I'm a 99% limited partner in a partnership that owns one piece of commercial real estate worth $51 million (with $41 million in mortgages). I'm considering transferring my entire limited partnership interest into an irrevocable grantor retained annuity trust (GRAT), which will pay me an annuity for seven years and then pass the remaining trust principal to a discretionary trust for my husband and children. Does either transfer -- into the GRAT, or later out of it -- trigger New York's Real Estate Transfer Tax?

Plain-English summary

Petitioner was a 99% limited partner in a limited partnership whose sole asset was commercial real property in New York City, worth $51 million and subject to about $41 million in mortgages. She was also the sole shareholder of the corporation that served as the partnership's 1% general partner. She proposed transferring her entire 99% limited partnership interest to an irrevocable grantor retained annuity trust (GRAT). Under the GRAT's terms, she would receive an annuity of about $2 million per year (20% of the real property's net value) for seven years, guaranteed to be paid even if trust income fell short (drawing on principal if needed), with any excess income added back to principal. After seven years (or her earlier death), the annuity would stop, the GRAT would terminate, and its principal would pass to a discretionary trust for the benefit of her husband and children.

Transfer into the GRAT: fully taxable. The Department held that transferring the 99% limited partnership interest to the GRAT is a transfer of a "controlling interest" in an entity owning real property -- a taxable conveyance under Tax Law §1401(e). Under §1401(d)(iii), the consideration is the real property's fair market value apportioned to the ownership percentage transferred: $50.49 million (99% of $51 million). Critically, the Department found the mere-change-of-form exemption (§1405(b)(6)) does NOT apply to this leg, because Petitioner's retained annuity interest carried no real risk of loss -- the $2 million payment was guaranteed regardless of trust performance, making her position "comparable to that of a seller of an interest in real property who takes back a seven-year purchase money note" rather than someone who retained a genuine beneficial ownership stake. The conveyance was therefore taxable on the full $50.49 million.

Transfer out of the GRAT: exempt. By contrast, when the GRAT terminates and its principal (the LP interest) passes to the discretionary trust for Petitioner's husband and children, the Department found this transfer IS exempt under §1405(b)(6): the husband and children were already the beneficial owners of the LP interest while it sat in the GRAT, and they remain the beneficial owners after it moves to the discretionary trust. Since there's no change in beneficial ownership on this second leg, it's a mere change of form or identity, not a taxable event.

What this means for you

An estate-planning trust transfer of real-estate-holding entity interests is not automatically shielded from transfer tax just because it's a "trust," not a "sale"

Moving a controlling interest in a real-property-owning entity into any trust -- including an estate-planning vehicle like a GRAT -- is measured against the same "controlling interest" and "mere change of form" rules that apply to any other conveyance. Whether tax applies turns on whether beneficial ownership actually changes, not on the trust's estate-tax characterization.

A guaranteed annuity payment looks like a purchase-money note, not retained ownership, for transfer-tax purposes

Because the grantor bore no real economic risk (the annuity had to be paid from principal if trust income was insufficient), the Department treated her retained interest as debt-like consideration rather than a continuing beneficial ownership stake -- meaning the full value of the transferred interest was taxable, not just some smaller "risk-adjusted" portion.

The SAME entity interest can be taxed once but not twice, depending on what happens at each step

The GRAT-to-discretionary-trust transfer avoided tax because the ultimate beneficiaries (husband and children) didn't change between the two trusts -- if a GRAT's remainder beneficiaries differ from who legally receives the trust principal at termination, that mismatch is exactly what the Department will scrutinize on the back end.

Common questions

Q: Does transferring real estate (or an entity that owns real estate) into an irrevocable trust avoid New York's transfer tax?
A: Not automatically -- if the transfer conveys a controlling interest in an entity that owns real property, and the grantor doesn't retain genuine beneficial ownership (for example, because their retained interest is a guaranteed payment stream rather than real economic risk), the transfer is taxable like any other conveyance.

Q: Is a later transfer out of that trust to another trust for the same family also taxable?
A: It can be exempt if the beneficial owners don't change -- here, the husband and children were the beneficial owners both before and after the GRAT-to-discretionary-trust transfer, so no tax applied to that second step.

Q: How is the tax measured when a controlling interest in an entity, rather than the real property itself, changes hands?
A: Consideration is the real property's fair market value apportioned to the percentage of ownership interest transferred or acquired -- here, 99% of $51 million.

Citations and references

Statutes, guidance, and case law:

• Section 1402(a) of the Tax Law
• Section 1401(e) of the Tax Law
• Section 1401(b) of the Tax Law
• Section 1401(d) of the Tax Law
• Section 1401(f) of the Tax Law
• Section 1405(b)(6) of the Tax Law

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/real_estate_tran_ao_2002.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/real_estate/a02_1r.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-02(1)R
Real Estate Transfer Tax
April 3, 2002

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. M000629A

On June 29, 2000, the Department of Taxation and Finance received a Petition for Advisory
Opinion from Manda Muller Kalimian, P.O. Box 645, Locust Valley, NY 11560.
The issues raised by Petitioner, Manda Muller Kalimian, are:
(1) Whether the transfer by Petitioner of an interest in an entity that owns real property to
a grantor retained annuity trust would be subject to the Real Estate Transfer Tax imposed
pursuant to Article 31 of the Tax Law (the "transfer tax").
(2) Whether the subsequent transfer from a grantor retained annuity trust, at the end of the
term of such trust, of the principal of the trust to a discretionary trust for the benefit of
Petitioner's husband and children would be subject to the transfer tax.
Petitioner presents the following facts as the basis for this Advisory Opinion.
Petitioner is a 99% limited partner in a limited partnership. The general partner of the
limited partnership is a corporation owned by Petitioner. The limited partnership owns only one
asset, commercial real property located in the City of New York. The fair market value of the real
property is $51 million. The real property is subject to mortgages of approximately $41 million.
Petitioner is considering transferring her entire limited partnership interest to an irrevocable
grantor retained annuity trust ("GRAT"). The limited partnership interest is the only asset being
transferred to the GRAT. Pursuant to the terms of the GRAT, the GRAT will pay Petitioner an
annuity payment of approximately $2 million (20% of the net value of the real property) per year
for a term of seven years. The annuity will be paid from income derived from the GRAT, and,
should that income be insufficient in any year, from the GRAT principal. If the GRAT income
exceeds the amount of the annuity, the excess income will be added to the GRAT principal.
Petitioner is both the grantor and the initial trustee of the GRAT. The GRAT further provides that
after a term of seven years (or upon the death of Petitioner, whichever is earlier) payment of the
annuity will cease, the GRAT will terminate, and the GRAT principal will be transferred to a
discretionary trust for the benefit of Petitioner's husband and children. No beneficiary will assume
any liability for the indebtedness on the property.
Under the provisions of the Internal Revenue Code ("IRC"), Petitioner will be making a
taxable gift equal to the difference between the net value of the assets transferred to the GRAT
($10,000,000) and the present value of the annuity stream retained by Petitioner, which Petitioner

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has computed to be $9,927,392. During the term of the GRAT, Petitioner would be deemed to be
the owner of the trust and would be taxed on all income of the GRAT for federal tax purposes (IRC
section 671 and 677). Furthermore, 100% of the GRAT principal would be included in Petitioner's
gross estate were she to die during the trust term (IRC section 2036). Due to this possible reversion,
Petitioner is also deemed to be the owner of the GRAT principal under IRC section 673.
Applicable Law
Section 1402(a) of Article 31 of the Tax Law imposes a tax on each conveyance of real
property, or interest therein, where the consideration for such conveyance exceeds five hundred
dollars.
Subdivision (e) of section 1401 of the Tax Law provides, in part:
(e) "Conveyance" means the transfer or transfers of any interest in real
property by any method, including but not limited to sale, exchange, assignment,
surrender, mortgage foreclosure, transfer in lieu of foreclosure, option, trust
indenture, taking by eminent domain, conveyance upon liquidation or by a receiver,
or transfer or acquisition of a controlling interest in any entity with an interest in real
property. . . .
Subdivision (b) of section 1401 of the Tax Law provides:
(b) "Controlling interest" means (i) in the case of a corporation, either fifty
percent or more of the total combined voting power of all classes of stock of such
corporation, or fifty percent or more of the capital, profits or beneficial interest in
such voting stock of such corporation, and (ii) in the case of a partnership,
association, trust or other entity, fifty percent or more of the capital, profits or
beneficial interest in such partnership, association, trust or other entity.
Subdivision (d) of section 1401 of the Tax Law provides, in part:
(d) "Consideration" means the price actually paid or required to be paid for
the real property or interest therein, including payment for an option or contract to
purchase real property, whether or not expressed in the deed and whether paid or
required to be paid by money, property, or any other thing of value. It shall include
the cancellation or discharge of an indebtedness or obligation. It shall also include
the amount of any mortgage, purchase money mortgage, lien or other encumbrance,
whether or not the underlying indebtedness is assumed or taken subject to.
*

*

*

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(iii) In the case of a controlling interest in any entity that owns real property,
consideration shall mean the fair market value of the real property or interest therein,
apportioned based on the percentage of the ownership interest transferred or acquired
in the entity. . . .
Subdivision (f) of section 1401 of the Tax Law provides, in part:
(f) "Interest in the real property" includes title in fee, a leasehold interest, a
beneficial interest, an encumbrance, development rights, air space and air rights, or
any other interest with the right to use or occupancy of real property or the right to
receive rents, profits or other income derived from real property. . . .
Finally, section 1405(b)(6) of the Tax Law sets forth that conveyances are exempt from the
real estate transfer tax to the extent that they "effectuate a mere change of identity or form of
ownership or organization where there is no change in beneficial ownership. . . ."
Opinion
With respect to Issue (1) raised by Petitioner, the transfer of Petitioner's 99% limited
partnership interest to the GRAT would be a transfer of a controlling interest in an entity owning
real property and, therefore, a taxable conveyance pursuant to section 1401(e) of the Tax Law.
Pursuant to section 1401(d)(iii) of such law, the consideration for such conveyance is measured by
the fair market value of the real property apportioned to the percentage of the ownership interest
transferred, or $50.49 million ($51 million multiplied by 99%).
Petitioner will irrevocably transfer her limited partnership interest to the GRAT. Upon
termination of the GRAT, the trust principal will be transferred to a discretionary trust for the benefit
of Petitioner’s husband and children. While Petitioner will receive payments from the GRAT for
the duration of the annuity term, she assumes no risk of loss during the term. In fact, the annuity
payment of $2 million is guaranteed under the provisions of the GRAT, such that it must be paid,
even where the income realized by the trust is insufficient to pay the annuity. In that instance, the
annuity must be paid from the GRAT’s principal. Income that exceeds the required annuity payment
must be added to the GRAT’s principal.
Currently, a limited partnership owns the real property of which Petitioner is a 99% limited
partner and the sole shareholder of a corporation which is the 1% general partner. After the 99%
limited partnership interest is conveyed to the GRAT, Petitioner will be entitled to an annuity
payment of $2 million per year for the next seven years for a total of $14 million. The present value
of the annuity ($9,927,392) as set forth in the Petition is approximately equal to the value of the
equity of the limited partnership interest ($10 million). After the conveyance, Petitioner’s interest

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in the real property will be comparable to that of a seller of an interest in real property who takes
back a seven-year purchase money note in the approximate amount of $10 million.
Therefore, it is concluded that the exemption from the transfer tax under Section 1405(b)(6)
of the Tax Law for conveyances that effectuate a mere change of identity or form of ownership does
not apply to any part of the conveyance to the GRAT. The conveyance by Petitioner of her limited
partnership interest to the GRAT would be subject to the transfer tax to the full extent of the
consideration ($50.49 million).
With respect to Issue (2) raised by Petitioner, Petitioner's husband and children would be the
beneficial owners of the limited partnership interest held by the GRAT and will continue to be the
beneficial owners of this interest after it is conveyed by the GRAT to the discretionary trust.
Therefore, pursuant to section 1405(b)(6) of the Tax Law, the conveyance of the limited partnership
interest from the GRAT to the discretionary trust, upon termination of the GRAT, will be exempt
from the transfer tax as a mere change of identity or form of ownership or organization since, under
the facts presented, there is no change in beneficial ownership.

DATED: April 3, 2002

NOTE:

/s/
Jonathan Pessen
Tax Regulations Specialist IV
Technical Services Division

The opinions expressed in Advisory Opinion are
limited to the facts set forth therein.