Estate planning has grown more complex. Now, federal agencies pay closer attention to wealth transfers. Certain clauses in a will or trust can raise red flags. This may prompt scrutiny from the IRS or the Treasury Department. The government aims to prevent tax evasion and other illegal transfers. Let’s look at the seven clauses that can trigger such a review. Understanding these triggers is key for a smooth asset transfer.
1. Large Bequests to Non-U.S. Citizens
Leaving a large inheritance to a non-citizen spouse can limit the marital deduction. A non-citizen spouse could take the assets and leave the country to avoid U.S. estate taxes. To prevent this, such bequests often trigger a federal review. The government may require the executor to place the assets in a special trust (QDOT). This process ensures the IRS can collect estate taxes later.
2. Significant Gifts to Unregistered Charities
Many people leave large gifts to charity to reduce estate taxes. However, the gift only qualifies for a deduction if it goes to a registered 501(c)(3) charity. If you leave money to an unregistered group, it may trigger a federal review. The government wants to ensure the gift is not a disguised transfer to family. The IRS will then verify the charity’s official status.
3. Dynasty Trusts with Ambiguous Terms
People use dynasty trusts to hold assets for multiple generations. This shields the assets from estate taxes for a long time. While legal, the IRS gives these complex trusts close scrutiny. Ambiguous terms or too much beneficiary control can trigger a federal review. The government ensures the trust is not a shell entity and that it complies with tax rules.
4. Bequests Involving Offshore Accounts or Entities
Transferring assets to or from offshore accounts is a major red flag. These arrangements immediately trigger a federal review from the IRS and FinCEN. The government actively combats offshore tax evasion and money laundering. Consequently, executors face strict reporting requirements. For example, they must file an FBAR to disclose such assets.
5. Drastically Undervalued Asset Appraisals
An executor might try to use a low appraisal value to minimize estate taxes. This often happens with assets like real estate or a family business. However, the IRS knows this tactic well. An appraisal far below market value will trigger a federal review. The agency may then require a new appraisal and impose large penalties for the undervaluation.
6. Clauses that Disinherit the IRS
Some people include so-called “tax protestor” language in their wills. These clauses explicitly state an intent to pay as little tax as possible. While minimizing taxes is legal, language that defies tax law is a direct challenge. Such clauses trigger a federal review by signaling a non-compliant estate. This action invites the IRS to conduct a thorough audit.
7. Large, Last-Minute Deathbed Gifts
Lifetime gifts can reduce the size of your taxable estate. However, the IRS looks closely at the timing of these gifts. Large checks written to family just before death can trigger a federal review. The government will then investigate the deceased’s mental capacity. If the gifts were for tax avoidance, the IRS may “claw back” the funds into the estate.
Ensuring a Compliant Estate Plan
Navigating federal tax law is a critical part of estate planning. Government agencies now intensely scrutinize clauses they once overlooked. You must ensure your assets transfer efficiently. You also want to protect your executor from a lengthy federal audit. Therefore, working with experienced professionals is vital. A well-drafted plan is the best way to protect your legacy.
Are you concerned that your will or trust might contain clauses that could attract government scrutiny? Share your thoughts in the comments.
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