October 10, 2017
All Tax Articles

If you set up a trust and transfer property to the trust, there is normally a deemed disposition of the property for proceeds equal to its fair market value. Therefore, for example, if there is an accrued gain on the transfer, you will realize a capital gain, half of which will be included in your income. Obviously, if the transfer is cash, you won’t have to worry about this issue (except possibly in the case of foreign currency).

However, for certain types of trusts, you can transfer property to the trust on a tax-free “rollover" basis. Effectively, you have a deemed disposition at your tax cost of the property, which results in no tax. The trust is deemed to acquire the property at your tax cost.

The trusts that qualify for the rollover include the following:

A spousal or common-law partner trust. This is a trust under which your spouse or common-law partner is a beneficiary and is entitled to all of the income of the trust and no one else can receive capital of the trust during your spouse’s lifetime. After your spouse’s death, other beneficiaries may receive income or capital out of the trust.

A joint spousal or common-law partner trust. This is similar to the trust described above, except both you and your spouse are beneficiaries. Both or either of you must be entitled to the trust income while you or your spouse are alive, and no one else may receive the capital until both of you have died.

An alter ego trust. This is a trust under which you are the beneficiary during your lifetime, under which you are entitled to all of the income and no one else may receive the capital of the trust while you are alive.

The tax-free rollover is automatic. However, you can elect out of the rollover on a property-by-property basis, in which case the regular rule applies (deemed disposition at fair market value). However, if the trust is inter-vivos (made during your lifetime), any loss on the election out of the rollover will typically be denied under the superficial loss rules.

In the case of a testamentary spousal or common-law partner trust (one arising upon your death, such as under your will), essentially the same rules apply. There is an automatic rollover, although your executor can elect out of the rollover. If the election out of the rollover gives rise to a loss, the superficial loss rule will not apply in such case, and the loss will be allowed.

This letter summarizes recent tax developments and tax planning opportunities from a third-party affiliate; however, we recommend that you consult with an expert before embarking on any of the suggestions contained in this blog post, which are appropriate to your own specific requirements. Please feel free to get in touch with Lee & Sharpe to discuss anything detailed above, we would be pleased to help.
Adam H. Sharpe

Hello, my name is Adam Sharpe, I am a partner at Lee & Sharpe.

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