How the NY Attorney General’s Lawsuit Against Trump Speaks to Estate Planning Issues

I watched the New York Attorney General Letitia James’ news conference with keen interest since much of what she accuses Donald Trump and his adult children of is fraud in their asset valuations. When completing a loan application, it’s common to provide a Personal Financial Statement (PFS) valuing one’s holdings so that the bank can rest assured there is enough collateral to justify the loan transaction.

In this civil case, the allegations include fraudulently elevating the values of various assets, including his Trump Tower apartment ($327 million vs. $37 million), tripling its true square footage, adding multiples to the appraised value of Trump’s Mar-a-Lago residence ($739 million vs. $75 million), and a dozen rent stabilized apartments, appraised at $750,000, but valued at over $49.5 million to the banks.  All told Trump’s inflated values added hundreds of millions to his net worth.

What’s interesting is that for tax purposes, low valuations are often desired. Property taxes, for example, are based upon assessed value. The tax is calculated by multiplying millage rates to the assessed value. The higher the assessed value, the higher the tax.

Taxpayers also desire low valuations when paying transfer taxes, which include gift, estate and generation skipping transfer tax. When assets are transferred, the fair market value of the asset is multiplied by the tax rate to arrive at the amount of transfer tax exemption that is consumed, or once the exemption is fully consumed, to calculate the amount of tax due.

Loan applications are normally not public documents, so taxing authorities like the IRS don’t have access to what individuals report to banks in these types of transactions. Instead, taxpayers normally employ estate planning attorneys and appraisers to legally decrease the value of assets for transfer tax purposes.

The IRS defines tax fraud as “the willful and material submission of false statements or false documents in connection with an application and/or return. To make this determination, investigators will look for any indicators of fraud such as but not limited to underreporting income, underreporting values for transfer tax purposes, using a false Social Security number, falsifying documents, intentionally failing to pay taxes.

If criminal tax fraud isn’t pursued, the IRS may still claim negligence and assess interest and penalties adding twenty percent (20%) or more to the demand for underpayment.

There are lessons to be learned here. When creating PFS for a bank where you’re seeking a loan, it’s important to have the ability to justify the valuations you’re reporting. In most lending transactions, the bank could call the loan if it discovers that the applicant fraudulently inflated values. Likewise, when reporting values for gift tax or estate tax returns, it is equally important to have verified appraisals created by a professional familiar with the transfer tax rules.

The legal documents should also be fashioned to promote discounted valuations. This is an ever-evolving area of the law, as the IRS detests this planning as it legally lowers the amount that taxpayers ultimately pay in transfer taxes. Court cases come out all the time. Various administrations have attempted to rewrite the tax law to limit valuation discounts.

Ultimately, it will be informative to learn how Trump reported these assets used inside of any estate planning strategies. Now that federal and state taxing authorities have access to the valuations he reported to obtain financing, they can compare those valuations to the ones that he used when filing gift tax returns.

©2022 Craig R. Hersch,  Sheppard Law Firm Learn more at www.floridaestateplanning.com