In New York, transfer taxes are an important consideration for anyone buying, selling, or transferring real estate. If you own a condominium or house in New York County (Manhattan) or Kings County (Brooklyn), it’s essential to understand how transfer taxes apply to you, particularly when making estate planning transfers into a revocable or irrevocable trust.
While transferring property into a trust can be a powerful estate planning tool, you must structure these transfers carefully to avoid incurring unnecessary transfer taxes. In this blog, we’ll discuss what transfer taxes are, how they apply to real estate transactions in New York and Kings Counties, and how a properly structured “no consideration” transfer into a trust can help avoid these taxes.
What Are Transfer Taxes?
In New York, transfer taxes are imposed on the sale or transfer of real property. These taxes can apply whether you are transferring ownership to a third party through a sale or to a trust as part of your estate plan. Transfer taxes are levied by both the State of New York and the local municipality—in this case, New York City.
Here’s a breakdown of the typical transfer taxes that may apply:
1. New York State Real Estate Transfer Tax (RETT):
The state imposes a transfer tax of 0.4% (or $2 per $500) of the consideration paid for the property. In addition, if the property is sold for $3 million or more, there is an additional mansion tax of 1% on the sale price.
2. New York City Real Property Transfer Tax (RPTT):
For properties in New York City, including Manhattan and Brooklyn, there is a city transfer tax in addition to the state tax. The NYC transfer tax rate varies depending on the value of the property:
- Residential properties (condominiums, houses, co-ops):
- 1% if the sale price is $500,000 or less
- 1.425% if the sale price is more than $500,000
Combined, these taxes can significantly increase the cost of transferring real estate, particularly in high-value markets like Manhattan and Brooklyn. However, with proper planning, these taxes can be avoided when transferring property into a trust as part of an estate plan.
Estate Planning Transfers into Trusts: Understanding “No Consideration” Transfers
When transferring real estate into a revocable or irrevocable trust as part of an estate plan, it is possible to avoid transfer taxes if the transfer is considered a “no consideration” transfer. A “no consideration” transfer means that the property is transferred without any payment or other valuable consideration in exchange, making it a non-taxable event under New York’s transfer tax laws.
To ensure that no transfer taxes are triggered when transferring your condominium or house into a trust, the transfer must meet certain criteria and be structured properly.
Structuring a “No Consideration” Transfer
For a transfer to a revocable or irrevocable trust to be exempt from transfer taxes, it must be structured in such a way that no consideration is paid for the transfer. In other words, the transfer should be purely for estate planning purposes and not in exchange for money, debt, or other valuable items.
Here’s how to properly structure a no-consideration transfer:
1. Revocable Living Trust Transfers:
Transferring property into a revocable living trust typically does not trigger transfer taxes if done correctly. This is because the grantor (the person transferring the property) retains full control of the trust and the property. Essentially, the ownership of the property does not change for tax purposes, as the grantor continues to be treated as the owner.
To ensure that a transfer into a revocable trust is considered a no-consideration transfer:
- The transfer documents should explicitly state that the transfer is being made for no consideration.
- No payment or exchange of value should be involved in the transfer.
- The grantor should remain the sole beneficiary of the trust during their lifetime.
Since the ownership is retained by the grantor in substance, no transfer taxes are due.
2. Irrevocable Trust Transfers:
Transfers into an irrevocable trust can be more complex, but they can still avoid transfer taxes if properly structured as a no-consideration transfer. In this case, the grantor is permanently giving up ownership and control of the property, but as long as no consideration is exchanged, transfer taxes can be avoided.
To ensure that a transfer into an irrevocable trust qualifies as no-consideration:
- The transfer must be clearly stated to be for estate planning purposes with no consideration paid.
- The property should be transferred without any outstanding debts or encumbrances, such as a mortgage. If a mortgage is involved, it could be considered a form of consideration, triggering transfer taxes.
- The trust must not pay the grantor or any other party for the property. This includes cash payments, assumption of debt, or other valuable exchanges.
3. Affidavit of No Consideration:
When recording the deed to transfer real estate into a trust, it’s important to file an Affidavit of No Consideration with the local tax authority, such as the New York City Department of Finance. This affidavit is a sworn statement that confirms the transfer was made without consideration, and it supports the exemption from transfer taxes.
This document should include:
- A statement that the transfer is to a trust for estate planning purposes.
- A declaration that no consideration, monetary or otherwise, was exchanged for the property.
- Information about the grantor, the trust, and the successor trustees.
By following these steps and filing the necessary documentation, you can ensure that your transfer into a revocable or irrevocable trust is exempt from transfer taxes.
Common Mistakes That Can Trigger Transfer Taxes
Even if your intention is to make a no-consideration transfer, certain missteps can unintentionally trigger transfer taxes. Here are some common pitfalls to avoid:
1. Mortgaged Properties:
If the property you are transferring into the trust has a mortgage, the outstanding mortgage balance could be considered a form of consideration. This is because the trust is effectively assuming the debt, which the tax authorities may view as payment. In such cases, partial transfer taxes may be due on the mortgage amount.
To avoid this, you may need to pay off the mortgage before transferring the property into the trust or consult with an estate planning attorney to explore alternative solutions.
2. Incomplete Paperwork:
Failing to file an Affidavit of No Consideration or omitting important details in your transfer documents can lead to delays or inadvertent taxation. Be sure to work with a legal professional to ensure that all documentation is properly completed and submitted to the relevant authorities.
3. Implying Consideration:
If the transfer documents or deed imply that consideration was paid – whether through language or an attached payment – transfer taxes will likely be triggered. Make sure the deed and related documents are carefully drafted to avoid any suggestion of a sale or exchange.
Planning Ahead with Properly Structured Trust Transfers
For condominium and house owners in New York and Kings Counties, transferring property into a trust can be a smart estate planning move, allowing for the seamless transfer of assets to beneficiaries. Call us to avoid the costly burden of transfer taxes. By working with us, you can protect your estate from unnecessary taxes and ensure that your loved ones receive the full benefit of your assets.
