Page 76 - amm1

Continued from page 74
residence to their children, their children only receive the lower assessed value (and lower property taxes) if they continue to use the property as their primary residence. Furthermore, if the property’s current fair market value at the time of the transfer to the descendants exceeds the parent’s assessed value by more than $1 million, the property will be partially reassessed.
So, under Proposition 19, if a parent chooses to transfer their home to their children during the parent’s lifetime, the children only enjoy the lower property taxes if they move into the home with their parents! This may not be practical, feasible, or desirable for many adult children who have families of their own to think of, or who have jobs in other states or outside the area of their parents’ homes.
If a parent transfers
a property to a child
at the time of the
parent’s passing
(whether through a Will
or a Trust), the child
automatically receives
the property for income
tax purposes at the
then current fair market
value (or fair market
value measured up to
6-months from the date of death) in what is called a “step-up in basis.”
But if the parent makes an “inter vivos gift” to a child during the parent’s lifetime, the child will receive the real estate at the parent’s original basis for tax purposes. Accordingly, when the child decides to sell the property, the child will be responsible for capital gains taxes on the sale amount less the parent’s original basis. This could cost the child hundreds of thousands to millions of dollars in additional capital gains taxes.
So, how can Apartment Owners transfer their holdings to their heirs without triggering a reassessment and without making their heirs responsible for a mountain of capital gains taxes? The solution is to use a highly specialized type of “Non-Grantor Trust” that is not self-settled and that names the current owner as the Beneficiary (or one of several Beneficiaries). With this type
of specialized Trust, the Trust is able to earn income from passive activities the Trust would own investment properties, (such as rent and lease income that is earned from apartment buildings, single-family residences, or commercial property) and, pursuant to Section 643(b) of the Internal Revenue Code, defer the income tax liability in perpetuity -- so long as the income is added to the corpus of the Trust (meaning it is not distributed to trust beneficiaries), and so long as the trustee uses his or her discretion to declare the income as an extraordinary dividend. (The Trustee can still use the income for the Trust’s benefit, such as for buying other properties, lifestyle, etc.)
So, the current owner(s) of the property placed into trust would have a Non-Grantor, Irrevocable, Discretionary Trust that is not self-settled
established by a third- party settlor, and have the settlor name the current owner as a beneficiary. The current owner would then sell the property to the Trust and record that sale with the county without triggering a reassessment under Proposition 19.
The current owner’s heirs can then be added to the trust at any time. With this type of trust, the trust maintains the ownership of the property at all times, causing the capital gains that occur on a future sale to a third party to belong to the trust, not the heirs. Although the trust has the same basis as the current owner(s), this causes no issues for the trust because, under Section 643(a) (3) of the Internal Revenue Code, so long as the capital gains are added to corpus and declared by the trustee to be an “extraordinary dividend,” no capital gains occur. This means that neither the heirs nor the trust will have to pay capital gains taxes upon the sale of the property.
This highly specialized type of trust is the subject of 58 copyrights and is proprietary to Platinum Trust Group. You can learn more about how it can help you mitigate taxes and have ironclad asset protection by watching the livestream replay at www.PlatinumTrustGroup.com/AAGLA.
“...under Proposition 19, if a parent chooses to transfer their primary residence to their children during the parent’s lifetime, the children only enjoy the lower property taxes if they move into the home with their parents!”
76 JUNE 2021 - APARTMENT MANAGEMENT MAGAZINE AMM1/6