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AN INTRODUCTION TO GUN TRUSTSUNDER 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, transferand 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 illegallypossessing 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 1968 – 18 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 restrictedfirearms to trusts or corporations have more than doubled in the last four years, to more than39,000 in 2012 from about 15,000 in 2008.

3. Two Supreme Court cases established that an individual’s right to beararms 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.

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b. In 2010, McDonald v. City of Chicago, 561 U.S. 3025 (2010)incorporated the individual right to the states.

4. The penalties for unlawful possession of NFA firearms, be it actual orconstructive, 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, thatindividual, and only that individual may possess the firearm. United States v. Turnbough, 114F.3d 1192 (7th Cir. May 14, 1997).

6. Using an entity simplifies the process of acquiring firearms regulatedunder Title II of the Gun Control Act, i.e. the National Firearms Act of 1934.

a. Prior to submitting paperwork to ATF, an individual must submitdocumentation to the local Chief Law Enforcement Officer (CLEO) of his or her jurisdiction.

b. CLEO turn-downs of such applications are a reality across theUnited States. There is no process to compel a CLEO to sign off on the application to acquire anNFA firearm.

c. An entity is not required to submit through the CLEO, but mayinstead submit the proper documentation directly through the vendor to the NFA Branch of theATF.

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 TaxDivision of the IRS.

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1986 Law Enforcement Protection Act – Made it illegal for anyoneto manufacture or import armor piercing ammunition.

1994 Brady Handgun Violence Prevention Act – Act imposed a 5-day waiting period and background check before a licensed gundealer can sell or deliver a handgun to an unlicensed individual.

2008 - District of Columbia v. Heller, 554 U.S. 570 (2008) 2010 - McDonald v. Chicago, 561 U.S. 3025 (2010)

2. National Framework

a. Gun Control Act of 1968 (18 U.S.C. §§921-931) – Title I

i. Definition of a firearm – “Any weapon (including a startergun) which will or is designed to or may readily be converted to expel a projectile by the actionof an explosive,” or “the frame or receiver of any such weapon.” The definition includes asilencer (suppressor) or a “destructive device.”

ii. The Commerce Clause of the U.S. Constitution providesstatutory authority for the GCA. The Commerce Clause has been broadly construed, allowingregulation of even “intrastate” matters.

iii. Prohibited Persons – It is unlawful under the GCA forcertain individuals (known collectively as “prohibited persons”) to possess firearms. It is alsounlawful to transfer a firearm to such a person when the transferor “knows” or has “reasonablecause to believe” the transferee is a prohibited person. Prohibited persons include any person:

Under indictment or information in any court for acrime punishable by imprisonment for a termexceeding one year;

Convicted of a crime punishable by imprisonmentfor 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 anintimate partner or child of the intimate partner; or

Who has been convicted of a misdemeanor crime ofdomestic violence

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b. National Firearms Act of 1934 (Title II) – The NFA was enacted toimpose a tax on the making and transfer of firearms defined by the act. It requires the registrationof NFA firearms with the Secretary of the Treasury. Types of NFA Firearms include, but are notlimited 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 machinegun;

Any combination of parts from which a machinegun can be assembled if the parts are in thepossession or under the control of a person;

Silencers and any part designed and intended forfabricating 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 ofteninvoked 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.

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The lawful transfer of an NFA firearm requires the filing of an appropriate transfer form with theATF, payment of any transfer tax, approval of the form, and registration of the firearm to thetransferee. Approval must be obtained prior to the transfer being made. (See Exhibit A)

b. Only previously registered firearms may be lawfully transferred

c. The term “possession” includes both actual and constructivepossession.

i. Actual possession is to have in one’s actual and physicalcontrol

ii. Constructive possession exists when a person knowinglyhas 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 (7th Cir. May 14,1997).

4. Ohio Firearm Law Concepts

a. What constitutes a firearm in Ohio?

i. “Firearm” means any deadly weapon capable of expellingor 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 readilybe rendered operable. R.C. 2923.11(B)(1).

ii. “Handgun” means (1) Any firearm that has a short stockand is designed to be held and fired by the use of a single hand; (2) Any combination of partsfrom which a firearm of a type described in division (C)(1) of this section can be assembled.R.C. 2923.11(C)

b. What firearms may be owned in Ohio? The Ohio constitutionacknowledges the right to keep and bear arms. Ohio law provides very few additionalrestrictions 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 purchasea firearm. R.C. §2923.21 (A) (1).

ii. You must be over 21 or older to own or purchase ahandgun. R.C. §2923.21 (A) (2).

iii. Must not be under a disability as provided in R.C. §2923.13, which provides:

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(A) Unless relieved from disability as provided in section 2923.14 of the RevisedCode, no person shall knowingly acquire, have, carry, or use any firearm ordangerous 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 offenseof violence or has been adjudicated a delinquent child for the commission of anoffense that, if committed by an adult, would have been a felony offense ofviolence.

(3) The person is under indictment for or has been convicted of any felony offenseinvolving the illegal possession, use, sale, administration, distribution, ortrafficking in any drug of abuse or has been adjudicated a delinquent child for thecommission of an offense that, if committed by an adult, would have been afelony 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 chronicalcoholic.

(5) The person is under adjudication of mental incompetence, has beenadjudicated as a mental defective, has been committed to a mental institution, hasbeen found by a court to be a mentally ill person subject to hospitalization bycourt order, or is an involuntary patient other than one who is a patient only forpurposes of observation. As used in this division, "mentally ill person subject tohospitalization by court order" and "patient" have the same meanings as in section5122.01 of the Revised Code.

(B) Whoever violates this section is guilty of having weapons while underdisability, a felony of the third degree.

III. Gun Trust Planning

A. The interplay of State and Federal Law: Ohio’s Constitution protects the rightof 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 anylocal ordinances. This restriction on municipalities was upheld by the Ohio Supreme Court in thecases of OFCC vs. Clyde, 120 Ohio St.3d 96 (2008) and City of Cleveland vs. State of Ohio, 128Ohio St.3d 135 (2010).

Ohio, like most other states, regulates deals, Concealed Carry Permits, which personsmay or may not possess a firearm, and the restoration of gun rights that have been lost.

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Gun trust planning intersects with both federal and state law in terms of what firearmsmay 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 agrantor for the benefit of designated beneficiaries under the laws of the state and the valid trustinstrument.”

2. Three parties to a trust:

a. “Grantor” (Settlor, Trustor, Trustmaker) is the person who createsthe trust;

b. “Trustee” is the fiduciary (a person or entity) who administers thetrust; 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 theright to amend, restate, or revoke the trust. The Grantor is normally not a trustee or the primarybeneficiary, 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 revocableliving trust that is designed and intended to own firearms and accessories, and to provide fortheir 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 tostate.

b. R.C. §5804.02 of the Ohio Trust Code sets forth the requirementsto 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 createdby a court order, has capacity to create a trust.

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(2) The settlor of the trust, other than the settlor of a trust createdby 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 notaddress 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 propertythat 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 andothers, who may not be gun people.

4. Will any living trust work? No.

a. A gun trust is not just a name for a living trust that holds title tofirearms

b. A gun trust is a purpose-built living trust designed foradministration of guns in compliance with firearm laws.

c. It is drafted to eliminate trust provisions and trustee duties thatmay conflict with the requirements of federal and state firearm law.

d. It usually quite different from a conventional living trust.

5. Drafting Considerations

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a. Use a simple name for the gun trust. Using the typical formalnaming convention used with traditional living trusts that sets forth the trust name, date, name oftrustee, etc. can result in a kick-back of a Form 4.

b. Right to revoke the trust. Most living trusts allow a Grantor toterminate a trust, this would create potential criminal exposure for an NFA gun trust as anunregistered firearm is contraband and illegal to possess. Firearms must be properly transferredprior to the trust being revoked.

c. Trust must prohibit transfers that do not comply with local, stateand federal law, including the NFA.

d. Prohibit Trustee from receiving any firearm that is not properlyregistered. All NFA firearms must be registered in the National Firearms Registration andTransfer Record (NFRTR).

e. Require that beneficiaries comply with all local, state and federallaw. 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 lifetimeof Grantor. This will provide protection for those the Grantor “shares” firearms with at firearm-related events. For example, gun owners commonly exchange firearms to “try out.” In thewrong context, this could technically constitute an unlawful transfer, and subject both parties toliability.

g. Most living trusts provide a Trustee with discretion to terminate atrust when the situation dictates. This would create potential criminal exposure for an NFA guntrust as an unregistered firearm is contraband and illegal to possess. Firearms must be properlytransferred prior to the Trustee terminating the trust.

h. When making distributions of trust property following the death ofthe Grantor, the Trustee must be instructed to follow ATF rules. Special instructions shouldaddress the following:

i. Distributions that may involve transporting NFA firearmsacross state lines which require prior approval of the ATF.

ii. Determining whether a beneficiary is a “prohibited person”under either state or federal law; and

iii. Is the firearm permitted in the beneficiary’s state ofresidence?

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g. The trust should define “lawful heir” as a transfer to a lawful heirunder 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 mustbe 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

2. Business entities are probably less flexible in design for an individualclient

a. They are not set up to provide flexible benefits to family andfriends.

b. Many people do not act consistently with what the entity generallyrequires.

c. How does one document his or her right to possess the firearm?

3. Unlikely to provide any additional benefit to an individual non-businessowner.

4. Better for businesses or perhaps for an “association” desiring to ownexotic or very expensive firearms.

5. What kind of insurance is available? Coverage would not be availableunder a typical homeowner’s or umbrella policy.

Gun Trust Outline.pdfExhibit A Printed.pdfExhibit B Printed.pdf