When my oldest daughter Gabi was just two years old, I knew that she had a bit of my tax lawyer instincts to find loopholes in the law. Gabi wanted to eat a small muffin while watching one of her favorite television shows. The tiled kitchen floor was adjacent to the living room and television, but she knew that she wasn’t allowed to bring food onto the carpeted floor.

“You know you can’t take that into the living room,” I scolded Gabi as she eyed the muffin, while longingly looking at the room with the television. A slight smile formed on her face, and out of the corner of her eye she looked my way while gingerly picking up the muffin. “You have to eat that while in the kitchen,” I continued, “so we won’t have crumbs on the carpet.”

Now with a large grin, Gabi opened her mouth wide and shoved the entire muffin in. With a big smile (and full mouth) she skipped into the room, satisfied that she had her cake and ate it, too. I just had to laugh.

It’s the human instinct, isn’t it? None of us like being told what we can and cannot do. We’ll look for a way to circumvent the rules whenever we can. Tax lawyers, especially, are keen on finding ways to maneuver through complex laws to benefit our clients.

But there is a difference between finding a legitimate loophole in the law and simply breaking the rules. Take the gift tax laws, for example. The tax code provides that we can gift up to $12,000 annually to any beneficiary. Gifts totaling above that amount during a calendar year to any particular beneficiary requires us to file a gift tax return, lowering our lifetime exemption amount, or if that amount has been consumed, actually paying gift tax.

More than just a few times a year, a client will tell me that he will want to transfer some large asset but not follow the rules. “I’ll just sell the lake house to my son for one dollar,” they’ll declare, thinking that they’ve outsmarted the IRS man.  I then break the bad news that the sale for a $1 is considered to be a gift to the extent that the transaction was less than what one would sell the home to a nonrelated person.

Another classic example of people believing that they can outsmart the tax man is with relation to giving collectibles, valuables or jewelry.  One client of mine told me that she wrote the names of her children on post-it notes and affixed those notes to the back of valuable artwork hanging in her home. “I told the kids that each of those paintings is theirs, so after I die they should come into the house and take the artwork off my wall.”

“The IRS doesn’t consider that a lifetime gift and the artwork will still be included in your estate,” I told her. You actually have to part with control over the artwork in order for it not to be counted as part of your estate.

“But how will they ever know?”

I ask whether she had the artwork insured. The IRS knows that folks try to get out of declaring these sorts of valuables on gift tax and estate tax returns, so they often ask for a copy of the decedent’s homeowner’s policy. The IRS knows to look for policy riders that cover valuables. If the rider is in place, they consider the insured asset yours whether you gave it away or not.

So are there legal loopholes? Sure there are. Some loopholes are even sanctioned by the tax code. Qualified personal residence trusts and charitable trusts come to mind.

Are there valid loopholes that the tax code doesn’t specifically authorize? Yep. Irrevocable life insurance trusts and certain family limited partnerships are both examples of loopholes the IRS doesn’t like but have found success. In the former, the IRS doesn’t much like the fact that you can qualify premium payments as gift tax free, but they have lost enough cases to acquiesce to that type of transaction. Family partnerships are a bit more problematic in that they are much closer to “the line”. It’s almost impossible for laymen to navigate partnerships successfully without the assistance of a qualified professional. Those willing to employ a good tax lawyer may find success with that technique.

So if you think that you have a sure fire way to fool the tax man, you should think again. Chances are, the bright idea you had to get around the tax law has been tried by a few thousand people before you. Unsuccessfully, I might add. So be careful out there. Ignorance of the law isn’t considered a valid excuse, and the IRS has heard more excuses than a fifth grade teacher when asking students why they haven’t turned in their homework.

As for Gabi? She’s a teenager now. Need I tell you whether she’s still trying to figure out ways to get around the rules?