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The line between sharing helpful information and “affinity fraud” is very thin when well-meaning friends and colleagues share bad information.
My regular readers know that while I cover many different specifics of asset protection for physicians, I have several consistent core themes. One theme is that asset protection takes many forms, including using legal tax avoidance strategies to maximize what you can keep. A second recurring theme is avoiding activities that generate risk and using appropriate due diligence when implementing any tax strategy, so you are not committing tax evasion without consulting with your own experts and creating greater losses. In other words, talk to your own expert advisors to avoid committing tax fraud.
Part one of our discussion provided the generally applicable basics about all tax plans and your liability as the tax-payer. Part two provided twelve specific schemes on the I.R.S. dirty dozen list. In part three, we examine several strategies that doctors often recommend to each other. Unfortunately, the line between sharing helpful information and “affinity fraud” is very thin when well-meaning friends and colleagues share bad information, bad planners, or both, with good intentions. All of these strategies have significant costs and are exceptionally fact specific. What (they think) worked for them may not work for you.
What is it?
In the most simple terms, a conservation easement allows property owners to separate various rights associated with ownership of a specific piece of real estate (like land development, subdivision, historical preservation of landmarks and architecture, water and mineral rights, etc.) and give those to some qualifying organization that wants to see some specific feature “conserved.”
What are the benefits?
If done right, the easement generates a tax-deductible gift that may reduce income tax. The restriction in a valid easement may also reduce property taxes and can also sometimes reduce estate taxes by reducing the value of an estate because the subject property can’t be freely developed or changed.
How it goes wrong
Again, the issue here is not that easements are inherently illegal or abusive, at least not yet (remember, what’s legal today may not be in the future). Rather, it’s that they can be abused by bad planners, bad clients, and bad facts when they don’t comply with the law.
As always, the first place to look for clues about the compliance of your plan should be the taxing authority itself. Here are five specifics the IRS doesn’t like, in their owns words. I’ve simply added emphasis (see underlined text) for clarity:
Background - Abusive Transactions Involving Charitable Contributions of Easements
In recognition of our need to preserve our heritage, Congress allowed an income tax deduction for owners of significant property who give up certain rights of ownership to preserve their land or buildings for future generations.
The IRS has seen abuses of this tax provision that compromise the policy Congress intended to promote.
1. We have seen taxpayers, often encouraged by promoters and armed with questionable appraisals, take inappropriately large deductionsfor easements.
2. In some cases, taxpayers claim deductions when they are not entitled to any deduction at all(for example, when taxpayers fail to comply with the law and regulations governing deductions for contributions of conservation easements).
3. Also, taxpayers have sometimes used or developed these properties in a manner inconsistent with section 501(c)(3).
4. In other cases, the charity has allowed property owners to modify the easement or develop the land in a manner inconsistent with the easement’s restrictions.
5. Another problem arises in connection with historic easements, particularly faÃ§ade easements. Here again, some taxpayers are taking improperly large deductions. They agree not to modify the faÃ§ade of their historic house and they give an easement to this effect to a charity. However, if the faÃ§ade was already subject to restrictions under local zoning ordinances, the taxpayers may, in fact, be giving up nothing, or very little. A taxpayer cannot give up a right that he or she does not have.
As stated, this strategy, like the others we will continue to examine in our next installment, is fact specific to the subject property, the organization it is being donated to, and the deductions actually being taken.
Attorney Ike Devji has practiced in the areas of asset protection, risk management, and wealth preservation law exclusively for the last 15 years. He helps protect a national client base with over $5 billion in personal assets that includes serval thousand physicians and is a contributing author to multiple books for physicians and a frequent medical conference speaker and CME presenter.