AN INTRODUCTION TO GUN TRUSTS UNDER THE NATIONAL FIREARMS ACT Presented By: Paul J. Kellogg, Esq. Phillips Law Firm, Inc.

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1 AN INTRODUCTION TO GUN TRUSTS UNDER THE NATIONAL FIREARMS ACT Presented By: Paul J. Kellogg, Esq. Phillips Law Firm, Inc. July 12, 2013 I. Introduction: A. Goals: 1. Educate professionals on how to protect their client s ownership, transfer and possession rights in connection with weapons regulated by the National Firearms Act (NFA), while alive, when incompetent and at death. 2. Discuss how to protect a client s family members and friends for illegally possessing or transferring NFA weapons during and after the owner s lifetime. 3. Definitions: a. NFA National Fire Arms Act, 26 U.S.C. Chapter 53. b. BATFE Bureau of Alcohol, Tobacco, Firearms and Explosives commonly referred to as the ATF. c. GCA Gun Control Act of U.S.C. Chapter 44. d. NFRTR National Firearms Registration and Transfer Record. e. CLEO Chief Law Enforcement Officer. B. Perspective Popularity of Gun Trusts 1. A 2006 poll reported that 42% of Americans keep a gun in their home. 2. According to a recent New York Times article, transfers of restricted firearms to trusts or corporations have more than doubled in the last four years, to more than 39,000 in 2012 from about 15,000 in Two Supreme Court cases established that an individual s right to bear arms for self-defense is constitutionally protected. a. In 2008, District of Columbia v. Heller, 554 U.S. 570 (2008) overturned a handgun ban in the Federal District of Columbia. 1

2 b. In 2010, McDonald v. City of Chicago, 561 U.S (2010) incorporated the individual right to the states. 4. The penalties for unlawful possession of NFA firearms, be it actual or constructive, can result in fines up to $250,000 and 10 years in prison. a. Penalties are strictly enforced. b. Can result in the forfeiture of the weapon and any vessel, vehicle, or aircraft used to conceal or convey the firearm. 5. Constructive Possession: When an individual owns an NFA weapon, that individual, and only that individual may possess the firearm. United States v. Turnbough, 114 F.3d 1192 (7 th Cir. May 14, 1997). 6. Using an entity simplifies the process of acquiring firearms regulated under Title II of the Gun Control Act, i.e. the National Firearms Act of a. Prior to submitting paperwork to ATF, an individual must submit documentation to the local Chief Law Enforcement Officer (CLEO) of his or her jurisdiction. b. CLEO turn-downs of such applications are a reality across the United States. There is no process to compel a CLEO to sign off on the application to acquire an NFA firearm. c. An entity is not required to submit through the CLEO, but may instead submit the proper documentation directly through the vendor to the NFA Branch of the ATF. II. Firearms Law Overview A. History on Gun Laws 1. Timeline of Significant Firearms Events and Laws 1791 Second Amendment Ratified 1871 National Rifle Association Founded 1934 National Firearms Act FDR hoped to eliminate machine guns from America s streets during prohibition 1938 Federal Firearms Act Congress elected to regulate those involved in selling and shipping firearms 1968 Gun Control Act Prompted by the assassinations of JFK, MLK and RFK. Expanded licensing requirements 1972 ATF created Enforcement of the Gun Control Act was given to the Treasury Department s Alcohol and Tobacco Tax Division of the IRS. 2

3 1986 Law Enforcement Protection Act Made it illegal for anyone to manufacture or import armor piercing ammunition Brady Handgun Violence Prevention Act Act imposed a 5- day waiting period and background check before a licensed gun dealer can sell or deliver a handgun to an unlicensed individual District of Columbia v. Heller, 554 U.S. 570 (2008) McDonald v. Chicago, 561 U.S (2010) 2. National Framework a. Gun Control Act of 1968 (18 U.S.C ) Title I i. Definition of a firearm Any weapon (including a starter gun) which will or is designed to or may readily be converted to expel a projectile by the action of an explosive, or the frame or receiver of any such weapon. The definition includes a silencer (suppressor) or a destructive device. ii. The Commerce Clause of the U.S. Constitution provides statutory authority for the GCA. The Commerce Clause has been broadly construed, allowing regulation of even intrastate matters. iii. Prohibited Persons It is unlawful under the GCA for certain individuals (known collectiv ely as prohibited persons ) to possess firearms. It is also unlawful to transfer a firearm to such a person when the transferor knows or has reasonable cause to believe the transferee is a prohibited person. Prohibited persons include any person: Under indictment or information in any court for a crime punishable by imprisonment for a term exceeding one year; Convicted of a crime punishable by imprisonment for a term exceeding one year; Who is a fugitive from justice; Who is an unlawful user of or addicted to any controlled substance; Who has been adjudicated as a mental defective or has been committed to any mental institution; Who is an illegal alien Who has been discharged from the military under dishonorable conditions; Who has renounced his or her United States citizenship; 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 Who has been convicted of a misdemeanor crime of domestic violence 3

4 b. National Firearms Act of 1934 (Title II) The NFA was enacted to impose a tax on the making and transfer of firearms defined by the act. It requires the registration of NFA firearms with the Secretary of the Treasury. Types of NFA Firearms include, but are not limited to: Machine guns; The frames or receivers of machine guns; Any combination of parts designed and intended for use in converting weapons into machine guns; Any part designed and intended solely and exclusively for converting a weapon into a machine gun; Any combination of parts from which a machine gun can be assembled if the parts are in the possession or under the control of a person; Silencers and any part designed and intended for fabricating a silencer; Short-barreled rifles; Short-barreled shotguns; Destructive devices; and Any other weapon. i. A few examples of destructive devices are: Molotov cocktails; Anti-tank guns (over caliber.50); Bazookas; and, Mortars. ii. A few examples of any other weapon are: H&R Handyguns; Ithaca Auto-Burglar guns; Cane guns; and, Gadget-type firearms and pen guns which fire a projectile by the action of an explosive. [26 U.S.C. 5845] 3. Understanding Transfers and Possession: Gun trust planning is most often invoked as a result of interest in acquiring a firearm subject to the NFA. a. The term transfer is broadly defined to include selling, assigning, pledging, leasing, loaning, giving away, or otherwise disposing of an NFA firearm. 4

5 The lawful transfer of an NFA firearm requires the filing of an appropriate transfer form with the ATF, payment of any transfer tax, approval of the form, and registration of the firearm to the transferee. Approval must be obtained prior to the transfer being made. (See Exhibit A) b. Only previously registered firearms may be lawfully transferred possession. control c. The term possession includes both actual and constructive i. Actual possession is to have in one s actual and physical ii. Constructive possession exists when a person knowingly has the power and intention at a given time to exercise dominion and control over an object, either directly or through others. United States v. Turnbough, 114 F.3d 1192 (7 th Cir. May 14, 1997). 4. Ohio Firearm Law Concepts a. What constitutes a firearm in Ohio? i. Firearm means any deadly weapon capable of expelling or propelling one or more projectiles by the action of an explosive or combustible propellant. Firearm includes an unloaded firearm, and any firearm that is inoperable but that can readily be rendered operable. R.C (B)(1). ii. Handgun means ( 1) Any firearm that has a short stock and is designed to be held and fired by the use of a single hand; (2) Any combination of parts from which a firearm of a type described in division (C)(1) of this section can be assembled. R.C (C) b. What firearms may be owned in Ohio? The Ohio constitution acknowledges the right to keep and bear arms. Ohio law provides very few additional restrictions on gun ownership and transactions than the restrictions provided by Federal Law. Ohio gun law relates mostly with the carrying and transportation of guns. c. Who May Own Firearms In Ohio? i. Generally anyone over the age of 18 may own or purchase a firearm. R.C (A) (1). ii. handgun. R.C (A) (2). You must be over 21 or older to own or purchase a , which provides: iii. Must not be under a disability as provided in R.C. 5

6 (A) Unless relieved from disability as provided in section of the Revised Code, no person shall knowingly acquire, have, carry, or use any firearm or dangerous ordnance, if any of the following apply: (1) The person is a fugitive from justice. (2) The person is under indictment for or has been convicted of any felony offense of violence or has been adjudicated a delinquent child for the commission of an offense that, if committed by an adult, would have been a felony offense of violence. (3) The person is under indictment for or has been convicted of any felony offense involving the illegal possession, use, sale, administration, distribution, or trafficking in any drug of abuse or has been adjudicated a delinquent child for the commission of an offense that, if committed by an adult, would have been a felony offense involving the illegal possession, use, sale, administration, distribution, or trafficking in any drug of abuse. (4) The person is drug dependent, in danger of drug dependence, or a chronic alcoholic. (5) The person is under adjudication of mental incompetence, has been adjudicated as a mental defective, has been committed to a mental institution, has been found by a court to be a mentally ill person subject to hospitalization by court order, or is an involuntary patient other than one who is a patient only for purposes of observation. As used in this division, "mentally ill person subject to hospitalization by court order" and "patient" have the same meanings as in section of the Revised Code. (B) Whoever violates this section is guilty of having weapons while under disability, a felony of the third degree. III. Gun Trust Planning A. The interplay of State and Federal Law: Ohio s Constitution protects the right of people to keep and bear arms from government infringement. All firearm laws in Ohio, except those restricting the discharge of firearms and certain zoning regulations, supersede any local ordinances. This restriction on municipalities was upheld by the Ohio Supreme Court in the cases of OFCC vs. Clyde, 120 Ohio St.3d 96 (2008) and City of Cleveland vs. State of Ohio, 128 Ohio St.3d 135 (2010). Ohio, like most other states, regulates deals, Concealed Carry Permits, which persons may or may not possess a firearm, and the restoration of gun rights that have been lost. 6

7 Gun trust planning intersects with both federal and state law in terms of what firearms may be owned, how they are acquired, who may possess them, and how they may be transferred. B. Basic Trust Concepts 1. Black s Law Dictionary defines a trust as: a legal entity created by a grantor for the benefit of designated beneficiaries under the laws of the state and the valid trust instrument. 2. Three parties to a trust: a. Grantor (Settlor, Trustor, Trustmaker) is the person who creates the trust; b. Trustee is the fiduciary (a person or entity) who administers the trust; and c. Beneficiary is the person or persons for whom the trust corpus, income and assets are administered and who receives benefits. 3. Two generic types of trust created during life: a. Revocable Living Trust: Grantor reserves the right to amend, restate, or revoke the trust. The Grantor is normally the trustee and a beneficiary. b. Irrevocable Living Trust: Grantor typically does not reserve the right to amend, restate, or revoke the trust. The Grantor is normally not a trustee or the primary beneficiary, although under Ohio s Legacy Trust Act new options are available. C. What makes a Trust a Gun Trust? 1. There is no formal definition. For our purposes, it refers to a revocable living trust that is designed and intended to own firearms and accessories, and to provide for their beneficial use. 2. What are the requirements for a valid gun trust? a. Trust must be valid under state law, which can vary from state to state. b. R.C of the Ohio Trust Code sets forth the requirements to establish a trust in Ohio: A trust is created only if all of the following apply: (1) The settlor of the trust, other than the settlor of a trust created by a court order, has capacity to create a trust. 7

8 (2) The settlor of the trust, other than the settlor of a trust created by a court order, indicates an intention to create the trust. (3) The trust has a definite beneficiary or is one of the following: ******** (4) The trustee has duties to perform; and (5) The same person is not the sole trustee and sole beneficiary. c. Any Valid trust will do, but it may not do the job if it does not address gun law and firearm issues. d. ATF relies on state law to determine the validity of a trust. 3. Attributes of a Gun Trust a. Should provide control over this specific kind of personal property that may be financially and / or emotionally valuable to the gun owner or others. b. Should provide a mechanism for informal or formal sharing during life without violating possession laws. c. Should simplify and clarify the process of transfer (buy, sell, loan, lease, bequeath) of a firearm and specifically NFA firearms. d. Should provide meaningful guidance to successor fiduciaries and others, who may not be gun people. 4. Will any living trust work? No. firearms a. A gun trust is not just a name for a living trust that holds title to b. A gun trust is a purpose-built living trust designed for administration of guns in compliance with firearm laws. c. It is drafted to eliminate trust provisions and trustee duties that may conflict with the requirements of federal and state firearm law. d. It usually quite different from a conventional living trust. 5. Drafting Considerations 8

9 a. Use a simple name for the gun trust. Using the typical formal naming convention used with traditional living trusts that sets forth the trust name, date, name of trustee, etc. can result in a kick-back of a Form 4. b. Right to revoke the trust. Most living trusts allow a Grantor to terminate a trust, this would create potential criminal exposure for an NFA gun trust as an unregistered firearm is contraband and illegal to possess. Firearms must be properly transferred prior to the trust being revoked. c. Trust must prohibit transfers that do not comply with local, state and federal law, including the NFA. d. Prohibit Trustee from receiving any firearm that is not properly registered. All NFA firearms must be registered in the National Firearms Registration and Transfer Record (NFRTR). e. Require that beneficiaries comply with all local, state and federal law. Grant to the Trustee discretion to make a determination concerning beneficiary compliance, and if necessary the authority deny benefits to a beneficiary. f. Provide for formal and informal trust beneficiaries during lifetime of Grantor. This will provide protection for those the Grantor shares firearms with at firearmrelated events. For example, gun owners commonly exchange firearms to try out. In the wrong context, this could technically constitute an unlawful transfer, and subject both parties to liability. g. Most living trusts provide a Trustee with discretion to terminate a trust when the situation dictates. This would create potential criminal exposure for an NFA gun trust as an unregistered firearm is contraband and illegal to possess. Firearms must be properly transferred prior to the Trustee terminating the trust. h. When making distributions of trust property following the death of the Grantor, the Trustee must be instructed to follow ATF rules. Special instructions should address the following: i. Distributions that may involve transporting NFA firearms across state lines which require prior approval of the ATF. ii. under either state or federal law; and Determining whether a beneficiary is a prohibited person residence? iii. Is the firearm permitted in the beneficiary s state of 9

10 g. The trust should define lawful heir as a transfer to a lawful heir under the NFA is not a taxable transfer. However prior approval by the ATF is still required. (See Exhibit B) h. Prohibited persons or persons under disability under state law must be specifically prohibited from serving as a Trustee or being a beneficiary of the trust. i. Require all Trustees must be at least 21 years of age to serve. D. Other Entity Options: Why not use a corporation or LLC? 1. Business entities require more formality than a trust. a. State filing requirements b. Business purpose concerns client friends. requires. owner. 2. Business entities are probably less flexible in design for an individual a. They are not set up to provide flexible benefits to family and b. Many people do not act consistently with what the entity generally c. How does one document his or her right to possess the firearm? 3. Unlikely to provide any additional benefit to an individual non-business 4. Better for businesses or perhaps for an association desiring to own exotic or very expensive firearms. 5. What kind of insurance is available? Coverage would not be available under a typical homeowner s or umbrella policy. 10

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