Is property transferred into my Living Trust exempt from Realty Transfer Tax?

Generally, yes, but the terms of the trust instrument must be written to ensure the property transfer is exempt. The exemption can apply to both property transferred into a revocable living trust and/or an irrevocable trust. The trust instrument dictates whether the transfer qualifies for an exemption from the imposition of the tax. Transferring property into an irrevocable trust is more difficult to argue it qualifies for an exemption to the transfer tax.

In Pennsylvania, the Realty Transfer Tax Act imposes a tax on any real estate transaction evidenced by a document. The statute defines a document as, a deed, instrument or writing which conveys, transfers, devises, vests, confirms or evidences any transfer or devise of title to real estate, but does not include wills. 72 Pa. Stat. Ann. § 8102-C.

However, there are many transfers of real property which are exempt from the imposition of the tax. Once such exemption is transfer of property to a living trust.  §8102-C.3(8). A living trust is any trust, other than a business trust, intended as a will substitute by the settler which becomes effective during the lifetime of the settlor, but from which trust distributions cannot be made to any beneficiaries other than the settlor prior to the death of the settlor. Miller v. Commonwealth, 84 A.3d 620, 621 (2013).

In Miller, a husband and wife, Mr. and Mrs. Miller, created a family irrevocable trust, which listed Mrs. Miller as the settlor, and her and her husband as co-trustees. The sole beneficiaries of the trust were Mr. and Mrs. Miller and their only child. Mrs. Miller irrevocably transferred the title to their house and farm to the trust.  They did not pay the transfer tax because they claimed the transfer of the properties were transferred to a living trust and therefore exempted from the tax. 

The Department of Revenue disagreed the transfer was exempt because it issued a Notice of Determination providing the transfer was subject to the realty transfer taxes, plus interest and fees. The Miller’s appealed. A three-judge panel of the Commonwealth Court agreed with the Millers, so the Commonwealth appealed to the PA Supreme Court.

The PA Supreme Court, in Miller, held that the trust must: (1) take effect during the settlor’s lifetime; (2) be intended as a “will substitute;” and (3) prohibit distributions to anyone other than the settlor before the settlor’s death. 

*Miller *adopted the Restatement formulation of a “will substitute”: an arrangement created during the donor’s lifetime under which (1) possession or enjoyment shifts outside probate to the done at the donor’s death, and (2) the donor retains substantial lifetime rights of dominion, control, possession, or enjoyment. The court evaluates the trust instrument objectively as a whole; the settlor’s testimony about subjective intent cannot cure trust terms that do not support will-substitute treatment.

The court opined that it was arguable that the Miller’s did not retain control over the property because the Millers could not take the property back and had to act in the interest of the trust beneficiaries.  The Miller court explicitly says irrevocable trusts can be a living trust under the statute, but the Miller Trust did not because the Miller trust allowed the trust to end before the settlor (Mrs. Miller) died.  Thus, in that situation, it is not equivalent to inheritance, as is required by the statute.

A second Pennsylvania case gives us a second example of when a transfer of property does not qualify as an exempted transfer under the Realty Transfer Tax Act. In, Gudzan v. Commonwealth, 962 A.2d 718 (Pa. Commw. Ct. 2008), Mr. Gudzan transferred multiple parcels of land from his own name into a land trust. The county in which he made the transfer said he owed the transfer tax because the transfer did not qualify as a transfer into a living trust.

Upon review of the trust agreement, the Commonwealth Court agreed that the tax was due for several reasons. One, because the property was transferred into a legal entity (an LLC) separate from Mr. Gudzan; two, the trust instrument contained continuity of life provisions; and three, the trust property was assignable or transferable. If you have the type of provisions in your trust, like Mr. Gudzan, your trust instrument will almost assuredly cause the state to view your trust as a business trust, rather than an ordinary trust. When the Commonwealth says your trust is a business trust, rather than an ordinary trust, the realty transfer tax is due and payable.

Finally, for a jointly held revocable trust, oftentimes with husband and wife as settlors and co-trustees during life, the trust instrument must be assessed carefully. The trust agreement should identify each settlor/grantor, be clear on each spouse’s retained powers, and whether any beneficiary can receive a distribution before the relevant settlor’s death. Drafted properly, property transferred into the name of your living trust will qualify for exemption under the realty transfer tax act.

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