Does Putting Property in an Irrevocable Trust Trigger Reassessment
Transferring property into an irrevocable trust may present estate tax planning benefits and asset protection opportunities as well as Medicaid eligibility advantages. Within this context, one of the initial questions raised is whether such a transfer would result in a reassessment alongside higher property taxes. The answer changes in accordance with state-specific property taxation practices and the nature of the transfer.
When Property Tax Reassessment Might Occur
A reassessment is triggered by property transfer in many states. However, there are specific exemptions that might be applied. Reassessment may be influenced by the factors presented below:
- Ownership Change: Property tax laws define placing a property in an irrevocable trust as a change in ownership and it could result in a reassessment at the current market value.
- Beneficiary Designation: If the trust designates a beneficiary other than the grantor or the grantor’s spouse, reassessment is more likely.
- State-Specific Exemptions: Some states may allow exclusions if the transfer is between close family members like parent-to-child transfers under specific legal provisions.
- Medicaid Planning and Trusts: If the trust is used for Medicaid planning, property tax rules may vary depending on the structure as well as the purpose of the trust.
Property Reassessment May Be Prevented
Certain scenarios allow a property to be placed in an irrevocable trust without resulting in a tax reassessment as outlined below:
- Retained Beneficial Interest: If the grantor remains a beneficiary with specific rights, reassessment may not apply in some jurisdictions.
- Transfers to a Living Trust First: Some property owners first transfer assets into a revocable trust before converting it into an irrevocable trust in order to avoid immediate reassessment.
- Parent-to-Child Transfers: Some state laws like California’s Proposition 58 (prior to 2021) provided reassessment exclusions for property transferred between parents and children.
Tax Implications Beyond Reassessment
Property tax reassessment is definitely an important factor. Yet, other tax implications should also be considered as listed below:
- Gift Tax Implications of Irrevocable Trusts: The IRS may consider the transfer a taxable gift and it may be subject to annual and lifetime exemptions.
- Estate Tax Planning Benefits: Property held in an irrevocable trust is generally removed from the grantor’s taxable estate and might reduce estate tax exposure.
- Capital Gains Tax on Irrevocable Trusts: Beneficiaries might not receive a step-up in basis upon the grantor’s passing and may increase tax burden in terms of capital gains when the property is sold.
- Income Tax on Irrevocable Trusts: Trust income could be subject to high federal tax rates if not distributed to beneficiaries in an effective manner.
Conclusion
Placing property in an irrevocable trust may be a smart strategy in the context of estate planning. However, property tax reassessment should be acknowledged as a fundamental aspect. Taxation experts can present professional assistance in order to align with long term goals when transferring property into a trust.
