ADDITIONAL TAX TO CONSIDER
On January 29, 2014, the New York Department of Taxation and Finance, Office of Counsel issued an advisory opinion in regards to a question regarding transfer of personal property from the settlor (creator) of the trust to the corpus of the trust. More specifically, a party inquired if “substituting” personal property from the settlor of the trust to the trust itself triggers sales tax liability. New York law now considers the transfer of assets from the personal property of the settlor to the trust as a taxable event. While the legal logic is sound, this adds to the list of taxes that one may have to pay when creating or funding a trust. Depending on different factors, the settlor must address a gift tax on the money or assets transferred to a trust. Any amount gifted above $14,000 per year is taxable by both the federal government and New York. The trust must also pay taxes on any income earned.
NEW YORK SALES TAX
This scenario does not involve gifting, which has its own tax liability. The language used in the advisory opinion indicates that it speaks to a specific scenario, namely, when there is “a transfer of title or possession for consideration.” The logic that the New York Department of Taxation and Finance employed is simple. To exchange personal property to a trust involves a change in ownership, as the settlor and the trust are different legal entitites. At the same time, New York tax law imposes sales tax on the sale of every personal item, unless specifically exempt.
FURTHER LAYER OF COSTS
While previously a settlor thought that he or she could sell assets to the trust, without liability, or, just as important, without complication, now there is the need to address sales tax. What further complicates the matter is that New York City has its own sales tax of 8.875 percent while the rest of the state is at four percent. As such, the sale of a rental property for $1,000,000 now requires a payment of $40,000 dollars or $88,750 dollars, in addition to the various costs and taxes associated with real estate transfers.
California residents deal with similar issues to avoid the state’s high income tax. The manner in which it is accomplished is by converting a tangible personal item to an intangible. The settlor sells the property to an LLC, then passes the stock in the LLC over to the trust. This approach has already been addressed, at least in a peripheral way, two times in New York Division of Taxation and Finance advisory opinions. The advisory opinion of TSB-A-10(1)M, issued on April 8, 2010 approved of the avoidance of estate tax. While estate tax is obviously not sales tax, this opinion speaks to the same legal issues that are involved in analyzing whether or not sales tax applies, namely, location of the physical asset and transfer within New York state. The additional opinion of TSB-A-08(1)M, issued on October 24, 2008 addressed the same issue The larger lesson is that the LLC is a valid means to avoid tax liability.
Given the constantly changing nature of the law on estate planning, a consultation with an experienced estate planning attorney is well advised.