Trust, real estate investment properties and the connection with tax laws

Transfer of estate properties to a Trust and its tax implications

Real estate investors and most families in the US own real estate properties for different purposes but in most cases, highly valuable estates are owned for investment purposes. Most people do transfer their investment property to a trust for benefits which include:

  • You no longer want to manage the real estate properties.
  • You want your family affairs to remain private and your heirs to avoid probate after you die.
  • You want to save on taxes, if possible.

First and foremost, we need to understand that every client (family or investor) circumstances are unique and we advise that you consult with your estate attorney or financial advisor before signing up for any type of trust.

Let’s discuss the various procedure or means of maximizing the benefits aforementioned:

To avoid probate or keep your family affairs private: This is one of the main benefits of creating a revocable trust. In this type of trust, you can name your spouse as a co-trustee or list one of your children as a trustee.

With this technique, you achieve three goals:

  • Your named co-trustee or successor trustee avoid the hassle of probate
  • Your family affairs remain private and
  • Your named co-trustee or successor trustee can manage your asset in a case where you are ill or incapacitated

How to save on taxes:

In an irrevocable trust, the properties do not remain in the estate of the grantor and as such are not subject to estate taxes. However, in a revocable trust, the estate remains in the grantor estate and could be subject to both state and federal estate taxes. The recent tax exemption amount for assets in the year 2018 stands at $11.18 million for an individual or $22.36 million for a married couple. This implies that if you have assets that amount above these figures, you are entitled to a reduction of taxable income.

Of course, this technique does not offer complete protection from taxes since the properties are still in your estate and usually you might still need to pay state estate taxes. Going by the fact that there a few intricacies and there is usually no-one-size-fits-all approach on maximizing these benefits, we advise that you consult with us for an experienced and expert guidance on trust and tax laws.

By gifting the properties outright or to an irrevocable trust: There would be federal gift tax if the gift amount is above the exemption amount when the gift is made. So, if the transfer was above $11.18 million, there would be a gift tax above the federal exemption amount and the grantor would have to complete a gift tax return.

On the technique of gifting, gifting of properties can actually come at a cost for your heirs due to the absence of stepped-up basis and capital gain tax they will have to incur whenever they decide to sell the property at the current market value. Conversely, if the properties were inherited, a high stepped-up basis can greatly reduce the beneficiary’s taxable capital-gain income when the beneficiary (heir) sells the inherited asset.

As you can see, the basis of the recipient of the asset may vary dramatically whether the asset is gifted during the donor’s lifetime or at death. Typically, it is best to gift assets which have a basis near fair market value while retaining assets that have a large built-in gain.

Estate and gift tax exemptions are constantly changing as new laws and regulations are passed. However, they hold the potential to significantly reduce your tax exposure. It’s best to consult with an experienced tax attorney who can answer your questions about estate and gift taxes, and any other questions you may have about how taxes can affect your estate.

IDIT: An Intentionally Defective Irrevocable Trust (IDIT) or an Intentionally Defective Grantor Trust (IDGT) is a useful estate tax planning instrument if arranged properly. It is set up to deliberately fail certain technical tests in tax law and it is approved by the IRS. For individuals looking to pass more assets on to their children and grandchildren, an IDIT could be the answer. With this technique, you may be able to limit estate taxes and also limit capital gain taxes for the property transferred to IDIT.

A successful implementation of an IDIT requires strategic planning and can be a complicated arrangement to some extent.

The transfer of properties to a trust, the benefits, tax laws amongst other subtle issues are major reasons you need an experienced and expert guidance before creating any type of trust. At Kathy Chan Real Estate Group, we have successfully worked with numerous clients based in San Francisco, Silicon Valley and abroad in evaluating their goals, and help in creating a befitting trust contract that maximizes benefits in line with your realistic estate goals within the confines of both federal and state tax laws. We offer a broad range of services which includes identifying and procuring appreciable investment properties in the San Francisco and Silicon Valley.

Visit our core service page to learn about us, what we do and how we can help you! Let’s work with you to earn what you really deserve.