Lots of individuals have used real estate to make charitable gifts. The question for today is, when is the gift deemed made?
To keep things simple, let’s assume:
- the real estate is environmentally clean undeveloped land;
- the donor holds legal title to the land (i.e., the land isn’t held in a corporation, LLC, or other entity);
- there’s no mortgage or other debt;
- there is no wetlands problem, no spotted owls, etc.; and
- the land is readily marketable.
Let’s assume further that the individual holding legal title to the land wants to use it to create a flip unitrust.
Basically, to create the trust, what the donor needs to do is execute a flip unitrust agreement and then deed the real estate to the trustee of the unitrust.
Simple, right? Well, yes, but what if the deed conveying legal title to the trustee is never recorded?
The question becomes, at what point in time is the land transferred into the trust? Transferred for federal income tax purposes. This point in time is when the charitable gift is made.
The answer is, it’s not clear…at least to me. Here’s why. At common law, title to real estate is transferred when the deed is delivered to the grantee (the grantee is the purchaser, the donee, whoever is the intended new title holder). The argument under common law, therefore, is that the transfer of title to the trustee of the flip unitrust occurs when the deed is delivered to the trustee.
The problem with this argument from a federal tax standpoint is that until and unless the deed is recorded, the trustee’s title can be defeated by someone who pays to buy the same land from the same donor if the buyer has no actual knowledge of the prior delivery of the deed to the trustee.
The situation here is a mess. If you get involved in a situation like this, be sure to contact your SHARPE newkirk consultant and competent legal counsel.
by Jon Tidd, Esq