IRS Involvement in Probate Proceedings
Abusive trust arrangements are often promoted as ways to hide assets from the Internal Revenue Service. The IRS is actively examining tax evasion schemes involving the use of trusts. Abusive trust arrangements may be viewed as sham transactions, and the IRS may ignore the trust and its transactions for federal tax purposes. In addition, penalties may be imposed.
According to the IRS, abusive trust arrangements often use trusts to hide the true ownership of assets and income or to disguise the substance of transactions. These schemes give the appearance of separating responsibility and control from the benefits of ownership, as would be the case with legitimate trusts, but the taxpayer in fact controls them.
The IRS notes that abusive trust arrangements typically are promoted by the promise of such benefits 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.
However, the IRS emphasizes that abusive trust arrangements will not produce the tax benefits advertised by their promoters. Moreover, in some cases, taxpayers and/or the promoters of these trust arrangements may be subject to civil and/or criminal penalties.