Watch Out When Using This Type of Trust: IRS

The Internal Revenue Service is warning taxpayers about questionable tax practitioners and independent promoters “selling schemes aimed at wealthy taxpayers,” such as potentially abusive arrangements involving charitable remainder annuity trusts.

According to the IRS, promoters can advertise these schemes to attract clients and “misapply the rules and leave the filers vulnerable.”

Such abusive tax arrangements “remain a focal point for our enforcement efforts,” IRS Commissioner Danny Werfel said in a statement.

“Taxpayers should beware of potentially abusive arrangements and promoters pushing them,” Werfel added. “People should seek out trusted, reputable tax advice and not be fooled by aggressive advertising and sales pitches.”

As the IRS explains, charitable remainder annuity trusts, or CRATs, are irrevocable trusts that let individuals donate assets to charity and draw annual income for life or for a specific time period. A CRAT pays a specific dollar amount each year.

The IRS states that it “examines charitable remainder trusts to ensure they correctly report trust income and distributions to beneficiaries, file required tax documents and follow applicable laws and rules.

“Unfortunately, these trusts are sometimes misused by promoters, advisors and taxpayers to try to eliminate ordinary income and/or capital gain on the sale of property,” the IRS explains.

In abusive transactions of this type, “property with a fair market value in excess of its basis is transferred to a CRAT,” the IRS says. ”Taxpayers may wrongly claim the transfer of the property to the CRAT results in an increase in basis to fair market value as if the property had been sold to the trust.”