New York State recently released an advisory opinion relating to the substitution of tangible personal property for real property between an individual and an irrevocable trust of which the petitioner retains non fiduciary control. The issue is whether the transfer constitutes a sale and if it is subject to sales and use tax.
The petitioner in this case has created an irrevocable trust and owns the Trust property for Federal and New York State income tax purposes. Per the agreement, the petitioner has the right to reacquire property from the trust so long as property of equivalent value is transferred back to the trust. This is known as the “Power to reacquire” and enables the petitioner to acquire property from the trust so long as property of equivalent value is substituted.
When a person transfers property to another person (a trust would also be included under the definition of a “person” per section 1101(a) of the Tax Law) then a transfer has been made to a separate entity. The argument has been made by the petitioner that because the trustees have no authority to approve or decline the substitution, there is no negotiation or bargaining therefore the exchange is not supported by consideration. According to TSB-A-99(22)S, an involuntary transfer is also considered a sale and so long as the individual receives something of value in the transfer, consideration is present. Even if a transfer is a non-event for income tax purposes, it is still considered a sale so long as it is made to a separate entity. In this case, the petitioner is looking to acquire real property for the tangible property. According to section 1105(a) of the Tax Law, sales tax should be charged on every retail sale of tangible personal property, unless otherwise exempt.
The question remains, how can an individual transfer tangible personal property and not be exposed to sales and use taxes?
A way to avoid paying sales and use tax on the amount of property that is acquired would be if the petitioner purchased the property with the intent to transfer it to the trust, in which case the petitioner may qualify for the resale exclusion. To demonstrate this, the individual must show that it was purchased only for resale.
It is also important to distinguish that if there is no consideration (nothing is received from the transfer) then no sales tax would be applicable.
Trusts and estates are becoming a larger necessity in recent years as families are looking to transfer wealth to the next generation. Precautions should be taken in order to ensure that the best possible methods are used in order to reduce or eliminate exposure to taxes. Clients with considerable assets should be consulted so that they don’t make decisions with unplanned repercussions. Please contact Chris Vignone or Frank Fioretti for further information.