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An estate plan is a set of powerful tools that protect your wealth and furnish you with financial security. However, like all powerful tools, estate planning techniques are subject to misuse and when this happens, the consequences can be severe. An experienced estate planning attorney is your best resource for avoiding fraudulent estate planning practices and yet responsible planning for the future means being equipped with some knowledge of your own.

Each year, the IRS releases an annual list of abusive arrangements and tax scams that taxpayers should be aware of and avoid. In 2022, this list included:

1. Avoiding Taxable Gain via Use of a Charitable Remainder Trust (CRAT)
Here, assets that have gained in value are placed in a CRAT and improperly stepped-up based on fair market value. The CRAT then sells the assets without declaring capital gains as a function of the new, stepped-up basis. The proceeds of this sale are then put toward a single premium immediate annuity and only a small percentage of the annuity is treated as income while the rest is treated as a tax-free investment.

2. Misuse of Tax Treaties
This is a broad category but the IRS refers specifically to U.S. citizens or residents avoiding U.S. taxes by claiming an exemption for income deriving from a foreign individual retirement account in a country where they lack a local connection.

3. Fraudulent Foreign Captive Insurance
This tax scam applies in very specific cases and yet is worth mentioning as it highlights the need to involve a tax professional when navigating insurance plans.

The IRS notes that, “U.S. owners of closely held entities, or the entities themselves, may claim a deduction for the cost of ‘insurance coverage’ provided by an insurance arrangement involving a Puerto Rican or other foreign corporation that has cell arrangements or segregated assets plans that the U.S. owner also holds a financial interest in.” Such arrangements become problematic when coverage includes implausible risks, non-arm’s-length pricing, and a lack of business purpose for entering the arrangement.

4. Spear Phishing Attacks
Here, the risk is to tax professionals and estate planning attorneys. Emails are sent to such individuals in an attempt to steal their software, credentials, and client data. From here, the scammers attempt to file fraudulent tax returns in pursuit of a refund. Individuals need to be aware of this risk as it underscores the need to work with a professional who takes cyber security seriously.

To learn more about planning for the future, building financial security, or any other matter related to estate planning, do not hesitate to reach out to the Law Firm of Christopher W. Dumm either by calling 417-623-2062 or using the contact form on our website.

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