CLE Course Outline: Personal And Residential Property Tax Exemptions, Homestead Protection and Homeowner's Insurance Coverage For Homes In Trusts

NAELA MemberThis outline by Attorney John L. Roberts is Part of a Continuing Legal Education Program Entitled: Everyday Tax Issues for Elder Law Attorneys presented on February 15, 2005. This outline is for information and education purposes only. It is not legal advice or opinion. Legal advice can only be provided to you by a competent professional who understands your unique circumstances.

Income tax exclusions, property tax exemptions, the homestead protections and homeowners insurance must be considered when counselling clients who are considering transferring their home into a trust.

Mass. Gen. Laws ch 59 §5 offers 53 clauses of tax abatements and exemptions from municipal real estate property taxes. These clauses are directed to charitable organizations, and to homeowners. The homeowner exemptions benefit military veterans, survivors of police and firefighters and elders who qualify with low income and assets.

Department of Revenue Informational Guideline Release 91-209 explains how the homeowner loses eligibility for these tax breaks if the taxpayer does not own the legal and beneficial interest in the property.

"If a taxpayer places his domicile in trust, he must retain both

(1) a sufficient beneficial interest and

(2) a record legal interest in the property in order to be eligible for an personal exemption on that property."

The DOR Guideline has examples of all the following Trust arrangements:
*Settlor of a Revocable Living Trust who names himself as Trustee satisfies ownership requirement;
*If a beneficiary is not named, the beneficial interest requirement may be fulfilled where a settlor (1) reserves the right to disburse income and (2) specifies that if no direction for such dispersion is made the income inures to the settlor."
*If a settlor conveys his domicile into a trust, retaining a life estate, he has sufficient property interest to satisfy the ownership requirement for a personal or residential exemption.
" Kirby v. Assessors of Medford, 350 Mass. 386, 391 (1966). The Kirby case explains how there is no elderly tax exemption to a taxpayer who "has voluntarily chosen to hold his property in a form which separates the legal title and the beneficial ownership." Yet, the power of amendment and revocation makes the beneficial ownership of the trust property, as a practical matter for many purposes, including some tax purposes, essentially equivalent to outright ownership by the settlor. Kirby at 389. It was a revocable, amendable trust, but Mr. Kirby had named Mr. Colbert as the trustee of the trust.

In Moscatiello v Board of Assessors, 36 Mass.App.Ct. 622, 634 N.E.2d 147 (1994) (denying MG L c. 59, § 5C 20% exemption) the taxpayer's house was his principal residence, "but the title is held by the trustee of the Seventeen Monument Square Realty Trust, a nominee trust listing Moscatiello as sole beneficiary." The Appeals Court ruled that " if the holder of the record (i.e., legal) title does not qualify for the exemption, it is unavailable to the beneficial owner." "It would be administratively unsound to require assessors to analyze the provisions of each trust instrument and to determine eligibility for the exemption based on subtle differences in the degree of control exercised by a beneficiary who uses trust property as his principal residence." Id. at 626, 634 N.E.2d at 149.

Mass. Gen. Laws Ch. 62 §6(k) offers an income tax credit for Real Estate Taxes on a residence paid by Certain Persons Age 65 and Older. For this credit, a residence is defined as "the building or portion thereof, including a mobile home, owned or rented and actually occupied by the taxpayer as the taxpayer's primary dwelling during the taxable year and located within the commonwealth, together with so much of the land surrounding it, not to exceed one acre, as is reasonably necessary to the use of the dwelling as a home. A residence may consist of a part of a multi-unit or multi-purpose building."

Technical Information Release 01-19 explains that:

1. If a taxpayer's principal residence is owned by a grantor trust in which the taxpayer is a trustee, Homeowner Rules in Part II, Part IV and Part V apply.
2. If a taxpayer's principal residence is owned by a grantor trust and the taxpayer is not a trustee, the Renter Rules in Part II and Part IV apply.
3. If a taxpayer's principal residence is owned by an irrevocable trust, the Renter Rules in Part II and Part IV apply, regardless of whether the taxpayer is a trustee.

The Homestead Declaration law that took effect on March 16, 2011 must be considered if a home is to be owned in trust. Court cases have raised issues on what is required to claim a Homestead Exemption. In Assistant Recorder of the N. Registry Dist. of Bristol County v. Spinelli, 38 Mass. App. Ct. 655, 651 N.E.2d 411 (1995), registered land was held by Spinelli, as Trustee of her nominee Investment Trust. The sole beneficiary of the nominee Investment trust was her Living Trust. Even though the trustee of the nominee investment trust was also beneficiary of a living trust, she was not "owner" of the land held by nominee investment trust, and not entitled to homestead protection, even though she occupied the land as her principal residence. In Dwyer v. Cempellin, 424 Mass. 26, 673 N.E.2d 863 (1996) the Appeals Court ruled that the Declarant must be the individual owner of property who occupies property as a personal residence at the time of declaration.

Different ownership standards apply for Homeowners Insurance coverage. If the parents give away their entire interest in the property, it may jeopardize their ability to get homeowners insurance at homeowner's rates. Insurance companies may consider the residence to be rental property.