Yes. Even though your trust is common law, equity-based, and non-statutory, it must still comply with fundamental legal principles to be recognized, valid, and enforceable. A non-statutory trust does not mean it is exempt from judicial review, tax obligations, or fiduciary responsibilities. Courts and tax authorities apply substance-over-form principles to ensure that the trust operates as a legitimate fiduciary structure rather than a means to circumvent legal or tax obligations.

1. Legal Validity: Tests a Trust Must Pass

Regardless of its jurisdiction or non-statutory nature, a trust must meet fundamental principles of trust law to be enforceable.

A. The Three Certainties Doctrine (Knight v. Knight, 1840)

For any trust to be valid, it must have:

1. Certainty of Intention – A clear and enforceable declaration of trust intent.
2. Certainty of Subject Matter – Clearly defined trust property.
3. Certainty of Objects – Identifiable and ascertainable beneficiaries.

Even in a non-statutory context, failure to meet these three certainties can render the trust invalid or unenforceable.

B. The Substance Over Form Doctrine (Gregory v. Helvering, 293 U.S. 465 (1935))

Even if a trust claims to be non-statutory, authorities will evaluate its actual function rather than its label. If the trust operates as a mere extension of the grantor, or if assets are not truly held in a fiduciary capacity, it may be disregarded for legal or tax purposes.

C. The Control Test (Markosian v. Commissioner, 73 T.C. 1235 (1980))

A trust must maintain separation of control between the grantor, trustee, and beneficiaries. If the grantor retains too much discretionary power, or if assets are not truly independent of personal control, the trust may be considered a sham or alter ego, losing its protections.

2. Non-Statutory Status Does Not Negate Legal or Tax Obligations

A non-statutory trust means it is not created under statutory law but rather by private contract under the right to contract (Article I, Section 10, U.S. Constitution). However, this does not mean it is beyond legal scrutiny. Courts and tax authorities still review such trusts under the following principles:

• Trusts Cannot Operate Contrary to Public Policy

  • Trusts used to evade creditors, engage in fraudulent transfers, or circumvent tax obligations will be invalidated (Re Vandervell’s Trusts, 1971).
  • A trust must have a legitimate economic purpose beyond tax avoidance (Hannigan v. Commissioner, T.C. Memo. 2000-58).

• Judicial Recognition & Enforceability

  • Even non-statutory trusts must be structured in a way that courts will recognize as enforceable.
  • Courts apply equitable principles to determine if a trust is a valid fiduciary entity or an abuse of legal form (Bogert, The Law of Trusts and Trustees).

• UCC & Contract Law Considerations

  • If a trust engages in financial or commercial transactions, it must comply with Uniform Commercial Code (UCC) provisions to be enforceable.
  • Private contracts are binding but must still meet contract law principles to hold up under judicial review.

3. Tax Compliance & Reporting Obligations

Even as a non-statutory, common law trust, the trust may still have federal and state tax obligations under IRS rules governing non-grantor trusts (IRC § 643, § 671-678). The IRS and courts examine:

• Whether the trust is truly separate from its creator and beneficiaries.
• Whether it follows recognized tax and accounting standards.
• Whether its transactions align with legitimate reinvestment and fiduciary principles.

If a trust fails these tests, it may be reclassified, disregarded, or subject to penalties for non-compliance.

Conclusion: Compliance Is Necessary for Legal and Tax Recognition

While a non-statutory trust is a valid legal structure, it must still adhere to fundamental trust principles and comply with equitable, contractual, and tax-related legal tests. A trust that does not meet these standards risks being unenforceable, reclassified, or disregarded for legal or tax purposes.

Ensuring proper compliance is not just about meeting statutory laws—it’s about maintaining the trust’s integrity, legal recognition, and financial security.

An annual compliance review ensures that your trust remains legally compliant, financially transparent, and aligned with its original purpose. Trusts are subject to scrutiny from the IRS and courts, particularly when distributions, expenses, or trustee actions are not properly documented. Regular compliance reviews help ensure that all trust transactions, trustee duties, and beneficiary distributions adhere to contract law principles and do not inadvertently violate tax laws or fiduciary responsibilities (See IRC § 643, § 671-678).

Without regular reviews, a trust may face IRS audits, challenges from beneficiaries, or even allegations of being a sham trust, particularly if there is a lack of separation between personal and trust assets (See Markosian v. Commissioner, 73 T.C. 1235 (1980)). A proactive compliance review corrects potential risks before they become legal issues and protects the trust’s legitimacy.

If your trust is flagged as non-compliant, it may be subject to IRS reclassification, taxation, penalties, or legal scrutiny. The IRS has broad discretion to disregard trusts that do not follow proper administration procedures, treating them instead as alter egos of the grantor or beneficiaries (See Zmuda v. Commissioner, 79 T.C. 714 (1982)).

Some common reasons a trust may be flagged include:

• Failure to maintain separate records for trust assets and personal assets (Rev. Rul. 2004-86).
• Improper distributions that do not follow the trust agreement.
• Lack of trustee independence, where a trustee acts solely under the direction of beneficiaries (IRC § 677).
• Misclassification of expenses or income to avoid taxation.

If flagged, the IRS may subject the trust to back taxes, penalties, and legal proceedings, potentially piercing the veil of trust protection and holding trustees or beneficiaries personally liable (Anderson v. Commissioner, T.C. Memo 1997-458). A trust compliance audit can help correct these issues before an IRS review occurs.

Yes. Many clients seek independent trust audits to ensure their existing trust is structured correctly, legally compliant, and not vulnerable to IRS reclassification. A trust created elsewhere may contain outdated provisions, improper tax elections, or administrative weaknesses that could expose it to scrutiny (See Estate of Gerson v. Commissioner, 507 F.3d 435 (6th Cir. 2007)).

A compliance review includes:

• Analyzing the trust’s governing provisions to confirm legal enforceability (Restatement (Third) of Trusts § 76).
• Ensuring all asset transfers were completed correctly and legally documented.
• Assessing trustee duties and responsibilities to confirm they align with legal standards (Bogert, Trusts and Trustees § 543).
• Reviewing tax classifications and filing history to prevent unnecessary taxation or penalties (IRC § 641-692).

If the trust is found to be outdated or defective, a trust restatement or amendment may be necessary to correct deficiencies before they lead to disputes or tax issues.

A trust can be classified as a sham trust if it is deemed to be a mere extension of the grantor or beneficiaries, rather than an independent legal entity (Zmuda v. Commissioner, 79 T.C. 714 (1982)). To avoid this, trustees must ensure:

• True independence of the trustee: The trustee must have actual control, not just act as a figurehead (IRC § 677).
• Proper record-keeping: Trust assets must be separately maintained and documented, not commingled with personal funds (Bogert, Trusts and Trustees § 543).
• Adherence to distribution rules: Beneficiaries cannot withdraw funds at will or treat the trust as a personal account (Markosian v. Commissioner, 73 T.C. 1235 (1980)).
• Legitimate business purposes for transactions: If a trust owns a business or investments, transactions must be properly structured and documented (Gregory v. Helvering, 293 U.S. 465 (1935)).
• Accurate tax filings: The trust must file correct tax returns, properly classifying income and expenses (IRC § 641-692).

If the IRS determines that a trust is a sham, it can disregard the trust entirely, tax all assets as personal income, and impose penalties (Anderson v. Commissioner, T.C. Memo 1997-458). Regular trust audits and compliance reviews help ensure that the trust remains a legally recognized entity.

If a trustee fails to uphold their fiduciary duties, they can be held personally liable for financial losses, tax penalties, and legal damages. A trustee’s legal responsibilities include:

• Acting in the best interests of beneficiaries and avoiding conflicts of interest (Restatement (Third) of Trusts § 78).
• Keeping accurate financial records and providing transparency (Uniform Trust Code § 813).
• Ensuring proper tax reporting and avoiding misclassification of income or expenses (IRC § 641-692).
• Following the terms of the trust agreement and making distributions accordingly (Bogert, Trusts and Trustees § 543).
• Maintaining the trust as a separate legal entity and not treating it as personal property (Zmuda v. Commissioner, 79 T.C. 714 (1982)).

If a trustee breaches their duties, they may face legal removal, personal liability for damages, or court-imposed oversight. Regular compliance audits help trustees fulfill their legal responsibilities and prevent mismanagement risks.

Frontier Capital Trust specializes in structuring and maintaining 508(c)(1)(A) faith-based trusts, ensuring they meet IRS compliance requirements while maintaining their tax-exempt status. Unlike 501(c)(3) organizations, which require IRS approval and are subject to government restrictions, a 508(c)(1)(A) religious organization operates as a mandatory tax-exempt entity under 26 U.S. Code § 508(c)(1)(A). However, proper compliance is crucial to avoid IRS scrutiny, improper classification, or loss of exemption (Foundation of Human Understanding v. United States, 88 Fed. Cl. 203 (2009)).

To maintain 508(c)(1)(A) compliance, we assist with:

• Structuring faith-based trusts properly to ensure they align with religious purpose guidelines.
• Ensuring tax-exempt transactions comply with IRS rules (IRC § 6033(a)(3)(A)(i)).
• Avoiding Unrelated Business Income Tax (UBIT) pitfalls, which can apply if the trust engages in certain business activities (IRC § 511-514).
• Providing accurate documentation and reporting guidance to maintain exemption status.
• Drafting governance provisions to ensure the trust remains a true religious organization, preventing reclassification risks.

Failure to properly structure and manage a 508(c)(1)(A) faith-based trust can lead to revocation of tax-exempt status, IRS audits, or legal challenges (Biblical Research v. Commissioner, 87 T.C. 705 (1986)). Our compliance services help trustees and founders maintain the integrity, mission, and legal standing of their religious trust, ensuring continued exemption from taxation, reporting requirements, and government interference.