Monday, May 17, 1999

Don't put your faith in all trusts

Some are scams to avoid taxes

The Cincinnati Enquirer

        Look before you leap. If it's too good to be true, it probably is. Most cautionary cliches are likely true when it comes to buying into or setting up trusts, tax and financial planning experts say.

        Internal Revenue Service officials say they have seen an increase in abusive or fraudulent trust promotions. The agency says it has identified more than 800 potentially abusive trust returns filed in Ohio. And at least seven Ohioans have been convicted of charges related to trust schemes designed to avoid taxes.

  The Internal Revenue Service offers the following warning signs of potentially abusive trusts:
  • Promises that you can deduct personal living expenses, such as family meals and personal residence expenses.
  • Promoters who will not furnish copies of the arrangement or discourage outside opinions by your own tax adviser or attorney.
  • Trusts promising to eliminate paying of employment or income taxes.
  • Trusts promising charitable deductions for personal expenses, such as write-offs for family members' college tuition expenses.
  • Promoters who do not have ties within your community.
        “We've seen a number of trust promotions whose sole purpose is to avoid creditors and eliminate taxes,” said IRS District Director C. Ashley Bullard. “Unfortunately, they have no legal foundation, and investors are placing themselves and their assets in jeopardy.”

        John E. Harris Jr., certified financial planner with Oxford Financial Group, said part of the problems might stem from confusion with legitimate and useful trusts, commonly called revocable and irrevocable trusts.

        Revocable trusts are also called “living trusts.” People who are aging or who have substantial assets find living trusts useful because they enable heirs to inherit the trust's assets while avoiding lengthy and public probate proceedings, Mr. Harris said.

        The trust acts as a separate entity to the person setting it up. But inheritance, income and capital gains taxes are still applied at the same rate with or without a living trust, he said.

        Irrevocable trusts differ in that they cannot be dissolved in the same way living trusts can be. The trade-off for not having access to your assets is that they pass on to your heirs without federal estate taxes, as the assets are not in your estate.

        These both are different from the “boilerplate” or “off-shore” trusts touted as tax shelters or asset protectors. These trusts, often promoted over the Internet or through seminars, promise a reduction of income and capital gains taxes.

        “Generally the promoters paint the picture of how simple these are to execute,” Mr. Harris said.

        But the IRS says investors can be held liable for civil and criminal penalties, as well as back taxes, if they get involved in an abusive trust.

        “The rule should be seek proper legal advice or competent tax counsel, and not buy one off the Internet or from a seminar,” Mr. Harris said. “If it's too good to be true, it probably is.”

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