Key takeaways: A heavily marketed tax package tells dentists to place their practice in a trust, run income through trust layers, and borrow against life insurance to live on “tax-free” dollars at effective tax rates far below what any practice owner normally pays. The IRS has formally called these arrangements abusive since 1997, courts have rejected them for more than four decades, and in 2025 a dentist who bought one was sentenced to 41 months in federal prison. This article explains the pitch, the law, and what actually works.
If you practice dentistry long enough, someone will eventually pitch you this structure at a seminar, a study club, or over dinner with a colleague: put your practice in a trust, let the trust “own” the income, add a charitable entity on top, buy cash-value life insurance inside the structure, and borrow against the policy to spend untaxed dollars. The promoter, often calling himself a tax strategist, promises a dramatically reduced effective tax rate, sometimes pitched in the single digits or low teens, plus bulletproof lawsuit protection.
We researched this structure thoroughly for our clients. Here is what the tax law, the Tax Court, and the Department of Justice have to say about it.
What is the trust tax shelter being pitched to dentists?
These packages are typically sold at practice-management and asset-protection seminars for a one-time fee of roughly $25,000 to $50,000. The promoter creates a layered structure: a “business trust” that purportedly owns the practice, a “family trust” that holds the home and personal assets, and often a “charitable trust” or private family foundation at the top of the stack. Practice receipts are deposited into the trust accounts, personal living expenses are recharacterized as trust expenses or charitable contributions, and the practitioner is told the income now “belongs” to the trusts. Cash-value life insurance is frequently layered in: the trust or an affiliated benefit plan buys a policy, and the practitioner takes policy loans to spend untaxed dollars.
Variations exist, including packages built around a “non-grantor, irrevocable, complex, discretionary, spendthrift trust” said to exclude income under section 643 of the Internal Revenue Code, but the architecture and the promises are the same.
The common thread in every version: the practitioner keeps doing exactly what he or she did before. The same dentist treats the same patients in the same operatories, lives in the same house, and spends the same money. Only the paper changes.
What does the IRS say about trust tax schemes?
The IRS has warned about these structures by name for nearly three decades. Notice 97-24, 1997-1 C.B. 409, describes the layered business-trust, family-residence-trust, and charitable-trust format and states that such arrangements will be disregarded or recharacterized. The IRS maintains a standing Abusive Trust Tax Evasion Schemes enforcement program and has featured trust schemes repeatedly in its annual Dirty Dozen list of tax scams.
Most recently, IRS Chief Counsel memorandum AM 2023-006 addressed the current “section 643 spendthrift trust” pitch and concluded that its central claim, namely that capital gains and extraordinary dividends allocated to corpus escape tax, rests on quoting the statute out of context. A non-grantor trust is a separate taxpayer that reports and pays tax on that income in full.
Why doesn’t putting your dental practice in a trust reduce taxes?
The structure fails under three settled doctrines, and any one of them is independently fatal.
- Assignment of income. Since Lucas v. Earl, 281 U.S. 111 (1930), income from personal services has been taxed to the person who performs the services, regardless of any contract or instrument directing payment elsewhere. Dental fees are quintessential personal-service income: they exist because a licensed dentist performed the procedure. A trust cannot perform dentistry, and no assignment, however elaborately drafted, moves that income off the practitioner’s return. For a dentist who remains the practice’s primary provider, this doctrine alone disposes of the structure.
- The grantor trust rules. Under Internal Revenue Code sections 671 through 677, a person who transfers property to a trust but retains control or benefit (powers over distributions, continued use of the residence, or effective access to the accounts) is treated as the owner of the trust, and the trust’s income is reported on that person’s individual return. The promoted packages depend on the practitioner retaining exactly this control, which is precisely what makes the trusts transparent for tax purposes.
- The sham-trust doctrine. Courts disregard trust arrangements that change nothing economically real. The leading case involves a dentist. In Markosian v. Commissioner, 73 T.C. 1235 (1980), the taxpayer conveyed his dental practice, his home, and even his “lifetime services” to a family trust, then continued practicing in the same office with the same equipment while the trust paid the household bills. The Tax Court held the trust was an economic “nullity” and taxed all of the income to him, identifying four factors: the taxpayer’s relationship to the property did not change; no independent trustee stood between the family and the funds; no other beneficiary economically benefited; and the taxpayer treated the trust property as his own. Every promoted package of this type exhibits all four factors by design.
The later cases are uniform. Zmuda v. Commissioner, 731 F.2d 1417 (9th Cir. 1984), disregarded a layered chain of purported business trusts as shams. Vlach v. Commissioner, T.C. Memo. 2013-116, involved a physician who routed clinic income through a promoter-designed web of trusts capped by a “charitable” entity; the Tax Court held all three trusts were shams, restored the income to the physician’s return, and sustained accuracy-related penalties.
Doesn’t the IRS have to pierce the corporate veil?
A common question, and the actual rule is less favorable to the taxpayer than veil-piercing. Piercing a corporate veil is a remedy a creditor must affirmatively establish. In the tax cases above, the courts simply treat the trusts as if they do not exist because they lack economic substance, and the burden in a deficiency case rests largely on the taxpayer to prove otherwise. The practitioner ends up where he or she started, taxed on all of the income, plus interest and penalties, less the promoter’s fee. Federal disregard also does not depend on state-law validity: a trust can be perfectly valid under state trust law and still be ignored for federal income tax purposes.
How do state laws treat trust-owned dental practices?
Every state regulates who may own and operate a dental practice, and the trust packages are usually sold with no attention whatsoever to these rules. Under the corporate practice of dentistry doctrine, many states permit only licensed dentists, or professional entities owned by licensed dentists, to own a practice at all. Colorado’s flat prohibition played a central role in the criminal case discussed below: the dentist’s own attorneys and CPAs told him a trust could not own a dental practice there, and he proceeded anyway. Other states permit a non-dentist entity, such as a dental support organization, to hold non-clinical assets and provide management services, but reserve the practice itself, the patient relationships, and all clinical decisions to licensed dentists. A promoter selling the identical trust package in all fifty states has, by definition, accounted for none of this, and an ownership structure that violates the practice act creates licensing exposure on top of the tax problems.
Washington illustrates the more permissive end of the spectrum, and the structure still fails there. Only a licensed dentist may practice dentistry in Washington, and corporations and similar unlicensed entities are prohibited from practicing dentistry or soliciting dental patronage, which is a gross misdemeanor, with each day treated as a separate offense (RCW 18.32.675). Since 2017, Washington has permitted an unlicensed entity such as a dental support organization to own or lease practice assets and provide business-support services, but the entity may not own patient records and may not interfere with the dentist’s clinical judgment (Senate Bill 5322 (2017), amending RCW 18.32.675). Even where a trust could lawfully hold equipment and a lease, Washington law keeps the dentistry itself, the activity that generates the fees, personal to the licensed dentist, which is exactly what makes the assignment-of-income doctrine fatal to the tax pitch.
The lawsuit-protection half of the package also depends on state law, and in most states it fails outright. The majority rule, which Washington follows by statute, is that a self-settled trust, meaning a trust a person funds for his or her own benefit, is void as against that person’s existing and future creditors (RCW 19.36.020). A trust a dentist funds and controls offers essentially no shield against the dentist’s own malpractice or business creditors, which is the principal risk these packages claim to address. A minority of states do authorize domestic asset protection trusts, but those regimes require an independent trustee, genuine surrender of control, and statutory waiting periods, and they carry exceptions for fraudulent transfers and certain creditor classes. That is nothing like the keep-total-control structure sold at the seminars.
State taxes are the final piece, and the trust does not help there either. Washington imposes no personal income tax, so any claimed effective-rate reduction for a Washington dentist is entirely a federal proposition, and Washington’s business and occupation tax falls on the practice’s gross receipts no matter what entity holds them. In states that do impose an income tax, trusts do not escape it: states generally tax trust income to resident trusts, grantors, or beneficiaries under their own conformity and residency rules, and a trust disregarded federally as a sham will generally be disregarded for state income tax as well. How any of these rules applies to a particular arrangement is a legal question for a licensed attorney in the relevant state.
Can you really borrow against life insurance tax-free?
Borrowing against a personally owned life insurance policy funded with after-tax dollars is legitimately tax-free while the policy remains in force. That kernel of truth is what the pitch is built on. The abuse lies in attempting to fund the policy with untaxed dollars, and the courts have rejected every variation:
- Wegbreit v. Commissioner, T.C. Memo. 2019-82, aff’d, No. 20-1306 (7th Cir. Dec. 29, 2021): a business interest was moved into a trust that purchased an offshore private-placement life insurance policy, and the owner took over $3 million in “policy loans.” The trust was held a sham, the loans were taxable income, and the 75 percent civil fraud penalty was sustained.
- Neonatology Associates, P.A. v. Commissioner, 115 T.C. 43 (2000), aff’d, 299 F.3d 221 (3d Cir. 2002): physicians deducted contributions to a welfare-benefit plan funneling money into cash-value life insurance for their own benefit. Deductions denied; penalties sustained.
- Curcio v. Commissioner, 689 F.3d 217 (2d Cir. 2012): deductions denied for a section 419 plan funding cash-value policies for owners; employees may not “disguise their investments in life insurance as deductible” expenses “when those investments accumulate cash value for the employees personally.” Twenty percent negligence penalties upheld.
- De Los Santos v. Commissioner, 156 T.C. No. 9 (2021): premiums paid by a physician’s S corporation under a split-dollar arrangement produced taxable compensation income to the physician.
The consistent result: pre-tax dollars in, “tax-free” loans out, does not survive examination. Either the deduction is denied going in, or the loan is recharacterized as income coming out, and sometimes both, with penalties.
What if the dentist is not the main provider?
Promoters sometimes adjust the pitch for owners who have stepped back from daily clinical work: if associates generate the production, the argument goes, the practice income is no longer personal-service income and can safely belong to the trust. The variation removes the structure’s weakest point but not its fatal ones.
It is true that the assignment-of-income doctrine attaches to income from the taxpayer’s own services, so revenue produced by associate dentists looks more like business income than assigned earnings. Everything else survives intact. The grantor trust rules pull the income back to any owner who retains control or benefit over the trust regardless of who treats patients, and retained control is the design of every promoted package. The sham-trust doctrine likewise turns on economic reality rather than on clinical production. Wegbreit is the clearest illustration: the asset moved into the trust there was a financial-services business interest, personal services were never the issue, and the trust was still held a sham with fraud penalties. In addition, any services the owner does continue to perform, including management and oversight, require reasonable compensation reported and taxed to the owner personally. “Not the primary provider” must be factually true and documented, not merely asserted.
Even a version executed without any abusive element fails to deliver the promised rate, because federal trust brackets are sharply compressed. A genuinely irrevocable non-grantor trust with an independent trustee is a real taxpayer, and for 2026 it reaches the top 37 percent federal rate at only $15,650 of retained taxable income, with the 3.8 percent net investment income tax applying above the same threshold, while a married couple filing jointly does not reach the 37 percent bracket until taxable income of roughly $640,000. Retaining income in the trust raises the tax bill relative to individual ownership. There is no configuration, primary provider or not, in which this structure legitimately produces the advertised rates. The low rate in the pitch comes entirely from the abusive elements.
Where a trust genuinely fits an owner who has stepped back from production is wealth transfer, not income tax reduction: gifts or sales of non-voting interests in a properly structured entity to irrevocable trusts to move future appreciation out of the taxable estate. Those are established estate-planning techniques in which someone still pays income tax at ordinary rates each year.
Can you shift income to a spouse or children instead?
Assignment to a spouse is the original losing fact pattern: Lucas v. Earl itself involved a contract assigning half of the taxpayer’s earnings to his wife, and the Supreme Court taxed all of it to the earner, holding that the fruit cannot be attributed to a different tree from that on which it grew. For most married couples the exercise is also pointless, because a joint return already combines both spouses’ income at a single marginal rate. Paying a spouse a wage for real work in the practice is legitimate, but the wage lands on the same joint return and adds payroll tax, although it can support retirement plan contributions and certain benefits.
Shifting income to children runs into two separate walls. First, service income cannot be assigned to anyone, children included. Second, investment or trust income can be shifted in principle, but only by genuinely giving away the income-producing property itself. Under Helvering v. Horst, 311 U.S. 112 (1940), a taxpayer who keeps the property and merely directs its income to a family member is still taxed on that income; the tree must go with the fruit. Even completed gifts largely fail for minors because of the kiddie tax under section 1(g): a child’s unearned income above a small indexed threshold (roughly $2,700) is taxed at the parents’ top marginal rate, whether it arrives directly or as trust distributions, and the rule reaches children under 18 and most full-time students under 24. What remains legitimate is a wage paid to a child for real, age-appropriate work at a market rate, documented properly. Where family members hold real equity, section 1366(e) and the family partnership rules allow the IRS to reallocate income back to any family member who is undercompensated for services actually rendered.
Income the trust retains is taxed at compressed trust brackets. Income the trust distributes is taxed to the beneficiaries, with the kiddie tax applying to minors. Income of a trust the owner controls is taxed to the owner. In no branch of that decision tree does the income go untaxed. The only questions are whose return it lands on and at what rate, and none of the answers comes close to the rates in the sales pitch.
What happens to dentists who use these schemes?
The consequences are no longer hypothetical or merely civil. In 2016, Dr. Ryan Ulibarri, owner of a family dental practice in Fort Collins, Colorado, paid $50,000 for precisely this package: a business trust, a family trust, a charitable trust, and a private foundation. He moved the practice into the business trust and ran several million dollars of practice income through the structure from 2017 to 2022, deducting personal expenses (mortgage, vacations, boats) as trust and charitable expenses. He pleaded guilty to six counts of tax evasion in February 2025 and in June 2025 was sentenced to 41 months in federal prison, three years of supervised release, a $150,000 fine, and approximately $1.6 million in restitution. His own attorneys and CPAs had warned him that Colorado law did not permit a trust to own a dental practice; proceeding anyway featured prominently in the government’s case.
Promoters fare no better, and their client lists become the government’s audit roadmap. In June 2026, a federal jury convicted four promoters who sold the same four-entity trust package nationwide, marketed as eliminating tax on “upwards of 98 percent” of business profits, in a scheme the Department of Justice tied to roughly $40 million in tax loss. When a promoter is investigated, the IRS routinely obtains customer files, and purchasers become examination candidates. Promoters are also subject to civil penalties under section 6700 for promoting abusive tax shelters.
For the practitioner, the exposure looks like this: on examination, the trusts are disregarded, all income returns to the individual, and the resulting deficiency carries interest plus a 20 percent accuracy-related penalty (section 6662) or, where intent is established, a 75 percent civil fraud penalty (section 6663). Fraud leaves the statute of limitations open indefinitely, so exposure never ages out, and the most serious cases are referred for criminal prosecution under section 7201. Reliance on the promoter’s marketing materials or in-house opinion letters has repeatedly failed as a penalty defense; courts expect advice from an independent professional, not from the seller of the arrangement.
One more note on the effective-rate claims used in the sales pitch: a practice owner producing typical dentist-owner income cannot reach the single-digit or low-teens effective federal rates these pitches advertise through legitimate planning; the arithmetic does not get there. A reported rate at that level is a red flag for the structure itself, not evidence that it works.
What are legitimate tax strategies for dentists?
Practitioners drawn to these packages usually have substantial unrealized savings available through conventional, defensible planning: entity structure and compensation optimization; qualified retirement plans, where a 401(k) with profit sharing paired with a cash balance defined-benefit plan can generate six-figure annual deductions the law intends; health savings accounts; employment of family members who perform real work at market wages; cost segregation where the practitioner owns the building; and properly documented charitable giving. None of these produces a single-digit effective rate on a high income, because nothing legitimate does, but they produce substantial, durable savings that survive examination.
The bottom line
The trust-plus-life-insurance package is an abusive arrangement with a documented losing record spanning more than four decades, a standing IRS enforcement program aimed at it, and recent felony convictions of both a purchasing dentist and the promoters of a materially identical product. If someone presents this structure to you, have the materials reviewed by an independent CPA and a tax attorney before signing anything or paying any fee. Ten minutes of review is considerably cheaper than 41 months.
Questions about a structure you have been pitched, or about what defensible tax planning looks like for your practice? Contact Dental Accounting Group. We work exclusively with dental professionals, and we would be glad to run projections for your situation.
This article is provided for general informational purposes only and is based on federal tax authorities, public court records, and government publications available as of the date above, which are subject to change. It is not, and should not be relied upon as, tax, legal, or accounting advice for any specific taxpayer, and it is not an opinion on the laws of any state, including professional licensing, practice-ownership, trust, or asset-protection law; those questions should be directed to a licensed attorney. No specific promoter, company, or product is evaluated or referenced in this article. This content was prepared in accordance with the AICPA Statements on Standards for Tax Services. It was not written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed on any taxpayer. Application of the authorities discussed to any specific situation requires a separate engagement and analysis of that taxpayer’s facts. Positions taken on any tax return remain subject to examination by taxing authorities.
