“Dirty Dozen Tax Scams” is an annual list published by the IRS, warning taxpayers that illegal schemes and scams will lead to significant penalties, and even criminal prosecution. Topping this year’s list is identity theft, whereby scammers look for ways to use a legitimate taxpayer’s identity and personal information to file a tax return and claim a fraudulent refund.
Other scams on the list include phishing — fake Web sites or unsolicited e-mails asking gullible taxpayers to provide their Social Security number and their bank information because they have purportedly won such prizes as the Irish Sweepstakes.
Of interest to homeowners on the list is the misuse of trusts. According to the IRS, “for years, unscrupulous promoters have urged taxpayers to transfer assets [including real property] into trusts. While there are legitimate uses in tax and estate planning, some highly questionable transactions promise reduction of income subject to tax . . . and reduced estate or gift taxes. Such trusts rarely deliver the tax benefits promised.”
Just what is a trust? There are a number of them, but the most common is the “deed of trust” — the mortgage document you sign when you get a home loan. There are also “testamentary trusts” which is spelled out in your Last Will and Testament and comes into existence when you die.
Here, however, the IRS is referring to “revocable living trusts.” This is created while you are living and is often referred to as an “inter vivos” trust — which is Latin for “between the living.” We use the word “revocable” because the person who created the trust has the right to change its terms, or even cancel for any reason, during his or her lifetime.
Living trusts are always “cocktail party” conversation topics. “I set up a trust and put my property in it and now I am set for life,” says one partygoer.
Let’s set the record straight: Contrary to popular belief — and despite what the scammers tell you — living trusts do not save on estate taxes, nor do they save on income taxes. Why? Because for ownership purposes, the trust is the legal property title holder, but for tax purposes, the property remains in the name of the person who set up the trust, called the “grantor.”
AARP, which has researched the matter, warns that “the greatest growth in sales of living trusts is to people who are least likely to need one. Living trusts are not the solution that salespeople make them out to be.”
How do you protect yourself? AARP says you should learn to spot the scams. Here are some suggestions. If the salesperson tells you that a living trust will preserve your legacy by helping you to avoid probate costs and estate taxes, that’s only partially true. Yes, if your home is in a trust, it will not have to be probated. But, according to AARP, “most people don’t need to worry about probate or estate taxes.” For example, if you and your spouse own property as tenants by the entirety, on the death of one spouse, the property automatically vests in the survivor. And in any event, even when probate becomes necessary, modern probate laws have reduced the pain and the costs of the process.
Another way to spot a scam: The promoter states that the living trust documents (or kit) he sells are prepared by a lawyer. According to AARP, “pre-printed, generic forms are often passed off as custom-made documents. There is often no attorney involved.”
More important, the package is expensive, may not meet the procedural requirements of your state law and often does not give you instructions on how to fund the trust.
This is important: If you do not actually transfer your property into the trust, there is no validity to the trust. You will need a lawyer to guide you in the process, making sure that you really need to set it up, and if so, showing you how to accomplish that. A deed to the property is signed by the owners of the property as “grantors” and formally conveyed to the trust as “grantee.” The deed is then recorded among the land records in the jurisdiction where the property is located.
You may even have to advise your lender, especially if this is not your principal residence.
There are, of course, benefits to creating a living trust. As mentioned, it will avoid probate if done properly. If you own property in several states, without putting them into the trust, your heirs will have to probate in each state where the property is located. This is called “ancillary” or “foreign” probate, and can be time-consuming and costly.
Additionally, if you need assistance in managing your assets during a disability — and a simple power of attorney may not be acceptable — or if you have children or grandchildren with special needs, a living trust can be a useful tool.
But you have to discuss this with a lawyer you have retained and not with a scam salesperson who reached out to you on a cold call, an e-mail or even at your place of worship.
As property values in many areas have been declining, another scam has become popular. Companies using fictitious but official-sounding names, such as “tax adjusters” or “tax reassessment,” claiming that for a fee, they will significantly reduce your property tax bill. Often, homeowners receive letters in envelopes purporting to be from the government’s tax office. Indeed, I have read where some scammers are so bold that they threaten the homeowner with a penalty or a late fee if payment is not promptly made.
Why are these scammers continuing their efforts, despite local, state and federal efforts to enforce the laws and put them in jail? Because we are gullible and tend to believe everything we get in the mail — and especially by e-mail.
If you are a victim of any of these scams, immediately contact the attorney general’s office in the District or your state, as well as the IRS.
But the IRS says it best: Don’t be fooled in the first place.
Benny L. Kass is a Washington lawyer. This column is not legal advice and should not be acted upon without obtaining legal counsel. For a free copy of the booklet “A Guide to Settlement on Your New Home,” send a self-addressed stamped envelope to Benny L. Kass, 1050 17th St. NW, Suite 1100, Washington, D.C. 20036.J