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 Member Update
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This means that 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, it may not be a good idea for parents and grandparents to rush into a transfer of property prior to the February 15, 2021 deadline without serious consideration of the ramifications of the transfer.
HERE’S A SOLUTION
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 owns rental property generates rent and lease income that is earned when the Apartment Building, Single-Family Residence, or Commercial Property) and, pursuant to section 643(b) of the Internal Revenue Code, defers the income tax liability in perpetuity -- as long as the income is added to the corpus of the Trust (meaning it is not distributed to Beneficiaries), and as 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, for example, by buying other properties, lifestyle, etc.
So, the current owner(s) of the property 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 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, if the capital gain is added to corpus and declared by the Trustee to be an Extraordinary Dividend, no capital gain occurs. 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 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.
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Gina Gaudio-Grace, PhD, JD is a Retired Attorney, Graduate of Notre Dame Law School (1991), a former Lead Note Editor of the Notre Dame Law Review, and she holds a PhD in Entrepreneurship and Business Strategy. Ms. Gaudio-Grace is also the Operations Manager and Business Development Director of Platinum Trust Group. Gina and their team of Trust Advisors and Tax Professionals are available to consult with you to determine if this proprietary Trust is a fit for your needs.
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APARTMENT AGE • JANUARY 2021 57
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