Living trust property transfer question.

[hotrodjohn71]

What is the name of your state? CALIFORNIA
Living trust property transfer question.

I am a beneficiary of a property in my parents living trust.
I am wanting to know if I can directly transfer this to my son and what that would require.
The property also has a mortgage of about $40,000 which was a home equity loan.
How can this be done efficiently and at least cost?

Thank you

 

[Taxing Matters]

I am wanting to know if I can directly transfer this to my son and what that would require.

I'm not 100% clear on what you are asking. Are you wanting to have the property that is in your parent's living trust not go to you at all when the last parent dies and instead skip over you to your son? The most direct way to accomplish that is to ask your parents to change the trust (I assume the trust is a revocable living trust commonly used in CA for estate planning) to give the house to your son instead of you or to remove it from the trust and set up a beneficiary deed that transfers the home to him once they die.

In a typical revocable living trust the beneficiaries are simply given their share of the trust promptly after the last of your parents die. In that case, if your parents don't change the trust, you may also disclaim your interest in the trust property within nine months from when you become entitled to the property (i.e. within 9 months after the last parent dies and the trust becomes irrevocable). That nine month period is significant because that's the limit set in CA law to do it and because if you don't disclaim an inheritance or trust distribution within that time you could end up with gift tax issues when you pass the property to your son.

A disclaimer of your interest results in the beneficiary of the trust property being determined as though you had predeceased your parents. You don't get to select who gets the property if you do a disclaimer, however. If the trust specifies an alternate beneficiary if you predecease your parents, that's who would get your share. If it doesn't have an alternate beneficiary then who gets it is determined by CA intestate succession law (the law that determines who gets property from a will or trust if no beneficiary is specified who is still living). Under intestate succession law, your son will get it if you aren't married at the time the last of your parents die and your son is the only descendant you have still living. You'd want to consult a probate or trust attorney to determine the exact effect of your disclaimer at the time the last parent dies before making the disclaimer because the facts and law at the time the last parent dies will determine where the trust property goes. You want to be sure you understand the effect of the disclaimer before you give up that property.

 

[hotrodjohn71]

Thank you for your reply, I greatly appreciate it.

Yes this is a revocable style living trust whereby it can be changed regarding beneficiary, and yes, I want this house to skip over me and go directly to my son, however I have little faith that it will be changed into his name because of my mother's health at this stage.

She wants to change the name but has yet not gotten to it. And I do not want to refuse it because my understanding is it will go to the next of kin (my brother) and she does not want that, she would rather it go to my son but I'm trying to plan for what I will have to do in case the name is never changed.

Since that property has that loan amount against it, will that loan debt just go right along with the property? Or will it have to be paid off before it transfer can occur?

I'm trying to orchestrate this so that it saves all kinds of transfer fees or other Associated fees if the property should go into my possession first and then I try to transfer it into my son's possession.

 

[adjusterjack]

Since that property has that loan amount against it, will that loan debt just go right along with the property? Or will it have to be paid off before it transfer can occur?

Intrafamily transfers do not generally activate the "due on sale" clause.

But you will want to read the loan contract to make sure.

 

[Zigner]

Intrafamily transfers do not generally activate the "due on sale" clause.

But you will want to read the loan contract to make sure.

Assuming the property meets the requirements, the Garn-St. Germain Depository Institutions Act trumps contract terms:

https://www.law.cornell.edu/uscode/text/12/1701j-3

 

[adjusterjack]

I like to know which terms are getting trumped. But that's just me.

 

[hotrodjohn71]

Would I as the giver have to pay the gift tax, or would my son at the recipient have to pay?

 

[Zigner]

I like to know which terms are getting trumped. But that's just me.

I thought you'd be able to infer it

In any case, I was referring to your comment on intra-family transfers. Any due-on-sale clause in the contract is trumped by the law with regard to intra-family transfers.

 

[adjusterjack]

Would I as the giver have to pay the gift tax, or would my son at the recipient have to pay?

All you need to know about gift tax is at the IRS website:

Frequently Asked Questions on Gift Taxes | Internal Revenue Service (irs.gov)

 

[LdiJ]

All you need to know about gift tax is at the IRS website:

Frequently Asked Questions on Gift Taxes | Internal Revenue Service (irs.gov)

That is an exceptionally thorough FAQ regarding gift taxes. If someone can't find the info they want there, it likely doesn't exist.

 

[hotrodjohn71]

Thank you

 

[Taxing Matters]

She wants to change the name but has yet not gotten to it. And I do not want to refuse it because my understanding is it will go to the next of kin (my brother) and she does not want that, she would rather it go to my son but I'm trying to plan for what I will have to do in case the name is never changed.

Now that you mention having a brother, that does make a difference. The details of your family tree at the time your mother dies would be important if the trust does not name an alternate beneficiary for the house. It may well be that your brother would end up with it.

Since that property has that loan amount against it, will that loan debt just go right along with the property? Or will it have to be paid off before it transfer can occur?

Under federal law, if the property transfers to a child of the decedent a lender may not enforce the provision of a loan that allows the bank to call the entire loan due when the property is transferred. Others have already mentioned that law, the Garmin-Saint Germain Depository Instiutions act of 1982 (12 U.S.C. § 1701j-3).

If you take the property and then give it your son, any federal gift tax that may be owed would be paid by you. If that occurs on or before 12/31/2025 you'd likely not owe any gift tax but would have to file a federal gift tax return (Form 709). That's because the current gift and estate tax unified credit allows you to pass $13.6 million dollars in taxable gifts during your lifetime and not pay any tax. Instead, the taxable portion of the gift will just reduce that credit. After 2025, the unified credit will go back down to what it would be under law prior to the tax bill that passed in December 2017 (which is half of what it is now). So unless you plan to give away more than about $6.5 million in gifts over your lifetime the gift tax would not be a concern here, assuming that Congress does not change the law in 2025 to cut the unified credit amount even lower, like back to what it would have been under the law in 2001 (as a few of the most liberal members of Congress have suggested). I don't think that likely. If any change is made, it's more likely to be making the current rules permanent rather than making the law even worse than the cut that will happen automatically starting 01/01/2026.

Right now, I'd expect California property taxes and real estate taxes may be the greater tax concern. The state and a number of local governments are facing some serious budget problems and they'll be looking for ways to raise more revenue. They may look to real estate property tax and tranfer tax increased to foot some of that bill. No telling now how that's going to go.

 

[Taxing Matters]

That is an exceptionally thorough FAQ regarding gift taxes. If someone can't find the info they want there, it likely doesn't exist.

Unfortunately, that FAQ only covers the major highlights of the gift tax and there are lot of details to the gift that are important to know if you're one of those persons fortunate enough to be in a position to make millions of dollars in gifts. That's when seeing a tax attorney or other tax professional who is very familar with federal gift and estate tax is really important to do some planning to minimize the tax paid.

 

[LdiJ]

Unfortunately, that FAQ only covers the major highlights of the gift tax and there are lot of details to the gift that are important to know if you're one of those persons fortunate enough to be in a position to make millions of dollars in gifts. That's when seeing a tax attorney or other tax professional who is very familar with federal gift and estate tax is really important to do some planning to minimize the tax paid.

Oh yes, I do agree that if you are someone who is in that kind of position that you need to consult a professional! Most of those people are not going to come to a website like this in the first place though. However, for the ordinary person those FAQs are very thorough.

 

[Taxing Matters]

Oh yes, I do agree that if you are someone who is in that kind of position that you need to consult a professional! Most of those people are not going to come to a website like this in the first place though. However, for the ordinary person those FAQs are very thorough.

Sadly even some people with millions of dollars are clueless and go to the internet with questions rather than doing the sensible thing and paying the appropriate professional to advise and assist them. I've seen a number of people over the years who, whether by luck or frugality have accumulated a lot of wealth, but they still have the mindset of someone with much more modest means. They don't realize how much of a difference hiring a professional can make. The fees they pay now for that advice are rewarded many times over with money and aggravation saved in the future. I know you know that, but just in case someone in that situation happens to land here, maybe this comment will get them thinking about this more.