I’ve discovered a serious problem here in Eastern PA regarding recording a Deed where the property is being put into a Land Trust. PA is one of the very few states that require you to provide the full Trust documentation when the Deed is recorded. The Trust is then sent to the Department of Revenue, who actually read it. If the Land Trust has an assignable beneficiary, it is, in PA, a taxable event. They want to see only the property owners having the beneficial interest, and without our being able to change the beneficiary, ever.
So for instance, you record a Deed, include your Land Trust and then sell the property in two months – if that beneficial interest is assignable, you will now pay double the transfer taxes.
A PA attorney whose expertise a few years ago was in Land Trusts tells me he worked around that by providing the State with a simple but amendable Land Trust showing the sellers as beneficiaries of the Land Trust (but with no assignable beneficial interest). After recording the Deed he would then amend the Land Trust to read as he really wanted it.
Any feedback from anyone experiencing this problem? I’m currently on the hook to the State for $10K additional transfer taxes because of past assignable Land Trusts!
I’m not sure what kind of land trust you are using. I can only speak for the Equity Holding Trust that I use. I’ll ask Bill Gatten directly about your situation but here is what I have found:
In order to avoid characterization as a passive or dry (or “failed”) trust, a land trust trustee must have the obligation of collecting rents, paying taxes and managing the property…along with holding the property’s legal and equitable title.
Note that in Pennsylvania, a transfer of a property into a land trust, even for one’s own benefit "may” be subject to transfer taxation (up to 3.75% of the transfer value of a property. However, note that transfer into an inter vivos trust (such as is the land trust) for estate planning purposes is done without a transfer basis (sale price), and without “business intent.” Such a transfer for estate planning purposes by a homeowner who would subsequently, perhaps weeks or months later, appoint a co-beneficiary might (“could possibly”) escape the imposition of transfer taxation. This would be due to the fact that no money is changing hands (at that point), and that there has been no sale of, or divestiture of ownership in the property per se, other than vesting the title with a trustee for the trust (See Section 9503(c) of the Pennsylvania State Business Trust Law. See also HB 134, 1997, Act No. 7, which essentially states that, “…as of 11/1/98 business entities of any type must all pay capital stock taxes at a minimum amount of $300 per-year.” In this context the question arises as to whether a simple inter vivos, estate-planning tool such as a title-holding trust, is in fact in any manner a “business entity.” All subsequent documentation that comprises the Equity Holding Trust System™ is private, anonymous and forever unrecorded.
Note also that Pennsylvania law in general requires some specific termination activities for various business trusts and a termination filing-fee of $50 or so ($53 at this writing). However, in that an Equity Holding Trust™ is, in and of itself, purely designated to hold an asset for a specific period of time, the expiration of the trust automatically brings about its termination, thereby, logically BYPASSING the transfer tax requirements.
Hope this helps – I’ll post Bill’s response when I receive his email.
I thought about this overnight and there is one thing you mentioned that is illegal. “They want to see only the property owners having the beneficial interest, and without our being able to change the beneficiary, ever.”
THIS IS IN CLEAR VIOLATION OF FEDERAL LAW, I.E., GARN ST.GERMAIN ACT WHICH SPECIFICALLY STATES THAT THE SELLER MAY RETAIN OWNERSHIP AND LEASE THE PROPERTY TO A CO-BENEFICIARY. THERE MAY BE UP TO 10 BENEFICIARIES IN A LAND TRUST.
The restriction you describe is clearly outside the law and will not hold up in court.
Here’s Bill’s response:
In Pa, the best thing to do is just record the deed with the trustee being the property owner then do a silent substitution of trustee after the deed is recorded. That is silent, unrecorded, secret and nobody’s business. When the property is later sold, the owner of record could be given the trusteeship back if it became necessary, but it never has been. The buyer merely acquires the property from its owner, the trustee.
However, the fact is that Pa is indeed a pain to deal with. But remember that tax law and the Garn St., Germaine Act have nothing to do with each other. Just because the lenders have to allow for co-beneficiaries and leasing to one of them doesn’t affect what the state or country tax assessor wants to do. But restricting one’s beneficiary interest to an owner doesn’t make any sense…that the state says is that UNLESS the owner of record is the only beneficiary they will charge the transfer tax.