Did transferring Kentucky real estate into a trust avoid the transfer tax?

Plain-English summary

Kentucky's Attorney General concluded in 1995 that putting real estate into a trust did not, by itself, remove the transfer tax. The new exemption in KRS 142.050(7)(m) applied to a transfer to a trustee or from a trustee to a beneficiary only when a direct transfer from the trust's grantor to each individual beneficiary would have qualified for one of the statute's exemptions.

The AG rejected a reading that would exempt every transfer to a trustee regardless of the beneficiary. Because the 1994 amendment comprehensively addressed transfers involving trustees, the opinion expressly withdrew OAG 94-23, which had discussed a trust for a grantor's children.

Currency note

This opinion was issued in 1995. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Historical summary

Grantors transferring property to a trust

The AG read the direct-transfer condition as applying to property conveyed to a trustee, as well as property conveyed by a trustee to a beneficiary. A trust did not create a blanket exemption. The relevant comparison was whether conveying directly from the grantor to each individual beneficiary would have been exempt under KRS 142.050(7).

Trustees transferring property to beneficiaries

The same condition applied to a trustee's transfer out of the trust. The opinion treated both sides of the trustee transaction alike, rather than allowing every transfer into a trust and testing only transfers out.

Earlier AG guidance

The request asked whether OAG 94-23 should be changed after the 1994 amendment. The AG said the new paragraph covered the subject comprehensively and withdrew that earlier opinion. It did not leave OAG 94-23 as an alternate route to exemption.

Common questions

Was every Kentucky deed into a trust exempt from transfer tax under the 1994 amendment?

No. The AG said the exemption depended on whether a direct transfer from the grantor to each individual beneficiary would qualify under one of the listed exemptions.

Did the direct-transfer test apply only when a trustee conveyed property out of the trust?

No. The AG applied it both to transfers to a trustee and to transfers by a trustee to a beneficiary.

Did OAG 94-23 remain the AG's guidance on transfers to trustees?

No. OAG 95-15 expressly withdrew OAG 94-23 because the new statutory paragraph covered trustee transfers.

Background and statutory framework

KRS 142.050 imposed a tax on real property transfers, with exceptions in subsection (7). The 1994 amendment added paragraph (m) for property transferred to a trustee or by a trustee to a beneficiary. The AG compared two readings of the word "or" and chose the one applying the direct-transfer condition to both directions. It said the other reading would exempt every conveyance to a trustee, which the statute did not support.

Citations and references

• KRS 142.050(7)(m): trustee transfer exemption and its direct-transfer condition.
• OAG 94-23: earlier opinion expressly withdrawn by OAG 95-15.

Source

• Landing page: https://www.ag.ky.gov/Resources/Opinions/Opinions/OAG95-015.htm

Original opinion text

OAG 95-15

April 10, 1995

Subject: Real Estate Transfer Tax

Written by: Ross T. Carter

Requested by: Thomas H. Bugg, Hickman County Attorney

Syllabus: KRS 142.050(7)(m) exempts transfers to a trust only if the transfer would have been exempt if it were made directly from grantor to beneficiary.

Statutes construed: KRS 142.050(7)

OAGs cited: OAG 94-23 (w)

Opinion of the Attorney General

The question presented is whether our opinion in OAG 94-23 should be modified in light of the 1994 amendment to KRS 142.050(7).

KRS 142.050 imposes a tax on the transfer of real property. Subsection 7 of the statute provides several exemptions from the tax, including exemptions for transfers between family members, but not including any exemptions for transfers to or from a trust. We have said that the tax applies to a transfer to a trust in which the grantor, trustee, and beneficiary are the same person (OAG 83-43), while a transfer to a trust for the benefit of the grantor's children is not taxable, even if the grantor is the trustee. OAG 94-23.

In 1994 the following exemption was added to the list in KRS 142.050(7):

[The transfer of] property to a trustee, to be held in trust, or by a trustee to a beneficiary of the trust, if a direct transfer from the grantor of the trust to each individual beneficiary of the trust would have qualified for an exemption from the tax pursuant to one of the provisions of this section. As used in this paragraph, “trust” shall have the same definition as contained in KRS 386.800.

This provision may be parsed in two ways: the word or can be construed to separate the expression “to a trustee, to be held in trust” from the remainder of the paragraph, or it can be construed to group that expression with “or by a trustee to a beneficiary of the trust.” The alternative constructions may be represented as:

1. The statute exempts transfers of property:

to a trustee, to be held in trust,

or

by a trustee to a beneficiary of the trust, if a direct transfer from the grantor of the trust to each individual beneficiary of the trust would have qualified for an exemption.

2. The statute exempts transfers of property:

to a trustee, to be held in trust, or by a trustee to a beneficiary of the trust,

if a direct transfer from the grantor of the trust to each individual beneficiary of the trust would have qualified for an exemption.

We cannot discern any plausible justification for the first interpretation. Nothing in the statute suggests that the legislature would intend to exempt from taxation every transfer to a trustee. Such an interpretation could very quickly erode the tax base if knowledgeable practitioners structure transfers as trusts rather than direct conveyances. On the other hand, the second construction is logically consistent with a legislative intent to place transfers to trustees on the same footing as direct conveyances to beneficiaries.

We construe KRS 142.050(7)(m) as exempting transfers to or from trustees only if the transfer would be exempt if made directly from grantor to beneficiary. The provision does not exempt all transfers to trustees.

Because KRS 142.050(7)(m) comprehensively covers the subject of transfers to trustees, OAG 94-23 is out of date and is hereby withdrawn.

Chris Gorman

Attorney General

Ross T. Carter

Director

Division of Civil and Environmental Law