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Barbara, Enrolled Agent
Category: Tax
Satisfied Customers: 3017
Experience:  18+ years of experience in tax preparation; 25+ years of experience as a real estate/corporate paralegal.
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Must an Estate of a State US citizen pay a transfer tax on a

Customer Question

Must an Estate of a Washington State US citizen pay a transfer tax on a retirement condo in mexico that was held in a Trust (being waterfront property) and for which the trust named a substitute beneficiary?
Submitted: 1 year ago.
Category: Tax
Expert:  Jonathan Tierney replied 1 year ago.

Hi, my name is ***** ***** I my goal here is to provide you with a complete and accurate answer. All United States citizens are required to report all assets, wherever in the world they are located.

However, you mentioned that the property is held in a trust. Whether or not this is includable in the estates taxable assets depends on what type of trust is holding the property. If this is a grantor or revocable trust, where the person that set up the trust has the authority to revoke trust agreement entirely and take back title to all assets or rename beneficiaries while alive, then the property would be included in the estate assets.

However, if this trust was made irrevocable during the grantor's lifetime then the trust's assets are not included in the taxable estate assets, generally as long as the trust was made irrevocable more than three years before the decedent's death. The transfer to the irrevocable trust would have been a taxable gift at the time the transfer and a Form 709 should have been filed to report the gift and included in total lifetime transfers of the decedent. If not gift tax return was filed, then the executor of the estate would be responsible for the filing of the late gift tax return. However, the assets of the trust would not longer be part of the taxable estate assets.

Lastly, which entity, the trust or estate, would be responsible for paying any estate taxes? The IRS generally looks first to an estate to pay any estate taxes, however, if the estate does not have sufficient assets to pay the transfer tax, the IRS could seek to obtain the transfer taxes due from the trust. However, since the property is in Mexico and the trust has no US-based assets this would not be practical if the trustee of that trust is not cooperative. The decedent's will or the trust instrument should have directed the trustee and/or the estate executor as to how the transfer taxes should be paid (according to the IRS). If these documents do not mention anything as to who is responsible for the transfer assets, the estate is primarily responsible for all the transfer taxes with the trust as secondarily responsible if the estate is underfunded. IRS's view is the payment of transfer taxes should be part of the estate plan and, as such, would be part of the decedent's wishes in reducing the inheritance available to estate beneficiaries.

As an additional service, you can upload copies of the will and trust instrument and I can let you know what type of trust this is and how the documents instruct the trustee and executor how to pay the transfer taxes.

I hope to answers you question. Let me know if I can clarify anything. Joanthan

Customer: replied 1 year ago.
Hi Johnathan,
I would like to continue this conversation by first providing information regarding the trust I am referring to: " Foreigners are welcome to invest in property along the coast, but there are restrictions. The most important restriction is contained in Article 27 of the constitution which states "that foreigners cannot own property within 100 kilometers (60 miles) of the border and 50 kilometers (30 miles) of the coastline." The government, however, provides two ways to get around this restriction - through the use of a Trust (Fideicomiso) or a Mexican corporation.
How Does the Trust Work? - Three parties are involved in the trust:
The trustor (the owner of the original property)
The trustee (which is the bank)
The beneficiary (the person who will receive the benefits of the trust.)
The Trust, which in Mexico is called a Fideicomiso, does not give direct ownership to the foreign beneficiary. Instead, it establishes the legal basis by which the bank holds legal title to the property in order to act on the foreigners behalf. This trust deed assures the foreign buyer of all rights and privileges of ownership. The Foreign Investment Law, a Constitutional amendment created in 1973 and amended again in 1994, allows the trust to be established for a term of 50 years and is renewable any time during its existence, forever.
The Bank (trustee) holds the trust deed for the person who purchases the property (beneficiary). The property is not part of the bank's assets and cannot be liened or attached for any other obligations. You, the purchaser, are the beneficiary and have all rights of enjoyment of the property including the ability to remodel, lease, mortgage, pass to their heirs or sell the property at any time.Johnathan in this case the deceased was the beneficiary and his daughter is the substitute beneficiary.
Expert:  Jonathan Tierney replied 1 year ago.

Okay, now I understand the situation. Under US tax law Mexican Land Trusts (MLT) are not considered trusts at all. The Mexican property therefore belongs to the decedent and its fair market value would be included it the estate. US tax law does not determine what someone's rights to property are, but rather states how those rights, as determined under state or foreign law, to property are taxed.

I have attached a copy of an IRS Revenue Ruling that states that MLT's are not really "trusts" as they are to be treated as the property of the MLT beneficiary.

I hope this answers your question. Let me know if you need any additional information. Jonathan

Expert:  Barbara replied 1 year ago.
Different expert here - my name is ***** ***** please allow me to provide additional information which you will find helpful.
Based on the information contained in your question, it appears you are trying to determine if transfer tax is to be paid in Mexico by the deceased's daughter.
As you probably already know, transfer tax is paid by the person acquiring property and rates very among the states from 2% to 3.3% of the property’s market value. Additionally, a notary fee of approximately 1% of the value of the property may also apply. Taxable transactions typically include transfers that occur by reason of purchase and sale, donation, death, or contribution to, distribution from or reorganization of a legal entity.
In Mexico, death is considered to be a taxable transaction and transfer tax would be required to be paid.
Please let me know if I can assist you further.
Thank you and best regards,
Customer: replied 1 year ago.
thank you Barbara for your input. Actually the US citizen is deceased and named a substitute beneficiary in the MLT document. All the Mexican taxes were paid and a new MLT drawn up. Does the US require the Estate of the US citizen to pay a transfer tax
Expert:  Barbara replied 1 year ago.
I apologize I misunderstood what you were asking in your original question. Hence, my answer as it pertains to Mexico.
Mr. Tierney's answer is absolutely correct, and I urge you to rate his answer as "excellent."
Again, my apologies.
Best regards,