Debt Free

It’s bad enough when a dear relative dies. That last thing you need is for that to precipitate a lengthy legal battle over the estate. When the relative dies, their estate traditionally goes through some legal gyrations called probate, where the decedent’s debts, taxes and assets are reconciled and their remaining property is distributed according to the will. To put it bluntly; what a giant pain in the ass.

Recently, to eliminate probate and its attendant hassles, Joe Average has begun to place their assets into a legal state of being known as an irrevocable trust. This removes their ownership from the assets. It’s is irrevocable, meaning whoever set up the trust (the grantor) cannot change it. In addition, they are supposed to lose control of the assets to a trustee, who is appointed to administer the trust’s assets. Because they no longer have ownership or control of the assets and they cannot amend or change the trust, they are not liable for taxes owed on any income earned by the trust from operations or the sale of trust owned property.

If one just wants to sidestep the whole probate mess, a revocable trust may be used. The revocable trust hasn’t the estate tax protections of an irrevocable trust, however. Correctly setting up one of these vehicles is extremely complicated. If one of these trusts would benefit you, your relatives, or heirs, it’s essential you visit a good tax attorney so the trust can be properly constructed.

The tax avoidance implications of trusts have led many people to make at best exaggerated, and at worst outright fraudulent, claims about how they can get you out of paying any taxes using trusts. While trusts are excellent for income and estate tax avoidance if done correctly, an irrevocable trust may not meet your other financial and lifestyle needs. In the last 5 years, as trusts have gained popularity, many people have perpetrated some outlandish trust based tax avoidance schemes on the public, and have ended up in jail for their troubles.

First of all, no matter what Art Porth and Bill Drexler have said, you do, in fact, have to pay income taxes to Uncle Sam. All those interstates and F-22s have to get paid for somehow. Leave aside for a minute how much taxpayer dollars are wasted through either inefficiency or government largesse programs, you do have to pay taxes. You can minimize the amount you legally owe, but you can’t just tell the government to F’ off. That’ll land you in a heap o’ trouble. So, if you know that going in, you’ll be better prepared to see through those tax shelter scams you may run into.

The problem with some of these scams is that they’re recommended by individuals or firms that you know and trust. What is unfortunate for you is that if you get led into such a scam, you could still be liable for not only the back taxes, but penalties, fees and other legal consequences. In January of this year the U.S. 9^th Circuit Court upheld an earlier decision by a tax court that taxpayers are responsible for investigating their own tax shelters, so look out.

Some large companies that have recently gotten busted for incorrect tax filings, shelters, or outright fraud include tax preparation firm Jackson Hewitt, law form Jenkins and Gilchrist, and accounting firm KPMG. Many celebrities have been busted for tax fraud or evasion too, such as (actor) Wesley Snipes, (comedian) Richard Pryor, (congressman and Vietnam War hero) Randall Cuningham, (congressman) James Traficant, and (Survivor #1 winner)Richard Hatch, so simply being famous is no defense either. Bottom line; if sounds like a shady way to avoid paying your taxes, it probably is.