The National Firearms Act and Trusts: What You Need to Know

Dick Clark Law 1008 South 8th Street, Lincoln, Nebraska 68508 (402) 915-1791 www.dickclarklaw.com The National Firearms Act and Trusts: What You Need to Know August 2015 National Firearms Act 1 1. The National Firearms Act of 1934 ( NFA ) sometimes called Title II of the federal firearms law and the regulations promulgated under authority granted by the NFA 2 create tax and registration requirements that must be met prior to the interstate transport, importation, making, or transfer of certain items, including: a. Machine guns i. Any weapon which shoots, is designed to shoot, or can be readily restored to shoot, automatically more than one shot, without manual reloading, by a single function of the trigger. The term shall also include the frame or receiver of any such weapon, any part designed and intended solely and exclusively, or combination of parts designed and intended, for use in converting a weapon into a machine gun, and any combination of parts from which a machine gun can be assembled if such parts are in the possession or under the control of a person. ii. Only machine guns registered to private persons before May 19, 1986 are transferable to individuals and entities other than military, law enforcement, and certain Federal Firearms Licensees (FFLs). b. Silencers i. Any device for silencing, muffling, or diminishing the report of a portable firearm, including any combination of parts, designed or redesigned, and intended for the use in assembling or fabricating a firearm silencer or firearm muffler, and any part intended only for use in such assembly or fabrication. 1 Currently codified as 26 U.S.C. Chapter 53. 2 Interstate transport of NFA firearms by non licensees, except for silencers and AOWs, requires pre approval of an ATF Form 5320.20. 1

c. Short barreled rifles i. A rifle having a barrel or barrels of less than 16 inches in length, or a weapon made from a rifle if such weapon as modified has an overall length of less than 26 inches or a barrel or barrels of less than 16 inches in length. d. Short barreled shotguns i. A shotgun having a barrel or barrels of less than 18 inches in length, or a weapon made from a shotgun if such weapon as modified has an overall length of less than 26 inches or a barrel or barrels of less than 16 inches in length. e. Destructive devices i. Any explosive, incendiary, or poison gas, bomb, grenade, rocket having a propellant charge of more than 4 ounces, missile having an explosive or incendiary charge of more than one quarter ounce, mine, or similar device; any type of weapon by whatever name known which will, or which may be readily converted to, expel a projectile by the action of an explosive or other propellant, the barrel or barrels of which have a bore of more than one half inch in diameter, except a shotgun or shotgun shell which the Director finds is generally recognized as particularly suitable for sporting purposes; and any combination of parts either designed or intended for use in converting any device into a destructive device as described above and from which a destructive device may be readily assembled. The term shall not include any device which is neither designed or redesigned for use as a weapon; any device, although originally designed for use as a weapon, which is redesigned for use as a signaling, pyrotechnic, line throwing, safety, or similar device; surplus ordnance sold, loaned, or given by the Secretary of the Army under 10 U.S.C. 4684(2), 4685, or 4686, or any device which the Director finds is not likely to be used as a weapon, or is an antique or is a rifle which the owner intends to use solely for sporting purposes. f. Any other weapon (AOW) i. Any weapon or device capable of being concealed on the person from which a shot can be discharged through the energy of an explosive, a pistol or revolver having a barrel with a smooth bore designed or redesigned to fire a fixed shotgun shell, weapons with combination shotgun and rifle barrels 12 inches or more, less than 18 inches in length, 2

from which only a single discharge can be made from either barrel without manual reloading, and shall include any such weapon which may be readily restored to fire. Such term shall not include a pistol or a revolver having a rifled bore, or rifled bores, or weapons designed, made, or intended to be fired from the shoulder and not capable of firing fixed ammunition. 2. Items regulated by the NFA may be registered to natural persons, trusts, partnerships, corporations, estates, and associations. There are differences in the requirements that apply to individuals and those that apply to other types of registrants. a. Materials to be submitted by natural persons applying to make or transfer an NFA firearm: 3 i. Check for making ($200) or transfer tax ($200 or $5 if AOW) ii. (2) completed originals of ATF Form 1 (making) or Form 4 (transfer) 1. with sign off by a local Chief Law Enforcement Officer (CLEO) iii. Certification of Compliance (ATF Form 5330.20; certifies citizenship) iv. Fingerprint cards v. Passport type photographs b. Materials to be submitted by trusts or business entities applying to make or transfer an NFA firearm: i. Check for making ($200) or transfer tax ($200 or $5 if AOW) ii. (2) completed originals of ATF Form 1 (making) or Form 4 (transfer) 1. no sign off by a local CLEO is required iii. Certification of Compliance (ATF Form 5330.20) iv. Proof of the entity s existence and applicant s authority to act on its behalf (e.g., copy of trust agreement or articles of incorporation and any amendments) What is a Trust? 1. A trust is not a(n) a. Contract b. Corporation c. Will 3 There are some transfers that occur tax free on an ATF Form 5, such as a transfer to one s lawful heirs. 3

d. Agency relationship e. Bailment f. Entity (contrary to what the ATF might sometimes say) 2. Legal definitions of trust a. The right, enforceable solely in equity, to the beneficial enjoyment of property to which another person holds the legal title; a property interest held by one person (the trustee) at the request of another (the settlor) for the benefit of a third party 4 (the beneficiary). b. An equitable or beneficial right or title to land or other property, held for the beneficiary by another person, in whom resides the legal title or ownership, 5 recognized and enforced by courts of chancery. c. An obligation arising out of a confidence reposed in the trustee or representative, who has the legal title to property conveyed to him, that he will faithfully apply the property according to the confidence reposed, or, in other words, according to 6 the wishes of the grantor of the trust. d. An equitable obligation, either express or implied, resting upon a person by reason of a confidence reposed in him, to apply or deal with the property for the benefit of some other person, or for the benefit of himself and another or others, 7 according to such confidence. e. A holding of property subject to a duty of employing it or applying its proceeds 8 according to directions given by the person from whom it was derived. 9 3. Historical background a. Fideicommissum was a Roman customary practice (c. 200 B.C.) by which 4 Black s Law Dictionary, Seventh edition. 5 See Goodwin v. McMinn, 193 Pa. 046, 44 Atl. 1094, 74 Am. St. Rep. 703; Beers v. Lyon, 21 Conn. 613; Seymour v. Freer, 8 Wall. 202, 19 L. Ed. 300. 6 4 Kent Comm. 304; Willis, Trustees, 2; Beers v. Lyon, 21 Conn. 613; Thornburg v. Buck, 13 Ind. App. 446, 41 N.E. 85. 7 McCreary v. Gewinner, 103 Ga. 528. 8 Munroe v. Crouse, 59 Hun. 248, 12 N. Y. Supp. 815. 9 Rounds, Charles E. Jr. and Charles E. Rounds, III. 8.37: The Origin of the English Trust. Loring and Rounds: A Trustee s Handbook, 2008 edition. 4

property was committed to someone s care upon the previous owner s death to be distributed. Among other advantages, it enabled property to be distributed after death to people who were not the property owner s legal heirs. The person to whom property was entrusted in this way was often an heir himself. Originally enforceable only by the honor system and social ostracism, fideicommissum was later incorporated into the civil code. b. The Germanic salmannus (c. 520 A.D.) allowed for property to be transferred to a saleman during the life of a property owner for later transfer to a designated beneficiary upon the death of the original property owner. c. The waqf developed in Islamic law (c. 700 A.D.) to allow for the perpetual administration of family gifts and charitable endowments, most often characterized as religious in nature to ensure enforcement by local judges ( qadi ). A waqf currently has custody of Jerusalem s Temple Mount. d. The English use arose as a method for managing feudal estates to avoid the complications of a legal tenancy. During the 12th century, the use allowed absentee property owners to provide for the responsible administration of their property for the benefit of their families while they were fighting in the Crusades. The feoffee to uses would manage the estate, pay and receive feudal dues, use the estate s income for the benefit of the cestui que use (usually the settlor s family), and then relinquish legal ownership and control over the property to the crusader upon his return. The use was also notably utilized by Franciscan friars to circumvent the order s prohibition on the personal ownership of real property. 4. What does a typical trust look like? a. From A to B, for C for life, and then to D. A > B > C > D Settlor Trustee Life Beneficiary Remainderman i. Settlor: A person who makes a settlement of property, esp. one who sets up a trust. Sometimes called the grantor, trustor, or founder, this is the person who creates a trust and sets out its purpose. The settlor also contributes the initial property to fund the trust. ii. Trustee: One who, having legal title to property, holds it in trust for the 5

benefit of another and owes a fiduciary duty to that beneficiary. This person (an individual or an entity) acts as the legal owner of the trust property and has the power to manage the property as an owner. However, the trustee s legal ownership of the property is subject to certain equitable fiduciary duties owed to the beneficiary of the trust, including: a duty to be prudent with the trust property, a duty to act to carry out the terms of the trust, a duty of loyalty, a duty not to delegate, and a duty to account to the beneficiary. iii. Life Beneficiary: A beneficiary is a person who is designated to receive something under the terms of a trust. A life beneficiary is one who receives payments or benefits from a trust for life. iv. Remainderman: A type of beneficiary who holds or is entitled to receive a remainder. This is a beneficiary who will receive the property that remains when the trust eventually winds up. b. Trusts are incredibly flexible, and default rules in the common law and in statute can be extensively modified by explicit language in a trust agreement in order to adapt different trusts for markedly disparate purposes, including: 10 i. Spendthrift trusts ii. Family trusts iii. Charitable trusts 11 iv. Unit trusts v. Pension plans 12 vi. Remuneration trusts 13 vii. Corporate trusts 10 Spendthrift trusts are used to provide ongoing support (that is unreachable by creditors) for beneficiaries who, for whatever reason, are thought by the settlor to be incapable of making or unwilling to make wise financial decisions. 11 Unit trusts were used to structure collective investment vehicles and are now mostly obsolete. 12 Remuneration trusts are sometimes part of an employer s compensation package, often to provide for the families of corporate directors and other high level employees. 13 Corporate trusts are used to structure business entities and are common in the finance and insurance 6

viii. 14 Asset protection ix. Tax planning x. Co ownership 15 xi. Construction trusts 16 xii. Registration of items regulated by the NFA Using a Trust to Register NFA Items 1. Process a. Correspond with an attorney about your estate planning goals b. Have trust agreement and related documents drafted c. Execute trust documents d. Fund the trust (required for trust to be valid) e. Submit required documents to ATF s NFA branch with check for applicable tax f. Wait for ATF approval of your Form 1 or Form 4 and issuance of your tax stamp g. Pick up your firearm after a NICS check at your NFA dealer (Form 4), or proceed to make and engrave your firearm (Form 1) 2. Benefits over individual registration a. No CLEO sign off b. No photographs industries. 14 Trusts can be used to protect assets from creditors by vesting legal title and equitable benefits in people other than the debtor. 15 In some jurisdictions, money owed to contractors or subcontractors must be held in trust to avoid problems stemming from a principal s future insolvency. 16 Trusts have long been used to register NFA items, but their use has been greatly popularized in the last fifteen years with the advent of the Internet. 7

c. No fingerprint cards d. Ability to appoint co trustees who can legally possess the NFA firearms e. Written instructions for co trustees and successor trustees who may be unfamiliar with the special care required for NFA firearms 3. Benefits over business entity registration 17 a. Enhanced privacy b. No paperwork to file with state or local government c. No initial or recurring fees to the Secretary of State d. Clear, unambiguous guidance for disposition of the firearms upon your death 4. Drawbacks a. Currently, different ATF examiners treat transfers to the remaindermen of a trust differently. In some cases, examiners may approve a tax free transfer to a remainderman on a Form 5. In others, examiners may disapprove the Form 5 and assert that these transfers are taxable transfers that must be made using a Form 4. i. Transfers of NFA firearms from individuals to their heirs or legatees are clearly not subject to the transfer tax. b. There is an additional, one time expense associated with having a special purpose trust drafted. 5. Recent and Future developments a. ATF eforms are available for Form 1s and some forms relevant only to FFLs, but eform 4s are supposed to return later this year i. eforms submissions used to be processed significantly faster than paper ones, but according to NFATracker.com data they seem to be running about even now, at about 90 120 days from submission to approval b. In August 2013, ATF published a notice of proposed rulemaking referenced as ATF 41P that indicates its interest in: i. requiring all responsible persons be required to submit fingerprints and 17 E.g., articles of incorporation filed with the Secretary of State are public records. Generally, a trust agreement is not a public record. 8

photographs ii. CLEO sign off for all Form 1s and Form 4s, including those from trusts iii. Over 9000 public comments submitted during the comment period at the end of 2013 iv. Earlier this month, we learned that ATF has four reviewers working on the 41P comments, still a top priority for the agency, but no firm idea of when it will become effective, if ever 9

Resources National Firearms Act Handbook http://www.atf.gov/publications/firearms/nfa handbook/index.html Loring and Rounds: A Trustee s Handbook, 2013 edition by Charles E. Rounds, Jr. and Charles E. Rounds, III NFA Tracker publishes self reported data on ATF processing times and offers a web based wait time prediction application http://www.nfatracker.com 10