Property Taxes and Trusts

 

A common question for estate planning attorneys in Arkansas is what happens to property taxes when you transfer real property into a living trust.  The purpose of a living trust is to allow you to plan for the management of your property and other assets if you become incapacitated, as well as dictate how your property will be distributed after your death.  In most cases, when you transfer property into a living trust, the title of that property must be changed to reflect the trust as the new owner.  So how does that affect property taxes and trusts?

Transferring real property into a trust

When real property is re-titled and transferred into a living trust, there are a number of issues that must be considered.  First, the property will need to be reassessed.  The process of reassessment involves determining the current value of the real estate for the purposes of calculating property tax.  In most states, if you are the designated trustee of your living trust, your property will not be reassessed.  If this is the case, then the amount of your property taxes, which is based on the appraised value, should not change.  However, if you are subject to reassessment, then depending on the difference in the last assessed value of your property and the current value, your property taxes may change.

Other issues to consider

Along with the property taxes, any mortgage interest deductions you were able to deduct from your income taxes before the transfer should not change either.  Also, if the real property in your living trust is your residence, then there may be tax breaks available to you when you sell your home.  In fact, you should be able to exclude up to $250,000 of profit from the sale of your principal residence.  The exclusion is doubled for spouses who are co-owners.  Homestead rights, which protect the homeowner’s equity interest, will still apply to your trust property.  Another good thing to remember is that, if you have a due-on-sale clause in your mortgage, the clause cannot be enforced by your lender simply because the residence was transferred into the trust.

What if my real estate is not included in the trust?

Property that you do not title in the name of your trust, will be required to go through the court probate system upon your death.  If you have any property outside of the state of your residence, which is not included in your living trust, that property will be required to go through a separate probate proceeding called “ancillary probate.”

If you do not include assets that are owned jointly with your spouse, with a right of survivorship or by the entirety, that property may lose its estate tax exemption.  You can also run the risk of disinheriting your children or grandchildren, if they happen to be co-owners or tenants with you, and the property is excluded from your trust.

If you have questions regarding trusts, or any other estate planning needs, please contact Wilcox Attorneys, PA online or by calling us at (479) 443-0062.