Bull's-eye: How gun trusts can hit the mark with clients' estate planning

Individuals with firearms collections will likely need an additional layer of planning

Jan 14, 2015 @ 4:30 pm

By Darla Mercado

When it comes to estate planning for clients with firearms, they could either be sitting on a gold mine or a landmine.

Sales of firearms have been climbing. The number of background checks performed by the FBI's National Instant Criminal Background Check System hit 21.1 million in 2013, up from 19.6 million in 2012. The number is an indicator of how many people have bought firearms, as licensed gun dealers are required to call in a background check to either the FBI or state authorities before a sale.

(More: 8 of the most valuable guns ever sold)

Those background checks also jumped toward the end of 2014, totaling more than 2.3 million in December, versus about 2 million for the same period in 2013.

For clients who have a small collection of firearms, there's a way to bring them into the estate plan and ensure that they go to the right beneficiaries. Enter the gun trust.

“For the same reason we don't want to probate a house, we don't want to go through that with firearms,” said Bob J. Howell, an estate planning attorney and gun hobbyist in Plantation, Fla. “You want a mechanism where, if the person [owning the guns] loses capacity, someone can secure the assets, make sure they're safe and make sure they go where people would want them to go.”

TWO SIDES

There are two sides to the use of gun trusts. On the one hand, they ease the process of obtaining certain federally regulated firearms. Primarily, these are known as Title II weapons, such as machine guns and silencers, under the Gun Control Act of 1968.

Though individuals can acquire these items after going through a fingerprinting and photo process, paying a fee — known as a tax stamp Form 4 to the Bureau of Alcohol, Tobacco, Firearms and Explosives, or ATF — and obtaining the signature of chief law enforcement officer, a gun trust can act as an entity in the purchase of such firearms, according to Dennis Brislawn, an attorney with the Northwest Gun Law Group.

On the other hand — and within the context of estate planning — gun trusts address the issue of possession and transfer of firearms between individuals. The biggest potential problem is when, within a married couple, one spouse is a firearms enthusiast and he or she passes away. The surviving spouse who isn't an enthusiast will need to know what to do with the guns and could incur an accidental felony in the event of an improper transfer. Generally, you can't just hand a firearm over to a beneficiary.

LEGAL RAMIFICATIONS

When building a trust for guns, advisers and attorneys need to be aware not just of the laws governing the trust, but also the state and federal regulations on firearms. Mr. Brislawn shared an anecdote in which a trust company permitted someone to take a machine gun that was contraband out of state lines under the theory that if the person was OK to own it in one place, merely transporting it to another jurisdiction would be fine.

“You have to tell the ATF in advance if you're transferring the gun from state A to state B,” he said.

Firearms regulations vary from one state to another. Some require licenses and permits while other jurisdictions place limits on the size of the magazines.

“You might appoint a special trustee who is familiar with the transfer rules,” said David R. Duringer, a tax attorney with Protective Law Corp. “The No. 1 benefit of the gun trust is putting the right people in charge.”

The trust documents will instruct the trustee with respect to the control and administration of the firearms. The transfer of a Title II weapon to an heir requires the client file a Form 5 with the ATF.

Clients can also use trusts to provide beneficiaries with an income from the sale of the guns. Mr. Brislawn had structured a charitable remainder trust for a client who had a sizeable firearms collection but was unable to pass them to his adult children.

“We left the guns in that trust to provide an income stream [to them] and an endowment from the remaining principal to the National Rifle Association,” Mr. Brislawn said.

WHEN TRUSTS MAKE SENSE

Mr. Howell noted that there are two ways for advisers to proceed when addressing firearms in an estate. They can build a gun trust when they want to carve the firearms out of the estate, which makes sense when only one spouse is an enthusiast and the other spouse wouldn't know what to do with the guns.

Still, a client can elect to keep the guns in a trust along with everything else if he or she is endowing everything to the same individual.

“A lot of times, if all this stuff is going to the same place, then it's easier to do it in one trust,” said Mr. Howell. Just make sure to add language to the trust that addresses the firearm assets, he noted.

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