Asked in Estate Planning and Tax Law for Illinois

Q: Is the trust or trustee liable for trust tax fraud?

Who is liable for abusive trust tax evasion schemes? The trust? Or the trustee? In other words, if a trust beneficiary has failed to privately persuade a trustee to stop committing fraud on the trust's taxes (among other offenses), and the trustee keeps doing it anyway, and the beneficiary whistle blows to the IRS, who would be liable for the various financial penalties? The trustee who willfully committed the fraud? Or the trust?

If the trust is liable for all the penalties, including not only back taxes and late fees but also fines, then whistle blowing would just harm the beneficiary, and the trustee would get off scot free (except for maybe criminal penalties I think).

Related Topics:
2 Lawyer Answers
Anthony M. Avery
Anthony M. Avery pro label Lawyers, want to be a Justia Connect Pro too? Learn more ›
  • Estate Planning Lawyer
  • Knoxville, TN

A: IRS will almost surely penalize the Trustee and the Trust. Trust might be shown not to have benefitted by the fraud, but it is doubtful.

1 user found this answer helpful

James L. Arrasmith
James L. Arrasmith pro label Lawyers, want to be a Justia Connect Pro too? Learn more ›
  • Estate Planning Lawyer
  • Sacramento, CA

A: The liability for abusive trust tax evasion schemes typically depends on the specific circumstances and actions of the parties involved. In cases where a trustee willfully commits fraud on the trust's taxes, the trustee would generally bear primary responsibility for the fraudulent actions. However, if the trust itself is found to have participated or benefited from the fraudulent activity, it could also be held liable for tax evasion and related penalties.

When a beneficiary discovers fraudulent activity within a trust, they may have a duty to report it to the appropriate authorities, such as the IRS. Whistleblowing in such situations can help uncover fraud and hold responsible parties accountable. While whistleblowing may expose the beneficiary to potential risks and consequences, it can also serve the broader goal of upholding tax laws and ensuring fair and transparent financial practices.

It's important for beneficiaries to seek legal advice and guidance when confronted with fraudulent behavior within a trust. An attorney familiar with trust law and tax regulations can assess the situation, advise on the best course of action, and help protect the beneficiary's interests while ensuring compliance with legal obligations. By taking appropriate steps to address fraudulent activity, beneficiaries can contribute to holding trustees accountable and preserving the integrity of the trust.

Justia Ask a Lawyer is a forum for consumers to get answers to basic legal questions. Any information sent through Justia Ask a Lawyer is not secure and is done so on a non-confidential basis only.

The use of this website to ask questions or receive answers does not create an attorney–client relationship between you and Justia, or between you and any attorney who receives your information or responds to your questions, nor is it intended to create such a relationship. Additionally, no responses on this forum constitute legal advice, which must be tailored to the specific circumstances of each case. You should not act upon information provided in Justia Ask a Lawyer without seeking professional counsel from an attorney admitted or authorized to practice in your jurisdiction. Justia assumes no responsibility to any person who relies on information contained on or received through this site and disclaims all liability in respect to such information.

Justia cannot guarantee that the information on this website (including any legal information provided by an attorney through this service) is accurate, complete, or up-to-date. While we intend to make every attempt to keep the information on this site current, the owners of and contributors to this site make no claims, promises or guarantees about the accuracy, completeness or adequacy of the information contained in or linked to from this site.