Planning for the Family Trust and Real Estate Assets
by Michael Trainotti
I have recently been involved reviewing a family trust executed by a husband and wife who owned a number of real properties besides the family residence. The husband died recently, and the family trust did not provide for his portion of the real estate to utilize either a decedent trust or marital trust (“A-B Family Trust”). Rather, everything is to be distributed to the wife under the terms of the family trust. The family wants to keep all of the real properties after the death of the wife.
Unfortunately, the assessed value of the non-residential properties is more than $1 million. As will be explained below, for property tax purposes there will be an increase in property taxes beyond the $1 millions of assessed value today when they are distributed to the children.
Under the Tax Cuts and Jobs Act (“Act”) that became effective January 1, 2018, a couple can now transfer $11,180,000 each for a total of $22,360,000 until December 31, 2025. Under the old law, if it was effective today, the same couple could have transferred up to $5,460,000 each or a total of 10,920,000 at the end of 2017.
Today, 99% of the population is not impacted by the estate tax, and the planning now turns toward the discussion of income tax planning for a step up in basis on both deaths and transferring non-residential real estate to children of up to $1 million of assessed value per parent.
If the family trust had non-residential properties of less than $1 million, the traditional A-B family trust would have been the best plan. For example, if there was no irrevocable B trust established on the death of the husband, and the total amount of all the non-residential real properties had assessed values of under $1 million, the wife could transfer the nonresidential real properties under the parent-child exclusion and the real properties would get a full step up in basis for income tax purposes. In the case I am describing, the total value of the estate is under $6 million. A Form 706 estate tax return will be utilizing a portability election made by the wife of her husband’s unused $11,180,000.
Since the family trust has more than $1 million in assessed value, the family trust needed to have irrevocable marital trust on the death of the husband so that when the wife dies there are two transferors of the $1 million each to their children for the parent child exclusion. The non-residential real properties would again get a full step up in basis for income tax purposes.
Unfortunately, the portability election will not create a marital trust to in order to have two transferors. Even if the family decided to go to court to modify the family trust to include a marital trust, it would not be respected by the assessor’s office since the husband did not create the marital trust.
This leaves the family with a difficult choice to make regarding the properties. To avoid any increase in property taxes, the wife needs to disclaim a portion of the properties to her children. If this choice is made, any increase in the value of the properties disclaimed between the husband’s death and the wife will be a loss. The disclaimer must be done by the wife within 9 months of the husband’s death. All of this could have been avoided with proper planning.
Michael Trainotti, Inc., A Law Corp
400 Oceangate, Suite 520
Long Beach, CA 90802
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