“Abusive” Trusts
A family dentist in Colorado paid $50,000 for what he may have thought was a legitimate tax shelter. He placed his dental practice into a limited liability company, then assigned 90% of its income to a trust. Two more trusts were involved in the scheme, including a charitable trust. One of the trusts was used to make mortgage and car payments as well as credit card bills, taking deductions for these expenses. The charitable trust also was used to pay personal expenses, such as season tickets for a baseball team and lending money to the dental practice. The dentist’s accountant told him he thought the arrangement was “wacky,” but that proved no deterrence.
The story was reviewed in detail in The Wall Street Journal by Laura Saunders [“A Tax-Shelter Crackdown Uncovers a Dentist’s ‘Smile High Trust,’ September 27, 2024]. Last March, the IRS posted a notice on “Abusive trust tax evasion schemes.” This was followed by an indictment of six tax-shelter promoters in April—one of whom was the one who sold the shelter to the Colorado dentist. An Arizona promoter pled guilty to concealing about $60 million of income for his 60 clients. The dentist was charged with concealing $3.5 million over a five-year period. He faces the possibility of prison for tax evasion, as well as the payment of back taxes with interest.
Trusts are central to many perfectly legal wealth management strategies. However, it should be clearly understood that:
• trusts do not avoid income taxes;
• trusts do not convert personal expenses into deductible expenses; and
• if it seems too good to be true, it isn’t true.
A corporate fiduciary, such as a bank trust department or a trust company, is an excellent source of advice on the legitimate uses of trusts. If you are interested what a trust might do for you and your family, we would be pleased to meet with you at your convenience.
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