Trusts are hot, and the IRS has declared war on them. It has increased staff and is planning more audits of trusts.
But most Retirement Watch readers can relax.
Trusts put together by the scam artists are those the IRS is going after. These are trusts that purport to eliminate taxes without changing your use or control of wealth. Those trusts often are offshore trusts, located in tax haven countries, but also can be U.S.-based trusts.
Be worried if your trust contains all your assets and purports to give you regular checks that are tax-free. The checks from the trust often are described as loans or as tax-free distributions of capital. This type of trust has been heavily marketed over the last decade or so, but it clearly does not comply with the tax law.
Aggressive charitable trusts also are targets. In these, you get a substantial charitable contribution today for putting money or property in a trust. But over time you get all or most of the money and its earnings back, while charity gets little or nothing.
Dangerous trusts also are those that promise to eliminate taxes by simply by setting up a trust or series of trusts. Be especially wary if someone says the IRS won’t be able to figure out the transactions or it seems the whole structure is designed to confuse the IRS or hide assets.
Don’t spend time on trusts such as these or other trusts that sound too good to be true. Stick with the safe, solid trusts I’ve always recommended. They’ll save you taxes, leave your assets to those you want to get them, and give you peace of mind. These trusts include marital and Bypass Trusts (used to cut estate and gift taxes), QTIP trusts (to save estate taxes and make sure your children end up with assets), charitable remainder or lead trusts, irrevocable life insurance trusts, and special needs trusts (to provide for a loved one who needs help). I’ve discussed all these and other legal, effective trusts in past visits.
Trusts can be an important strategy for you. But don’t be swayed by aggressive presentations that focus on one type of trust that seems to have everything. To protect yourself, be sure that your estate team includes an independent fee-only estate planning professional, such as an attorney or accountant.