Estates & Wills & Trusts

Estate planning and tax: A cautionary tale

By Ian Hull

Much of the estate planning process involves minimizing taxes that might otherwise be due and payable from one’s estate upon death. On occasion, however, the end goal of attaining large tax savings has been known to entice people to bend the rules a bit too far.

A recent article written by Ben Steverman titled “The Estate Tax Dodge That Went Too Far” highlights one such example.

The article involves the estate of Julius Schaller, a wealthy businessman who once owned a grocery business in Philadelphia called J. Schaller & Co. Steverman describes that when Schaller died in 2003, his executors set up a $2.6 million dollar scholarship fund called the “Educational Assistance Foundation for the Descendants of Hungarian Immigrants in the Performing Arts, Inc.” The $2.6 million dollar donation provided enough of a deduction to reduce Schaller’s estate’s tax bill to zero.

A year after Schaller’s death, the foundation awarded its first two scholarships – one to Schaller’s niece and one to Schaller’s nephew. Each of the niece and nephew got another set of scholarships the next year, as did another Schaller relative.

Steverman describes how the IRS cried foul and litigation that subsequently ensued. The foundation’s lawyers argued that the scholarship was technically open to all eligible descendants of Hungarian immigrants; however, the foundation never followed through on promises to advertise the scholarship in newspapers. While the foundation did send information to Scholarships.com and Fastweb.com in 2007, this was only after the IRS had commenced a formal audit.

On July 1, U.S. District Judge Reggie B. Walton ruled the foundation wasn’t a legitimate tax break. He held that “[t]he Foundation’s activities contravened the law in such a blatant and egregious manner that the Court could not come to any other conclusion.”

There are many ways to minimize estate taxes in Canada, several of which we have outlined in a previous blog post which can be viewed here. Setting up a foundation, a charity or a scholarship fund can certainly minimize estate taxes if properly structured and carried out.

It is important to remember that executors can be found personally liable for losses they cause the estate. As such, if you’re acting as an executor it is important that you seek proper guidance from knowledgeable professionals when making investment decisions or contemplating tax minimization strategies. As illustrated above, tax minimization can quickly become tax avoidance if not properly structured or carried out!

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