Family Trusts and Property Tax Considerations

This article discusses the benefit of using the A-B family trust for property tax purposes when a couple owns rental property or properties that exceeds more than $1 million of assessed value for parent child exclusion. Each parent can transfer to their children either during their lifetime or on death up to $1 million of assessed value without having a change in ownership (“CIO’) for property tax purposes for a total of $2 million. The transfer of a family residence to a child has no limit on its value compared to a rental property with a $1 million limitation.

The American Taxpayer Relief Act of 2012 (“ATRA”) has given us a permanent set of estate, gift, and GST tax rules for the first time in more than a decade. In 2016, a couple can transfer up to $10.9 million without having to worry about their estate paying any estate taxes on the death the surviving spouse ($5.45 million per person). ATRA also unified the lifetime gift tax exclusion amount to $5.45 million.

Portability. ATRA provides for a portability provision between spouses that allows the unused $5.45 million exclusion amount of the first spouse to die to be used by the surviving spouse on his or her death, for a total $10.9 million. Prior to 2011, in order for a married couple to assure this outcome, they used the A-B family trust on the death of the first spouse to transfer his or her assets into a nonmarital trust in order for it not to be taxed on the surviving spouse’s death.

Today the question for married couples will be: do they want to continue with this type of planning or not? From a property tax standpoint only, the answer is yes since portability is merely an election on Form 706 for a deceased spouse’s estate return and not a separate marital or nonmarital trust.

Portability vs A-B Family Trust Example. If a couple had two separate rental properties that each had assessed values of $1 million and elected portability when the first spouse died (“deceased spouse”), on the death of the surviving spouse there would be a CIO since there was only one parent that transfer the two properties to their children totaling $2 million of assessed value. Contrast that to if separate marital or nonmarital trusts were utilized on the death of the deceased spouse and one of the two properties was transferred into either a marital or nonmarital trust. The deceased spouse would be the transferor for one property and the surviving spouse the transferor of the other property and avoided a CIO.

Despite the fact that a couple can transfer up to $10.9 million to their children under ATRA it, from strictly a property tax point of view, you still need two transferors to transfer rental properties that have assessed values beyond $1 million. This is often a major consideration when planning for couples that own rental properties and want to avoid CIO would be avoided.