July 11, 2013

Death and taxes

"In this world nothing can be said to be certain, except death and taxes." Benjamin Franklin, as quoted in a letter to Jean-Baptiste Leroy in 1789.

Given this certainty, taxpayers respond by engaging in various tactics to reduce, minimize, avoid or evade their inevitable taxation. For example, nefarious individuals peddle phoney trusts as methods to ostensibly shield income from taxation.  Unfortunately, the zealotry to which a person pursues avoiding taxation can lead them to believe these crooked arrangements. A wealthy San Diego nursery owner, via her son, fell victim to this scam. The tale of her account unfolded in court as explained below.

Estate of Young (2008) 160 CA4th 62

The late Irma Young was a wealthy nursery owner who had amassed a number of real estate holdings. Through here attorney, Dennis Burns, she devised an estate plan in 1991 which called for the distribution of her estate to her 4 children equally. One peculiar part of her estate plan was that her son, Charles Parker, was only allowed to take his inheritance if he did not have any tax liabilities at the relevant time. This naturally prompts the response that Charles probably had difficulties with paying his taxes.

Charles began to attend asset protection seminars in 1992-1993 and became convinced that creating a land trust was an instrument that could be used to avoid paying taxes. Attorney Burns told her Irma that he believed that such trusts were not legitimate tax avoidance devices. Nevertheless, Charles convinced Irma to retain the individuals selling these trusts. In turn she, according to the court opinion, "paid approximately $30,000 to several persons to prepare such documents, some of whom took the money and did no work."

A total of 8 "tax avoidance" or "land trusts" were created for the 8 parcels of real property owned by Irma. Furthermore, 5 business trusts were created to hold her business interests. Of note, the drafting attorney for the business trusts was the trustee for 4 of them (Author's comment: this is generally a huge no-no in California).   

Later on in 1995, Irma became aware that these trusts were a facade and approached her old attorney to try to rectify the situation. Attorney Burns "asked her if she had gotten involved in one of Charles's schemes, and she said yes. He then told her that he had advised her against that, but she had not listened to him, and he could no longer help her and she should get another attorney." 

In 2000, Irma became acutely ill and she asked her son Stephen Parker to inquire as to status of her estate. Stephen naturally approached Charles who failed to provide him with the necessary information. Stephen then asked R. Richard Evans, the trustee of Irma's "trusts" for a copy of such and he provided Stephen with a copy of one of the land trusts. 

"Stephen told Irma about this and she said Charles and Evans were crooks. In May 2000, she called her four children to the hospital and told them that her plan was that each should share equally in her estate, and asked Charles to verify that that was her intent, which he did."    

"On July 30, 2000, Young died. Stephen was appointed the administrator of her estate. In that capacity, he formally requested that Charles and Evans supply him with business records relating to trusts, disposition of funds or property, and the original irrevocable land trust dated September 27, 1993. They replied that they did not have any such documents except for the 1991 will and inter vivos trust. The trusts had no cash left." (Author's comment: not good).

Ultimately, Stephen successfully sued for undue influence and fraud in the establishment of the trusts. 

One sad reality of this case is that neither Charles nor Evans knew Irma's tax bracket. Charles nonetheless coerced his mother to engage in very questionable and expensive behavior without knowing what benefits would accrue. One would think that knowing the current situation would be very helpful for future planning. For example, if Irma was a high-income individual who paid a lower tax rate than others, a la Warren Buffet or Mitt Romney, then pursuing such an exotic tax arrangement is baffling. The point of tax avoidance is to have a net gain. Yet with Irma, her son caused her to have a net loss, and a massive one at that.