
It is important for clients to know that unlawful possession rules regarding firearms apply regardless of the trust ownership. A gun trust does not prevent liability with respect to actual or constructive possession of a firearm by a prohibited person. It is important to advise clients of the risks and issues that remain despite the gun trust structure. For example, constructive possession can exist when a gun owner has a firearm in a residence where a prohibited person or any other individual not allowed to possess the firearm resides or has access and knows the gun is in the residence. These persons could be subject to prosecution.
Gun trusts do not bypass rules regarding waiting periods nor do they avoid criminal liability if prohibited parties are allowed to use firearms. Each trustee is responsible for determining the capacity of any beneficiary before a gun is distributed.
When Should a Gun Trust Be Considered?
Currently, a gun trust simplifies the acquisition of Title II firearms. A gun trust should be considered by someone planning to acquire Title II firearms. In deciding that the gun trust will have value, the purchaser should consider whether the purchaser desires others to be able to possess or use the firearms.
If someone already owns a Title II firearm, it may still make sense to use a gun trust if the owner of a regulated firearm desires to allow others to use the firearms (typically family members) and to provide a vehicle to pass the firearms to beneficiaries. The firearms can remain in trust for a significant period of time. Keeping firearms in a gun trust beyond the death of the settlor avoids a transfer upon the settlor’s death.
Using a gun trust can provide additional guidance to a trustee as to the process required to lawfully transfer the firearms following the death of the settlor. It is unlikely that the same guidance would be found in a standard revocable trust or will. The gun trust is most useful when the settlor has family members or beneficiaries who have a desire to continue to use and possess the firearms beyond settlor’s life.
When Does a Gun Trust Not Make Sense?
A gun trust does not make sense if the gun owner will be the sole settlor, trustee and beneficiary. A gun trust structured in that manner is not permissible.
A gun trust doesn’t allow a gun owner to bypass applicable federal or state laws. A gun owner desiring to cross state lines must still provide advance notice to the BATFE and receive approval; however gun owners desiring “multistate” typically apply annually to use the firearm in a different state. BATFE will approve a 365 day period.
For a gun owner who owns only Title I guns, a gun trust is not necessary. Ownership and transfer issues can be handled through a standard estate planning revocable trust.
Once the new regulations are in effect, all responsible persons under the gun trust must satisfy the requirements for such persons. If there are numerous responsible persons, the process may be delayed. Regardless, the other benefits of the gun trust (probate avoidance, vehicle that survives settlor’s death, etc.) remain. Exactly how the new rules will work is unknown at this point.
The National Firearms Act of 1934 (NFA) and the Gun Control Act of 1968 (GCA) are the two most applicable federal laws. Regulations are issued by the Bureau of Alcohol, Tobacco, Firearms, and Explosives (BATFE).
Various states have laws that impact the ownership of firearms. State law should also be considered in determining the value and structure of a gun trust.[v]
In drafting the gun trust, include definitions of applicable law. Consider both federal and state laws. If it is likely that the gun will be transported, give consideration to any state laws where guns may go. Specify that the trustee must comply with these laws. Specify that the trustee must comply with all applicable laws.
Transportation of most NFA firearms requires prior approval using Form 5320.20. Include this in the trust document by way of making the trustee aware of the requirement. Additionally, this is an item that should be included in your compliance letter to the client after execution of the trust.
Generally, a gun trust should be given a short name. While the engraving requirement typically applies only manufacturers of Title II firearms, a gun owner may later alter the barrel length or add attachments to Title I firearms causing them to become Title II firearms. Such modifications can result in the engraving requirement applying. In addition to considering a short name for the gun trust, the client should be advised of the process of properly registering and transferring altered firearms.
The settlor is the individual who creates the trust. If the settlor wants to continue to use or possess the firearm, the settlor should also serve as trustee; however, the settlor is not required to act as trustee. Joint settlors can create the trust and consideration should particularly be given to such approach in community property states. To the extent that use or possession is desirable, each settlor should be a trustee.
While it is lawful to have co-settlors, each can lawfully transfer firearms to himself personally or to another trust or corporation. If co-settlors are used, require both to accomplish transfers. Also, if more than one person plans to contribute a gun, consider more than one trust.
A revocable trust can be revoked at any time but the termination of a gun trust must be approved by the BATFE. The distribution of firearms to the beneficiaries is a transfer that requires such approval.
The settlor should have the ability to add trustees by using an appointment and acceptance document. Such procedure can also apply for special trustees. The trust protector can also be authorized to add or eliminate trustees. The settlor should also have the power to add or remove trust property; however, such provisions should require trustee compliance with any applicable transfer rules.
The trustee of a gun trust holds legal title of trust property. Each trustee has the power to administer the trust and has the right to possess and use firearms owned by the trust. The settlor may serve as trustee and may appoint as many co-trustees as they wish. However, the settlor may not be the sole trustee and the sole beneficiary. Because the trustee can possess the firearms, each must be at least 18 years of age. Each trustee must also be able to legally possess a firearm.
An issue arises with respect to the trustee who is under 21. A Title II gun purchaser must be 21 years of age; however an 18 year old may possess and use such a firearm. It may be advisable that all trustees be 21 years of age at the time of purchase of any Title II firearm.
In drafting the gun trust, the trust provisions should specify that each trustee, or successor trustee, be eligible to complete a transfer of a firearm and be eligible to possess any firearm owned by the gun trust. The document should also provide that no trustee shall be a prohibited person. This applies to current trustees and any successor trustees.
Address what happens if a trustee becomes a prohibited person. Generally, provide that such a trustee is removed effective immediately upon occurrence of the event that results in the trustee becoming a prohibited person.
The trust document can provide for the appointment of “special trustees.” Any special trustees must not be prohibited persons.
Any trustee in possession of a firearm owned by the trust should have the trust documents and the BATFE tax stamp available. A trustee has an obligation to safeguard firearms owned by the gun trust. Such obligations include proper storage. Trustees must determine the registration status of firearms that come into their possession.
Avoid the temptation to insert the standard trustee powers from your revocable trust document used for other purposes. The trustee powers should be carefully crafted considering the purpose of the trust. Consideration should be given to providing guidance to the trustee and support in avoiding NFA violations.
The trustee should not have the power to rename the trust as doing so would require re-registration of the firearms owned by the trust. The trustee’s authority to distribute should be limited by the rules applying to transfer of NFA assets. Consider inclusion of the power to decant.
The trustee should be required to determine the capacity of each beneficiary and to determine the federal, state and local laws that may apply to allowing the beneficiary to use or possess a firearm owned by the trust. Allow the trustee to terminate any current rights of a beneficiary without capacity.
Given the likelihood of having more than one trustee, consider carefully control of the trust. If there are two trustees, should both be required to act together? If there are three, is a majority sufficient?
The trustee should have the authority to terminate trusts, subject to applicable transfer rules. The trustee should also have the power to continue a trust if doing so is an appropriate action with respect to a beneficiary.
The trustee should be authorized to transfer only previously registered firearms. Unregistered firearms typically cannot be lawfully transferred.
If the trust owns firearms that are not required to be registered, the trust should include specific provisions addressing the distribution of those firearms. Such provisions should ensure that such firearms are not subject to the rules applying to Title II firearms.
For a gun trust to be valid, you must name a beneficiary at the time of creation of the trust. The beneficiary is the person who will ultimately receive the firearm(s). Unless a beneficiary is also a trustee, a beneficiary is not legally able to use or possess a Title II firearm during the settlor’s life. As mentioned previously, it is best to require a beneficiary to be age 21 before naming the beneficiary as a co-trustee; however, a beneficiary who is at least 18 can be named as a special co-trustee for periods of time prior to age 21 by use of trust addendums or trust protector appointments.
Because the trust is for the benefit of the beneficiaries, settlors and trustees should also be included as beneficiaries. The settlor can keep the power to add and remove beneficiaries.
In drafting the gun trust, it is important to prohibit the transfer of firearms to children or other prohibited persons. The gun trust must address when and how firearms will be transferred, the legality of the firearms in any location to which the firearms may go and the correct method for completing the transfer as well as the eligibility of the beneficiary to possess the firearms at the time they are transferred. In addition, the gun trust should address how and when a beneficiary can have possession of a firearm owned by the trust. Clearly prohibit use and possession by a minor beneficiary.
While a charity can be named as a beneficiary of a gun trust, you cannot name future unborn children as beneficiaries of a gun trust. You can provide that a trust protector can add a future child as long as the trust protector is required to make such addition only at such time as the child qualifies to be a beneficiary.
Under the new regulations, a “responsible person” is defined as any individual who possesses the power to direct the management and policies of a gun trust and includes persons with such power and those who have the power to receive, possess, ship, transport, deliver, transfer or otherwise dispose of a firearm for or on behalf of the trust.[vi] When the new regulations take place, responsible persons of gun trusts will include settlors, trustees and trust protectors.
Prohibited persons cannot ship, transport, receive or possess firearms. Prohibited persons include:
- Any person under indictment or information in any court for a crime punishable by imprisonment for a term exceeding one year;
- Any person convicted of a crime punishable by imprisonment for a term exceeding one year;
- Any person who is a fugitive from justice;
- Any person who is an unlawful user or addicted to any controlled substance;
- Any person who has been adjudicated as a mental defective or has been committed to a mental institution;
- Any person who is an illegal alien;
- Any person who has been dishonorably discharged from the military;
- Any person who has renounced US citizenship;
- Any person who is subject to a court order restraining the person from harassing, stalking, or threatening an intimate partner or child of the intimate partner; or
- Any person who has been convicted of a misdemeanor crime of domestic violence.>[vii]
In drafting the gun trust, it is important to include provisions that prevent any settlor, trustee, beneficiary or trust protector from being a prohibited person.
Listing of Firearms
Use a schedule to the trust to identify NFA firearms that are registered in the trust name. Such schedule can be updated as firearms are added or distributed.
Taxes and Expense
Do make provision for payment of taxes and expenses upon death of settlor. While the gun trust typically has a checking account established in the trust name, the gun trust is typically is not funded with significant cash. To avoid requiring selling a firearm to pay taxes, consider having any taxes and expenses paid by another source in the settlor’s estate. Authorize the trustee to coordinate with your personal representative or the trustee of another trust.
Prohibit the payment of taxes and expense from assets passing to a charitable entity or qualifying for the estate tax marital deduction.
Distribution Upon Death
The firearms can remain in trust for a period of time after death of the settlor. This is particularly important when there are beneficiaries who are not old enough to receive the firearms. If there is a power to add beneficiaries to this trust, careful thought must be given to the distribution structure. Typically, provide that all beneficiaries who receive a firearm must be at least age 21 and not a prohibited person.
Create a distribution option in the event that none of the beneficiaries are eligible to receive the guns and won’t become eligible. If Title I firearms are included in the gun trust, such firearms can be distributed by a “laundry list.”
Asset protection is often a goal in establishing a trust. Consider it in the context of the gun trust. Typically, a spendthrift provision should be included.
Effect of Divorce
Address the effect of divorce of any settlor, trustee or beneficiary. It may be desirable to automatically eliminate a divorcing spouse from any role under the trust. The settlor can always add such a person back to the trust if it later makes sense to do so.
Using a trust protector provides a method by which amendments can be made to consider changes to NFA or GCA rules or related regulations. It is important that the trust protector cannot be a prohibited person. Additionally, the trust protector should not be able to make a change that results in a prohibited person becoming a trustee or beneficiary. The trust protector should be subject to immediate removal in the event that the trust protector becomes a prohibited person.
Transfer or Purchase of Firearms
Transfer of a NFA firearm is “selling, assigning, pledging, leasing, loaning, giving away or otherwise disposing of an NFA firearm.”[viii]A gun trust should require compliance with the transfer rules.
A Title II firearm must be registered with the National Firearms Registration and Transfer Record.
If the firearm is already owned by the settlor, the Title II firearms may be transferred to a trust after completion and approval of Form 4, payment of the transfer tax and provision of proof of the gun trust’s existence. Currently, Form 4 does not require fingerprinting, photo, background check and CLEO approval for gun trusts. For Title II Firearms, other than “any other weapon” as defined in 26 USC 5845(e), the transfer tax is $200.[ix] For “any other weapon” the tax is $5.
Following the drafting and proper execution of the trust, a firearm may be purchased directly by the trust and is generally advisable as it avoids multiple payments of transfer taxes. In order to do so, the Trustee must first file Form 4, in duplicate, with BATFE and include payment of the applicable transfer tax and a copy of the trust. Approval generally takes several months. Following the approval of the application, a Trustee will be able to take possession of the firearm.
By way of reminder, a transfer to a beneficiary as a distribution from a trust is a transfer for purposes of the NFA transfer rules. Such a transfer requires the filing of Form 5, but is exempt from transfer tax. Any distribution of a Title II firearm should not be permitted until approval of Form 5 has been obtained.
The private express trust is the typical approach for a gun trust. In such a trust, the trustee holds the firearms in the trust for the benefit of the beneficiary.
Some states permit purpose trusts. Examples are funeral trusts and pet trusts. Some states permit special purpose trusts in the context of gun trusts.
Governing Law and Situs Change
Any provisions for change to governing law or situs should require that any situs change will consider how specific federal and state laws will impact the assets owned by the trust and ensure continued compliance.
Alternatives to a Gun Trust
For the gun owner who isn’t interested in sharing possession and passing Title II firearms on to beneficiaries, individual ownership can still make sense. Such a gun owner, however, should include special directions to the gun owner’s executor as to how to transfer or dispose of any Title II firearm.
For gun owners owning only Title I firearms, such firearms can avoid probate and be passed via will or a standard estate planning revocable trust.
LLCs and corporations can also be used to own Title II firearms. LLCs and corporations are generally more expensive to maintain than gun trusts as they may be subject to federal and state tax reporting, annual or biennial reporting rules, and state registration requirements. Both a limited liability company and a corporation can have an agreement covering succession, but a gun trust is typically a more flexible tool in this regard. In part, the reason is that some form an LLC and assume succession is automatically handled, when accomplishing that goal requires thought and preparation of adequate succession agreements or provisions that sometimes simply doesn’t get implemented.
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LISI Estate Planning Planning Newsletter #2411 (May 3, 2016) at https://www.leimbergservices.com Copyright 2016 Leimberg Information Services, Inc. (LISI). Reproduction in Any Form or Forwarding to Any Person Prohibited – Without Express Permission.
[i] 27 CFR Part 479.
<[iv] 26 USC § 5845(a). [v] For a summary of state and federal rules, see www.atf.gov/file/58536 and Stephen R. Halbrook, Firearms Law Deskbook 2013.[vi] 24 CFR § 479.11. [vii] 18 USC § 922(g). [viii] 26 USC § 5845(j). [ix] 26 USC § 5811(a).