change of trust beneficiary in lieu of recoded sale..Miami, FL

9 Replies

I am a new investor and I have found a property I am very interested in purchasing for rental purposes. The current owner is suggesting to change the beneficiary on the trust to me in lieu of a recorded sale.  Stating I will have the greatest advantage due to my property taxes remaining low, based on the last recorded assessed value from 2010. My question is wouldn't that create a bigger problem from me down the line if and when I try to sell the property?  The property was valued at $67500 in 2010, annual property taxes of $1300. My purchase price would be $265K, which would raise annual taxes to approximately $3500. If hypothetically I were to sell the property for $400K, would this mean I would be taxed on capital gains for the profit of the difference between the $67500 and the $400K? Or because a contract is signed showing that I purchased the property at the $265K, will I be only responsible for the difference from my purchase? I have asked a few local investors but no one is able to give me a clear answer. 

Property values in Dade are reassessed Every year, the purchase price doesn’t affect the assessment.  If there is a homestead exemption on the property, yes the tax value assessment will be higher, due to the save our homes annual cap.

Is this a “family trust” or just a Land trust.

Talk to a cpa about tax disadvantages of “buying the entity” versus buying the property.

Also, sometimes sellers want to do this because a regular sale, including a title search/insurance may bring to light some title issue the seller is trying to hide.

@Francesca Perez

Yes there is advantages to buying the beneficial interest in the trust. Always run title when buying property or interest in property as @wayne brooks alluded to. Get a professional to help you understand the advantages/disadvantages before you decide. 

I would not recommend getting involved in a trust someone else set up.  You are asking to be cheated/deceived.  

First thing is find out what kind of a Trust it is.  That makes a big difference.  Then find out who controls the Trust now and who will in the future.  Ask to see the tax returns for the Trust.  You will likely loose your tax write off, rent income, etc. as the Trust will be doing that.  Likely you will only pay taxes on distributions the Trust makes to you.

If you do decide to go that route, ask for a copy of the full entire whole Trust with all amendments.  Make sure you can identify all assets in the trust and their status.  The Trust can often use any asset to meet the needs of the trust itself or of the Trustor.  eg. for the Trust- computers, attorneys, debt service, etc.  for the Trustor, often anything including cars, housing, income, etc.  Often the Trust allows the Trustor to live well off Trust assets.    Make sure that all assets are fully and in abundance insured and that they are required to remain insured.  For example, if someone files a suit against anything in the trust or the trust itself, your property could be liquidated to pay for the lawsuit or debt.  Think attorneys and settlement.  IT does not matter that someone is the beneficiary-all Trust assets should have a beneficiary.  Also, the Trustor/ee can change the beneficiary at will in most Trusts.  As they are doing in selling the asset.  So being the beneficiary today does not make you the beneficiary until you want to sell, it makes you the beneficiary until the Trustor/ee decides to make their grandkid, or whoever, the beneficiary.  You will never control who is the beneficiary of that Trust!

Trusts almost always take care of the Trustor and the Trust itself before the beneficiary gets anything.  When can you actually get control of the property?  Do you have to wait until a Trustor passes or a certain point in time.  As a beneficiary you do not control the asset, the Trustor/ee does.  And they generally get compensation for managing the asset.  How much do you pay for their management?  Do you want to figure out how to fund a new roof with another partner (the Trust) or do you want to choose the contractor?  How do you, an outsider pay for the roof?  Do you make a donation to the Trust, is that tax deductible to YOU, likely not, but it will be for the Trust.  You can not mingle your money with the Trust money.  New roof on a Trust asset the Trust pays...but they will not likely pay for it if this is a scam cover and the house will not get  roof until you somehow get money into the Trust.  Same with the rent paid.  YOU will not see it.  The Trust will.  If and when any gets transferred to you, and how much they take out before giving you anything, will be determined by the Trust.

Go in with your eyes open.  And if you do not have total understanding, do not do it.  I would never keep title in a Trust that I did not control.  And I do keep title of my properties in a few Trusts, but I am in control of all of them and my kids are the beneficiaries.  I am the Trustor.  They get nothing until I die and they are certain ages. And I can change the beneficiaries anytime I want.

Remember most Trusts are not required to be bonded and do not have to do any accounting.  They only have to pay taxes, but the finances of the Trust do not have to be declared to the beneficiaries or anyone else without a court order.  How will you know if someone paid rent?  You won't!  How do you know if they put their cousin in there rent free?  You won't. The Trust takes out a loan against the title of the property and lets it get foreclosed on, you wont even know!   And you can not control it.  The Trust does.  Trusts can be a good way to rob you blind!

Eyes open!

Oh, about the capitol gains question you had, you will not be paying that, the Trust will. And you won't be selling the property, the Trust would. The capitol gains would be based on the price paid when the asset was originally purchased by the Trust. You would have a distribution of the amount that the Trust determines you should get as the beneficiary. That likely wont be the net proceeds from the HUD form as the Trust will likely take operating expenses, management fees, and of course will cover their taxes.

@Lynnette E. thank you so much for taking the time to provide me with such an in depth explanation.  I have decided to not go that route due to the fact that I don't fully understand it and its more than I can take on right now. As a new investor I am going to focus on this first property and getting the experience I need to be able to continue this new jorney of mine.  In the future I may revist the trust options, for I know it has its benefits.

Yeah, the seller was likely just looking to avoid reporting the sale to the irs.....title co.s/attorney’s are Required to report a seller’s sales proceeds to the irs in a real estate transaction.

@Francesca Perez  

The negative side of using  trusts was explained nicely by @Lynnette E. . However, you could be the trustee and the beneficiary if you so desired or replace the trustee with someone you trusted and have complete control as well as anonymity. You would also have the option to have the trust pay the taxes or you could distribute the proceeds to yourself personally to pay the taxes-options are available to you -As well as  other benefits. I find trusts quite helpful especially if it has an existing loan/mortgage, any positive grandfathered conditions, potential transfer of wealth without probate, etc  

However, You made the right choice when you said “I don’t understand them enough to get involved”- no matter what the benefits. Use of trusts are a large part of many investors “asset protection” strategy and estate planning especially in Florida so I would learn about them in the future. 

Sale of the beneficial interest in the trust in FL requires “stamps” which is Florida’s way of saying “transfer tax” and all income should be reported to the IRS so I don’t presume the seller would not report to the IRS and not have to pay taxes as @Wayne Brooks eluded —but possibly. 

@Carl Fischer Yeah, while the transfer of a beneficial interest in a land trust may require payment of doc stamps, it is rarely done since there is no record of the beneficiary anywhere, except in someone's desk drawer, unlike in an LLC/Corp.