Can My Parents Gift Real Property To Me Directly From Their Living Trust?

 


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Question: I am not sure if this is the place, or if this question can be asked / answered here.

My parents have property / real estate currently held in a trust whereby they are both the Grantor and the Trustee. I am the Successor Trustee.

Is it possible to transfer ‘ownership’ of this property from that trust to me prior to their death?

I am aware there are several methods to do this. However, what we would like to do is simply transfer ownership (not sell), whereby I become the legal owner of this property.

Would the trust simply have to be changed whereby I am now the Trustee, hence, the owner?

Also, what might the tax considerations be when the property is transferred from one person to another without the property being bought / sold? Regards, W. F.

Answer: Dear W. F. - Yes, the property can be transferred from your parent's trust directly to you via a quit-claim deed. However, there are two things that you have to be concerned with: (1) will the property be “marketable" if you decide to sell it at a later date, and (2) what will the tax consequences be as a result of this transfer?

Let's look at the “marketability" issue first. By “marketability" I mean, will you be able to prove to a prospective buyer that you have good title to the property? A deed that comes from a living trust may not be acceptable unless the prospective buyer can also look at the trust instrument to see that the transfer of the property is authorized. Your mother and father could amend the trust instrument to authorize the transfer but, remember, as trustees they are acting in a fiduciary capacity. That means they aren't acting on their own behalf, they're acting on behalf of all the trust beneficiaries. If there are other beneficiaries of the trust, they would have a legitimate complaint if the property was given to you as a gift. To be safe, you'd probably want all the other beneficiaries to sign-off on the transfer. If I was to purchase this property from you ten years from now, I would want to know that the other beneficiaries didn't have a claim to the property.

Whether the deed to the property is a quit-claim deed or a warranty deed, a prospective buyer wants to know that he's buying good title to the property. In order to have that assurance, he'd want to see the trust instrument recorded along with the deed to the property, and he'd want a signed and notarized consent from all the other beneficiaries of the trust recorded on the land records as well. That's not something that most trust owners want to do.

You see, when you're taking title to real property, you want to be sure you can sell it later on for it's full value. Being able to show a good title to the property is vital to its marketability. When you take property from a trust, it gets a lot harder to prove good title.

There's a couple of other issues that you should be aware of when you take real property from a trust. If your parents have a title insurance policy on the property, you should check with the title insurance company to see if the policy will be canceled as a result of the transfer. It's likely that it would be canceled because you would not be a “successor in interest" under the policy. In that case, you would have to purchase another title insurance policy and pay the additional premium, or simply go without and incur the risk of having a defect in the title.

If your parents have an existing mortgage on the property that is being transferred to you, then you need to check with the lender before the transfer to see whether there is an existing due-on-sale clause. If there is, then the lender may try to call the loan when the transfer is made. The lender may be prevented from calling the loan, however, under the Garn-St. Germain Depository Institutions Act of 1982. Under §341(d)(6) of that Act, an exemption may apply in the case of a real property loan that is secured by a mortgage on residential real property where the spouse or children of the borrower become an owner of the property. You'd have to check to see if that exception applies in your case.

Now, let's look at the tax consequences of transferring the property directly from the trust. Since this is a gift, there will be no realization of capital gains or ordinary income on the transfer. You will, however, inherit your parent's tax basis in the property. This is the same result that would be obtained if the property was transferred directly from your parents.

From a gift tax perspective, however, there is a distinct disadvantage to transferring the property from the trust; that is, the annual gift tax exclusion (currently $12,000) would not apply because gifts from a trust do not qualify for the annual gift tax exclusion. If your parents have an estate large enough to be concerned with estate taxes, then they probably won't want to give up that annual exclusion because it would require that they use up that much more of their unified credit against estate and gift taxes.

You should be aware of state gift tax laws as well. Certain states, for example, only provide for a gift tax exclusion equal to the federal annual gift tax exclusion. If the federal annual gift tax exclusion is not available, then an actual gift tax will have to be paid in the year of the transfer. This alone will often kill the deal once it becomes known to the transferor.

As you might have gleaned from the above, there are some real disadvantages to gifting real property from a living trust. However, those disadvantages can be avoided entirely by simply transferring the real property back to the grantor (your mother and father in this case), then having them transfer the property directly to you.

By so doing, you avoid problems with a due-on-sale clause if there is a mortgage on the property. You avoid a termination of any title insurance policy on the property. You insure a prospective buyer that you have good title to the property without having to record the trust instrument and without having to obtain the blessings of the other trust beneficiaries. And, finally, your parents can claim the annual gift tax exclusion, which may save considerable estate taxes somewhere down the road.

In the final analysis, it may cost a few extra dollars to transfer the property back to your parents and then to you, but it will be well worth it.

Attorney Michael Pancheri is a practicing attorney and the founder and CEO of the Living Trust Network. You may contact him by email at info@livingtrustnetwork.com . You may also contact him at the Living Trust Network's web site. Its URL is http://www.livingtrustnetwork.com .

Copyright 2006. The Living Trust Network, LLC.

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