[WSBAPT] RE Excise Tax question

Mon May 23 12:12:26 PDT 2016

Thank you for your insights, John.

From: wsbapt-bounces at lists.wsbarppt.com [mailto:wsbapt-bounces at lists.wsbarppt.com] On Behalf Of John Creahan
Sent: Thursday, May 19, 2016 5:53 PM
To: WSBA Probate & Trust Listserv
Subject: Re: [WSBAPT] RE Excise Tax question

Hi Eden,

Forgive me for jumping in late, but it seems to me that your client is making things more complicated than they are. I am not an accountant or even a real tax attorney, so take this discussion with a grain of salt. 

I assume that your client is the surviving spouse and trustee of the marital trust. I have been told (but never researched) that, unless the trust document says otherwise, a trust’s income beneficiary who resides in a trust-owned house pays the operating costs, such as utilities, taxes, insurance, etc. If so, it may have been improper for the trust to “borrow” from the trustee to pay those costs.

The mortgage raises more complicated questions, although I see two issues. First, did the trust actually have any mortgage liability? It seems likely that the surviving spouse was the sole borrower. In addition, do you know whether the surviving spouse deducted all of the mortgage interest (and real estate taxes) on his personal return, or only 50%? A 100% deduction would be inconsistent with the idea that the trust was paying its share. 

This structure appears to have negative income tax consequences. I believe, as someone else mentioned, that exchanging the property for the notes will be a taxable “sale” by the trust, at least to the extent that the trust has equity in the house, creating an income tax liability (at trust income tax rates). Cancellation of other notes may create COI income. 

It also raises fiduciary concerns. If the trust’s remainder beneficiaries are the children of your client and his deceased spouse, it may not matter whether his estate or the trust owns the house at his death (although the extra taxes may reduce the inheritance). If the remainder beneficiaries are adverse to the trustee, they may have legitimate concerns about this approach. 

I may be missing something here, but I hope this helps.

John

John Creahan

206-621-5848
 <http://www.cairn-law.com/> www.cairn-law.com

From: wsbapt-bounces at lists.wsbarppt.com [mailto:wsbapt-bounces at lists.wsbarppt.com] On Behalf Of Eden Rubenstein Toner
Sent: Thursday, May 19, 2016 4:07 PM
To: 'WSBA Probate & Trust Listserv' <wsbapt at lists.wsbarppt.com>
Subject: Re: [WSBAPT] RE Excise Tax question

Thank you all for the discussion.  Fyi--Rent is not in play because it would have been paid back to client as the income beneficiary anyway.

Eden

From:  <mailto:wsbapt-bounces at lists.wsbarppt.com> wsbapt-bounces at lists.wsbarppt.com [ <mailto:wsbapt-bounces at lists.wsbarppt.com> mailto:wsbapt-bounces at lists.wsbarppt.com] On Behalf Of Mike Winslow
Sent: Thursday, May 19, 2016 9:15 AM
To: 'WSBA Probate & Trust Listserv'
Subject: Re: [WSBAPT] RE Excise Tax question

Your points on the additional tradeoffs for rental value are well taken. I was looking at the facts as presented, and not beyond. I bet Eden would have addressed that, but worth considering as part of the general discussion. Loved your comment about tax attorneys.

Michael A. Winslow

1204 Cleveland Ave.

Mount Vernon, WA 98273

Ph. 360-336-3321

Em.  <mailto:Mike at winslegal.com> Mike at winslegal.com

This message is from an attorney, so it’s confidential. If you are not the intended recipient, it’s too late to stop reading this message, but you may not use it for any improper purpose. Huge Disclaimer available upon request.

From:  <mailto:wsbapt-bounces at lists.wsbarppt.com> wsbapt-bounces at lists.wsbarppt.com [ <mailto:wsbapt-bounces at lists.wsbarppt.com> mailto:wsbapt-bounces at lists.wsbarppt.com] On Behalf Of Martin Silver
Sent: Wednesday, May 18, 2016 9:09 PM
To: WSBA Probate & Trust Listserv
Subject: Re: [WSBAPT] RE Excise Tax question

my first point says one can fill out the affidavit without reference to mortgage debt assumption or taking subject to, but my second point, cod, is consideration, as I say.  So one can argue I am fudging a bit.  But I have seen transactions where some matters are handled outside escrow and thus not part of the closing record, especially perhaps where the borrower and the lender are the same person.  Moreover, we haven’t looked at the comparison between fair rental and the amount for mortgage payments, tax insurance etc.  I wonder if the trust really owes the client anything or whether the rental value should be written to full value in exchange for client paying the freight on the property, so that the note is voided out, all nunc pro tunc of course.  But I suppose the client is not in a position to acknowledge that he is getting the trust property for zero real consideration.  I guess I am spinning my wheels a bit– but to paraphrase George Mallory on the motive for climbing mountains “why does a tax lawyer want to avoid taxes? – because they are there!”  

From:  <mailto:mike at winslegal.com> Mike Winslow 

Sent: Wednesday, May 18, 2016 5:14 PM

To:  <mailto:wsbapt at lists.wsbarppt.com> 'WSBA Probate & Trust Listserv' 

Subject: Re: [WSBAPT] RE Excise Tax question

Martin,

The relief from Debt by the trust in exchange for the one half interest conveyed to the lender is ‘consideration’ under the WACs, regardless of whether the debt is secured or not. The transfer is not a true gift, bc there is relief from debt for the transferor.  YOU might sneak it through bc there is no record of a loan. But, If the DOR audits this transaction, without there being excise tax paid, I would wager interest and penalties will be charged to Transferor Trust.

Michael A. Winslow

1204 Cleveland Ave.

Mount Vernon, WA 98273

Ph. 360-336-3321

Em.  <mailto:Mike at winslegal.com> Mike at winslegal.com

This message is from an attorney, so it’s confidential. If you are not the intended recipient, it’s too late to stop reading this message, but you may not use it for any improper purpose. Huge Disclaimer available upon request.

From:  <mailto:wsbapt-bounces at lists.wsbarppt.com> wsbapt-bounces at lists.wsbarppt.com [ <mailto:wsbapt-bounces at lists.wsbarppt.com> mailto:wsbapt-bounces at lists.wsbarppt.com] On Behalf Of Martin Silver
Sent: Wednesday, May 18, 2016 4:50 PM
To: WSBA Probate & Trust Listserv
Subject: Re: [WSBAPT] RE Excise Tax question

If the client is the beneficiary sounds like you just do the deed as an inheritance/gift, no debt on the property and the affidavit just cites the inheritance/gift exemption and I don’t know why you would reference debt relief in the affidavit. 

If client is not the beneficiary and is receiving cod then isn't client  transferring consideration by cancelling the debt, even though there is no technical debt relief by the transfer because of absence of encumbrance against the property?

What I don’t see from the facts is why is the trust giving the client a note each year?  doesn’t the client owe the trust some rent for using its 1/2?  Don’t you have to figure out what the balance between fair rent due the trust and debt paid by the client for the trust’s 1/2 is to know whether and how much cod there is, if any? 

If client is the bene, who cares, but if there are other bene’s then the value of fmv 1/2 compared to 1/2 of expenses paid has to be figured out and that answers the consideration question for the affidavit.  Doesn’t it?  Make sense or am I missing something?     

From:  <mailto:patrick at alsnorthwest.com> Patrick J. Galloway 

Sent: Wednesday, May 18, 2016 2:58 PM

To:  <mailto:wsbapt at lists.wsbarppt.com> WSBA Probate & Trust Listserv 

Subject: Re: [WSBAPT] RE Excise Tax question

This one has me curious. I am not sure I understand the fact pattern or the estate planning strategy that was being implemented. Is there a tax benefit that was gained from the promissory notes? Is this an attempt to avoid claims of other beneficiaries of the trust? Is the client not a beneficiary of the trust? 

Can the trust simply make the distribution and dissolve? I am not sure why you would need to pay REET on a gift/inheritance and what the benefit of making the transfer for consideration is. Just looking for some education from the group on this one.

Thanks,

Patrick J. Galloway

Advance Legal Services, PLLC

8113 W. Quinault Ave. Suite 101

Kennewick, WA 99336

(509) 851-7884

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From:  <mailto:mike at winslegal.com> mike at winslegal.com
To:  <mailto:wsbapt at lists.wsbarppt.com> wsbapt at lists.wsbarppt.com
Date: Wed, 18 May 2016 14:06:27 -0700
Subject: Re: [WSBAPT] RE Excise Tax question

Under the provisions of the Real Estate Excise Tax rules the transfer of the interest is for value, equal to the relief from debt, so would be subject to tax as a “sale”. If there is remaining debt, that debt is not part of the consideration paid for the transfer.

 <http://app.leg.wa.gov/wac/default.aspx?cite=458-61A-102> http://app.leg.wa.gov/wac/default.aspx?cite=458-61A-102

see the definition of consideration  and sale.

Michael A. Winslow

1204 Cleveland Ave.

Mount Vernon, WA 98273

Ph. 360-336-3321

Em.  <mailto:Mike at winslegal.com> Mike at winslegal.com

This message is from an attorney, so it’s confidential. If you are not the intended recipient, it’s too late to stop reading this message, but you may not use it for any improper purpose. Huge Disclaimer available upon request.

From:  <mailto:wsbapt-bounces at lists.wsbarppt.com> wsbapt-bounces at lists.wsbarppt.com [ <mailto:wsbapt-bounces at lists.wsbarppt.com> mailto:wsbapt-bounces at lists.wsbarppt.com] On Behalf Of Eden Rubenstein Toner
Sent: Wednesday, May 18, 2016 1:28 PM
To: WSBA PT list
Subject: [WSBAPT] RE Excise Tax question

I’m trying to figure out the RE excise tax computation in this situation:  Client owns ½ interest in property.  A testamentary trust of which client is Trustee owns the other ½.  There are no other assets in the trust.  Client occupies the property and has paid mortgage, taxes, insurance and all expenses for many years, keeping track of all payments and issuing a promissory note from the trust to client each year.  The trust is now indebted to client for more than the value of the trust’s interest in the property.  Client wants to deed the property from the trust to client in full satisfaction of the debt, despite the fact that the debt is greater than the value of the property.

Questions—is tax due on the full amount of the debt being satisfied, or just the actual amount satisfied?  Does it matter that the debt is not secured by the property?  And if client continues to pay the full amount of the mortgage, is half the outstanding mortgage value part of the excise tax computation?

Thank you in advance for any guidance.

Eden

Eden Rubenstein Toner

Attorney at Law

1600-B SW Dash Point Road, #163

Federal Way, WA 98023

phone 206-953-4485

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