IRS Targets Abusive Trust Arrangements in Estate Planning

Tax planning is a key aspect of estate planning, especially for high-net-worth individuals and couples. When using trusts to mitigate estates’ and beneficiaries’ tax liability, however, estate planners need to be careful. Tax mitigation strategies can go too far, and the Internal Revenue Service (IRS) has recently targeted estate planners, their clients and others for Internal Revenue Code violations related to “abusive trust tax evasion schemes.” Boston tax lawyer Kevin E. Thorn, Managing Partner of Thorn Law Group, explains.

Tax Mitigation vs. Tax Evasion in Estate Planning and Administration

The IRS has published several resources on abusive trust tax evasion schemes in recent years. This includes the IRS’ Abusive Scheme Toolkit for External Stakeholders, among others. These resources make clear that the IRS is well aware of the ways in which estate planners help their clients—and their clients’ beneficiaries—avoid tax liability, both legally and illegally.

While the IRS' use of the term, “abusive trust tax evasion schemes,” is suggestive of intentional tax fraud, not all—or even most—cases involve intentional efforts to defraud the federal government. In most cases, estate planners and others get into trouble due to a lack of understanding of the laws that apply to the strategic use of trusts for estate planning and tax mitigation purposes. This includes the laws governing matters such as:

• Distributable net income (DNI)
• Gift tax reporting
• Issues related to foreign trusts

Regardless of whether estate planners are aware of the pertinent issues, and regardless of whether their clients or others are aware of these issues, mistakes can lead to IRS scrutiny. The IRS, “is actively examining these types of trust arrangements . . . [and] in appropriate circumstances, taxpayers and/or the promoters of these trust arrangements may be subject to civil and/or criminal penalties.”

Use of Abusive Trusts Arrangements Can Lead to IRS Audits

The income from a trust is taxable unless subject to a specific exemption under the Internal Revenue Code. Whether the grantor, the trust or the beneficiary is liable for the tax depends on the specific circumstances involved. In all circumstances, however, failure to pay tax under what is deemed to be an abusive trust arrangement can result in an IRS audit.

Estate planners have a duty to ensure that they are not exposing grantors, trusts and beneficiaries to the risk of an audit. While these taxpayers are ultimately responsible for any tax they owe, estate planners can face malpractice or negligence-based liability for creating abusive trust arrangements. IRS audits targeting alleged abusive trust tax evasion schemes often involve substantial tax liability; and, as a result, they are of substantial concern for all parties involved.

Contact Boston Tax Lawyer Kevin E. Thorn, Managing Partner of Thorn Law Group

If you have questions or concerns about the IRS’ efforts to crack down on abusive trust arrangements, or if you are currently facing an IRS audit involving an alleged abusive trust tax evasion scheme, you can contact Thorn Law Group for a confidential consultation. Please call 617-692-2989, email ket@thornlawgroup.com or send us a message online to schedule an appointment with Boston tax lawyer Kevin E. Thorn, Managing Partner.