New Strategy for Wealthy Taxpayers to Beat Property Taxes
By Alan Olsen
One of the biggest complaints of the Tax Cut and Jobs Act (TCJA) has been how it affects the state and local taxes (SALT) deduction form the federal return. These deductions have been a major part of many taxpayers’ returns for many years, especially wealthy taxpayers. The deduction was not completely eliminated, as originally proposed, but it was reduced to a $10,000 limit.
Wealthy Taxpayers Hit the Hardest
For many taxpayers, this is not an issue, but for wealthy taxpayers, especially those living in high tax states like New Jersey, New York, and Connecticut, this is big deal. In fact, it’s been such a big issue since the TCJA became law that several states have tried to pass new legislation to circumvent the new law. It remains to be seen if the IRS will allow these measures to move forward, but for now this is still a hot-button issue.
Regardless of how this plays out, there is another strategy that could save you some extra cash come tax time. Have you heard of non-grantor trusts? These trusts might actually allow you to claim multiple $10,000 SALT write-offs. The strategy comes from estate planning lawyer, Jonathan Blattmachr, who has already used it for several wealthy clients, as well as for himself.
Here’s how it works. Blattmachr owns two properties in New York. First, he put these into a limited liability company (LLC). Next, he transferred the interests in the LLC into five separate trusts he has set up in Alaska. Each of the trusts takes the maximum $10,000 SALT deduction. This strategy allows him to preserve the SALT write-off for about $50,000 in property taxes, which he has to pay each year on his properties.
There are some things to keep in mind if you choose to go this route. For starters, under a non-grantor trustyou will no longer control what’s placed in the trust. Likewise, you cannotbenefit from anything in the trust. Additionally, you mustput investment assets intothe trust that will create sufficientincome to help balance out the $10,000 deduction. For example,a vacation home that generates rental income could serve as this type of asset. Another option could be marketable securities.
Interest Increasing in Non-Grantor Trusts
Each situation will vary depending on how much you typically pay in property taxes. But several estate and financial planners say they have seen an increased interest in this strategy since the TCJA took affect. And the majority of those interested in these so-called non-grantor trusts are from high tax states, includingNew York, New Jersey and Connecticut.
Not for Everyone
However, these trusts are not for everyone. Even the super rich might not benefit from such a strategy. The wealthiest Americans do often you use trusts to help reduce their taxes. However, non-grantor trusts are a little different. They make the most sense for wealthy taxpayers with property taxes of up to $100,000.As always, it’s a goodidea to speak with a tax/financial professional before making such a move.