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Does Your Estate Planning Strategy Involve an “Abusive Trust Tax Evasion Scheme?”

News, Offshore Account Update

Posted in on March 31, 2022

In many respects, estate planning and tax planning go hand-in-hand. Failure to consider the tax implications of a proposed planning structure can leave clients and their beneficiaries facing unnecessary tax liability, and this, in turn, can leave estate planners facing allegations of negligence or professional malpractice.

But, it is also possible to go too far. If the Internal Revenue Service (IRS) determines that an estate planning strategy amounts to an “abusive trust tax evasion scheme,” this can lead to audits and liability for everyone involved. Learn more from Virginia tax lawyer Kevin E. Thorn, Managing Partner of Thorn Law Group.

When Tax Planning Becomes Tax Evasion

Incorporating trusts into an estate plan can be an effective way to ensure that beneficiaries receive as much of the estate as possible. From qualified personal residence trusts (QPRTs) to foreign trusts, a variety of different types of trusts can be used to mitigate tax liability in compliance with the Internal Revenue Code (IRC).

However, using trusts for tax mitigation purposes effectively requires an in-depth understanding of the rules that apply. This includes, but is by no means limited to, the rules set forth in Subchapter J of the IRC. Estate planners that are not sufficiently aware of these rules and the practical tax implications of using trusts for planning purposes can unknowingly get themselves, their clients and their clients’ beneficiaries into trouble.

The IRS is Targeting Abusive Trust Arrangements

The IRS has recently stated that it is “actively examining” trust arrangements that appear to impermissibly evade tax. This includes income, self-employment, and gift and estate tax liability. Referring to trusts that impermissibly evade tax as “abusive trust tax evasion schemes,” the IRS points to several issues that are likely to lead to tax audits for grantors, trust administrators and beneficiaries. Some examples of these issues include:

  • Vertically Layered Trusts – Vertically layering trusts in order to hide the ownership of assets or claim expense and distribution deductions is considered an “abusive” practice by the IRS. Segregating assets between trusts, entering into rental and service agreements, and using multiple-trust arrangements to reduce tax liability to nominal amounts are all potential red flags.
  • Issues Involving Distributable Net Income (DNI) – Improper distribution of DNI, improper distribution deductions and other DNI-related issues are also red flags for the IRS.
  • Failure to Report Assets Held in Foreign Trusts – Foreign assets are potentially subject to disclosure requirements under the Bank Secrecy Act and the Foreign Account Tax Compliance Act. Failure to report assets held in foreign trusts can lead to IRS audits targeting multiple potential violations.

Request a Consultation with Virginia Tax Lawyer Kevin E. Thorn, Managing Partner of Thorn Law Group

Virginia tax lawyer Kevin E. Thorn, Managing Partner of Thorn Law Group, represents individuals and entities in all IRS-related matters. If you need legal representation in relation to an alleged abusive trust arrangement, you can call 703-752-3752, email ket@thornlawgroup.com or contact us online to arrange a confidential initial consultation.

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