What is an Abusive Tax Trust? Article appeared at JD Supra on 8/9/19.
In a “legitimate” Trust, the ownership and control of the Trust assets and income is “separate” from a Settlor’s control and
benefit. IRS has been reporting that Trusts are used for abusive tax schemes to hide true ownership of assets and income, disguise financial transactions and corruptly reduce/avoid the payment of taxes.
IRS defines a Trust as a separate legal entity created and governed under the law of the state in which it was formed. In a Trust, there is a fiduciary relationship between a grantor, a Trustee, and a beneficiary for a stated purpose. The grantor is the creator of the Trust and the owner of the assets initially contributed to the Trust. The Trustee has the legal title to the Trust assets and administers the Trust according to the Trust agreement. The beneficiaries receive benefits from the Trust.
What is an Abusive Trust Arrangement?
They are arrangements that promise to deliver benefits that IRS lists as:
- Reduction or elimination of income subject to tax
- Deductions for personal expenses paid by the Trust
- Depreciation deductions of an owner’s personal expenses paid by the Trust
- Depreciation deductions of an owner’s personal residence and furnishings
- A stepped-up basis for property transferred to the Trust
- The reduction or elimination of self-employment taxes
- The reduction or elimination of gift and estate taxes
Abusive Trust RED FLAGS
- Trusts established to hide the true ownership of assets and income
- Trusts that disguise financial transactions
- Trusts used corruptly to reduce or eliminate income taxes or self-employment taxes
- Trusts that appear to show that a person is giving up control of their assets and money, but they still control the assets and how the assets are used
- Trusts that state that a Taxpayer is able to deduct personal expenses paid by the trust on their personal tax return
An Old Promoter Scheme: “Put Your Money in a Trust and Never Pay Taxes Again”
Promoters lead the way with promises to reduce or eliminate taxes via abusive schemes that entail corruptly underreporting income, omitting income, overstating deductions, making inaccurate or false entries in accounting records and hiding assets. The Promoters charge substantial fees (up to $100 thousand) to prepare trust documents that could incorporate foreign bank accounts, foreign corporations and multiple layers of domestic and foreign entities that conceal a Taxpayer’s true ownership of the assets and income.
Don’t be a Victim of your Own Making
Taxpayers that decide to engage in an abusive Trust Arrangement could be subject to civil and criminal sanctions. Trusts are legitimate tax planning vehicles used for estate planning, facilitating charitable transfer of property, or holding property for minors and incompetents as examples. Taxpayers ought to remember that: “If it sounds too good to be true, it probably is!”. Consult your specialized tax representative.