Business trust. This trust involves the transfer of an ongoing business into a trust. It is also known as an unincorporated business organization, a pure trust or a constitutional trust. This trust gives the appearance that the taxpayer has relinquished control of his or her business. In reality, through trustees or other entities controlled by the taxpayer, he still runs day-to-day activities and controls the business's income stream. Arrangements such as these do not provide tax relief. The courts have held that the business income is taxable to the taxpayer under a variety of legal concepts, including lack of economic substance (i.e., the sham theory), assignment of income or that the arrangement is a grantor trust. In some circumstances, the trust could even be taxed as a corporation.

Equipment or service trust. This trust is formed to hold equipment, rented or leased, to the business trust, often at inflated rates. The business reduces its income by claiming deductions for payments to the equipment trust. This kind of arrangement lays the same trap as the business trust, resulting in no tax reduction.

Family residence trust. Here, the taxpayer transfers family residences, including furnishings, to a trust, which then rents the residence back to the taxpayer. The trust deducts depreciation and expenses of maintaining and operating the residence, including gardening, pool service and utilities. The courts have consistently brought down these types of trusts, taxing income to the taxpayer while disallowing personal and nondeductible expenses.

Charitable trust. Taxpayers transfer assets or income to a trust which claims to be a charitable organization. The trust or organization pays for personal, education or recreation expenses on behalf of the taxpayer or family members. The trust then claims these payments on its tax returns as charitable deductions. These alleged charitable organizations are, in most cases, unqualified and have no IRS exemption letter; therefore, the contributions are not deductible. Charitable deductions are not allowed when the donor receives personal benefit from the alleged gift.

Foreign trust. These trusts are often domiciled in a foreign country that imposes little or no tax on trusts as well as providing financial secrecy. Typically, abusive foreign trust arrangements enable taxable funds to flow through several trusts or entities until, ultimately, the funds are distributed or made available to the original owner, allegedly tax-free. In fact, the income from these arrangements is fully taxable.

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