Two charitable lead annuity trusts, created under the same family trust instrument with identical remainder beneficiaries, are being combined into one 'Surviving Trust' by court order because their income no longer covers their required annual charitable payments. The trusts jointly own New York real property as tenants-in-common. To protect the separate remainder beneficiaries' interests despite the combination, we're setting up a bookkeeping 'Pro Forma Account' that tracks what each set of beneficiaries would have received had the trusts stayed separate, plus a 'Loan-Back Agreement' so that if a 2003 distribution from that account requires deeding out New York real property, the recipient beneficiaries can immediately loan the property interests back to the Surviving Trust instead of the trust having to sell real estate to raise cash. Does combining the trusts -- or the later Pro-Forma-driven deed-and-loan-back mechanism -- trigger New York's Real Estate Transfer Tax or Real Property Transfer Gains Tax?

Plain-English summary

Doris Jones Stein created a revocable trust in 1982 that, upon her death in 1984, established two charitable lead annuity trusts -- Annuity Trust I and Annuity Trust II -- each required to make annual payments to the Jules and Doris Stein Foundation until fixed termination dates (2003 and 2012, respectively), after which remaining assets would pass to trusts for the Trustor's grandchildren ("Grandchild Trusts") and, contingently, more remote issue ("Issue Trusts"). The two trusts had identical trustees, identical remainder beneficiaries, and were co-owners (as tenants-in-common, in undivided one-third and two-thirds interests) of two parcels of New York real property.

Why combine them. Declining real estate values and rental income, plus lower-than-expected returns on the trusts' stock and securities portfolios, meant the trusts' income could no longer keep pace with their mandatory annual charitable payments. To address this, the trustees petitioned a California court to combine the trusts into a single "Surviving Trust," which the court authorized and which took effect January 2, 1996. The Surviving Trust assumed all the combined obligations to the Foundation (the sum of both trusts' required payments until 2003, then just Annuity Trust II's obligation after that).

Protecting the separate remainder interests. Because Annuity Trust I and Annuity Trust II had different termination dates, the trustees needed a mechanism to make sure combining them didn't shortchange either set of remainder beneficiaries. They set up a "Pro Forma Account" -- a bookkeeping record, valued as of the January 2, 1996 combination date, tracking what would have been distributed to the Annuity Trust I beneficiaries (the Grandchild Trusts) in 2003 had the trusts never combined. When 2003 arrives, the Surviving Trust's trustees will distribute assets equal in value to the Pro Forma Account, using their discretion (under an in-kind distribution clause in the governing trust instrument) to choose cash, in-kind assets, or a combination. If liquid assets aren't sufficient and New York real property interests must be deeded out to satisfy the account, a pre-arranged "Loan-Back Agreement" lets the distributee Grandchild Trusts immediately lend the needed portion back to the Surviving Trust (recorded via matching deeds), so the Surviving Trust can keep meeting its ongoing obligations to the Foundation without actually losing the real estate or being forced to sell it.

Why it's exempt. New York's transfer tax and gains tax both exempt conveyances/transfers that are a "mere change of identity or form of ownership or organization" with no change in beneficial ownership (Tax Law Sections 1405(b)(6) and 1443(5), respectively) -- previously applied to a similar transfer of real property into a revocable grantor trust in Hilles Timpson, TSB-A-92(7)R. Here, the beneficiaries of Annuity Trust I and Annuity Trust II were identical before combination and remained identical (with the same proportional interests) after combination: the Foundation kept the same aggregate distribution rights, and the remainder beneficiaries kept the same vested/future rights to the same portions of trust corpus on the same schedule. Because no one's beneficial ownership interest in the underlying real property actually changed, the Department held both the trust combination itself, and the later Pro-Forma-Account funding mechanism (including the anticipated deed-and-loan-back), qualify for the mere-change exemption from the transfer tax and the gains tax.

What this means for you

Trustees combining or merging trusts that hold New York real property

If the trusts being combined have identical beneficiaries with identical (or proportionally preserved) beneficial interests before and after the combination, New York treats the combination as a tax-exempt "mere change of form" rather than a taxable conveyance -- even where the combination is driven by practical necessity (like insufficient income to meet mandatory distributions) rather than tax planning.

Estate planners structuring complex remainder-interest protections

A bookkeeping mechanism like a "Pro Forma Account" -- designed purely to preserve what each set of remainder beneficiaries would have received had trusts stayed separate -- doesn't itself create a taxable transfer, and neither does a later deed executed to fund that account if a matching "loan-back" deed is executed simultaneously so the underlying property's beneficial ownership snaps right back. The Department looked past the mechanics to the economic reality: no one's beneficial share of the property changed.

Accountants and tax professionals reviewing older multi-step trust transactions

Watch for the repealed Real Property Transfer Gains Tax when reviewing pre-June 15, 1996 real estate transfers in estate and trust files -- it no longer applies to any current transaction, but understanding it matters for historical basis and compliance review of older deals.

Common questions

Q: Does combining two trusts that co-own New York real property automatically trigger transfer tax?
A: Not if the trusts have identical beneficiaries with the same proportional beneficial interests before and after -- that's treated as a mere change of form, exempt from both the transfer tax and (for pre-1996 transfers) the gains tax.

Q: What if the trusts have different remainder beneficiaries or termination dates?
A: This ruling didn't need to resolve that scenario -- here, the trusts' beneficiaries were identical throughout, and only their termination dates differed, which the trustees specifically addressed with the Pro Forma Account mechanism to avoid disadvantaging either group.

Q: Does a later deed used to fund a Pro Forma Account distribution create a taxable transfer, even if it's immediately loaned back?
A: Not on these facts -- the Department found the pre-arranged loan-back, executed together with the distribution deed, meant beneficial ownership of the property returned to the Surviving Trust essentially simultaneously, so no real change in beneficial ownership occurred.

Q: Is the Real Property Transfer Gains Tax discussed in this ruling still relevant to new transactions?
A: No -- it was repealed for transfers occurring on or after June 15, 1996 and does not apply to current transfers; it's only relevant for reviewing pre-1996 transaction history.

Citations and references

Statutes, regulations, and prior opinions:

• Section 1401(e) of the Tax Law (definition of "conveyance" -- any transfer of any interest by any method, including trust combinations)
• Section 1402 of the Tax Law (RETT on conveyances over $500 consideration)
• Section 1405(b)(6) of the Tax Law (mere-change-of-form exemption from the transfer tax)
• Section 1440.7 of the Tax Law (gains tax definition of "transfer of real property")
• Section 1441 of the Tax Law (gains tax on transfers of $1 million+; repealed by Chapter 309 of the Laws of 1996 for transfers on/after June 15, 1996)
• Section 1443(5) of the Tax Law (mere-change-of-form exemption from the gains tax)
• Hilles Timpson, Adv Op Comm T&F, November 3, 1992, TSB-A-92(7)R

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/real_estate_tran_ao_1996.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/multitax/a96_10r.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-96 (10) R
Real Property
Transfer Gains Tax
Real Estate
Transfer Tax
September 10, 1996

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO.M960429A

On April 29, 1996, a Petition for Advisory Opinion was received from Lew R. Wasserman,
Jean Stein, Gerald H. Oppenheimer and Andrew Shiva, as Trustees of Annuity Trusts I & II under
the Restatement of Doris Jones Stein Family Trust dated 4/20/82, P.O. Box 30, Beverly Hills,
California 90213. The Petition raises issues concerning the combination of the two trusts. The
combination was previously addressed in two earlier advisory opinions (TSB-A-95(2)-R dated April
4, 1995 and TSB-A-96(1)-R dated January 26, 1996). However, Petitioners advise that the facts
concerning the combination have changed.
The issues raised by Petitioners, Lew R. Wasserman, Jean Stein, Gerald H. Oppenheimer and
Andrew Shiva, as Trustees of Annuity Trusts I & II under the Restatement of Doris Jones Family
Trust dated 4/20/82, are:

1. Is the combination of Annuity Trust I with Annuity Trust II, pursuant to which the New York
   Properties were transferred to the Surviving Trust on January 2, 1996, including the funding of the
   Pro Forma Account and the execution of the Loan-Back Agreement, exempt from the Real Estate
   Transfer Tax (the transfer tax) pursuant to Tax Law Section 1405(b)(6) and Section 575.10 of 20
   NYCRR as a mere change of identity or form of ownership or organization?
2. Is the combination of Annuity Trust I with Annuity Trust II, pursuant to which the New York
   Properties were transferred to the Surviving Trust on January 2, 1996, including the funding of the
   Pro Forma Account and the execution of the Loan-Back Agreement, exempt from the Real Property
   Transfer Gains Tax (the gains tax) pursuant to Tax Law Section 1443(5) and Section 590.7 of 20
   NYCRR as a mere change of identity or form of ownership or organization?
   Petitioner presents the following facts. On April 20, 1982, Doris Jones Stein (the "Trustor"),
   as trustor, created a revocable inter vivos trust, known as the Doris Jones Stein Family Trust (the
   "Family Trust"). The instrument establishing the Family Trust, as amended and restated on April 20,
   1982, provided for the creation of two charitable lead trusts following the death of the Trustor. The
   two trusts are referred to separately as "Annuity Trust I" and "Annuity Trust II" and collectively as
   the "Trusts". The Trustor died on April 7, 1984, and Annuity Trust I and Annuity Trust II were
   thereafter established in accordance with the terms of the Family Trust instrument and under the
   jurisdiction of the Los Angeles County Superior Court.
   Annuity Trust I and Annuity Trust II were each required to make certain annual charitable
   payments until their respective termination dates. At that time any remaining assets were to be
   distributed to trusts for the benefit of certain heirs of the Trustor or their appointees.

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The remainder beneficiaries of Annuity Trust I and Annuity Trust II are trusts for the benefit
of the Trustor's grandchildren (the "Grandchild Trusts") and more remote issue (the "Issue Trusts").
The Grandchild Trusts were established, and the Issue Trusts were provided for, at the date of the
Trustor's death according to the terms of the Family Trust instrument. There are now ten living
grandchildren of the Trustor and none of the grandchildren has died. Since none of the Trustor's
grandchildren have died leaving issue, no Issue Trusts have been established.
The terms and provisions of Annuity Trust I and Annuity Trust II were substantially identical
except that the Trusts provided for different annual amounts to be paid to charity and had different
termination dates. Annuity Trust I was to terminate on February 10, 2003 and Annuity Trust II was
to terminate on April 7, 2012. The annual payments for the Trusts were required to be made to the
Jules and Doris Stein Foundation (the "Foundation"), an organization exempt from Federal income
tax pursuant to Section 501(c)(3) of the Internal Revenue Code.
The beneficiaries of Annuity Trust I and the beneficiaries of Annuity Trust II were identical
at the time of the combination of the Trusts.
A substantial portion of the assets of Annuity Trust I and of Annuity Trust II consisted of
stocks and securities. In addition, Annuity Trust I and Annuity Trust II were co-owners of two
parcels of real property located in New York City (the "New York Properties") in undivided one­
third and two-thirds interests, respectively, as tenants-in-common. Both the value and the rental
income of the New York Properties have declined. Moreover, due to economic conditions, the
income of the Trusts from their portfolios of stock and securities was lower than was foreseen at the
time of their creation. As a result of these developments, the Trusts' obligations to make annual
contributions to the Foundation were substantially greater than their income.
Due to the financial difficulties facing the Trusts, the trustees agreed to combine the Trusts
on the terms and subject to certain conditions as set forth in an Agreement to Combine Trusts (the
"Agreement"), a Petition for Order Authorizing Combination of Trusts and Amending Trust
Instrument to Effectuate Combination which was filed with the Los Angeles County Superior Court,
and an Order Authorizing Combination of Trusts and Amending Trust Instrument to Effectuate
Combination which was signed by the Los Angeles County Superior Court (the "Order").
The Agreement and the Order provided that, on the effective date specified in the Agreement
(the "Effective Date"), Annuity Trust I was combined with Annuity Trust II. The Surviving Trust
succeeded to all of the assets and assumed all the liabilities of the Trusts existing on the Effective
Date. The Surviving Trust now has an obligation to make annual distributions to the Foundation
equal to the sum of obligations currently required of the Trusts. Prior to February 10, 2003 (the
termination date of Annuity Trust I), the Surviving Trust is required to annually distribute an amount

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Transfer Tax
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to the Foundation equal to the total of the amount which would have been required to be distributed
by the Trusts. After that date, the Surviving Trust will be required to distribute to the Foundation
only the amount required to be distributed by Annuity Trust II.
The Family Trust provides that the trustees of Annuity Trust I and Annuity Trust II are to be
the persons who serve from time to time as the directors of the Foundation. The combination of the
Trusts effected no change in the identity of the trustees. In addition, the trustees now have the same
powers with respect to the Surviving Trust that they had with respect to the Trusts.
The Agreement and the Order provide a method for determining the amount and timing of
any distribution to be made to the remainder beneficiaries of Annuity Trust I (the "Annuity Trust I
Beneficiaries") from the Surviving Trust on February 10, 2003, or thereafter. That method is such
that there will be established on the books of the Surviving Trust a financial record referred to in this
Agreement as the "Pro Forma Account". The Pro Forma Account was set up so that the remainder
interests of the Annuity Trust Beneficiaries and the Foundation's right to distributions was not
affected by the combination of the Trusts.
The Pro Forma Account functions as follows: all of the assets of Annuity Trust I and Annuity
Trust II were valued at their fair market value as of the Effective Date (i.e., January 2, 1996). The
Family Trust, as amended and restated on April 20, 1982 (the "Restatement"), contains an in-kind
distribution clause which grants the trustees the discretion to make trust distributions in cash or in­
kind or a combination thereof. Since the Restatement was the governing instrument of both Annuity
Trust I and Annuity Trust II, it would therefore be at the discretion of the Trustees of the Surviving
Trust as to the character of the assets to be used in order to make the distribution of the Pro Forma
Account in 2003 to the various Grandchild Trusts which were the remaindermen of Annuity Trust
I had it remained in existence. In other words, those Trustees will have discretion whether the
distribution is to be in cash, in-kind, or a combination of cash and in-kind. Presumably, those
Trustees will take into account the economic conditions at the time of distribution, the projections
for the future, possible tax consequences, etc. when making the determination as to the nature of the
assets which are to be distributed.
In all events, the total value of the assets to be distributed in satisfaction of the Pro Forma
Account in 2003 will be equal in value to the value of the assets which would have been distributed
in 2003 had the combination under the Agreement to Combine not occurred and had Annuity Trust
I remained in existence. For convenience, let us call the assets actually distributed the "Distributed
Assets".
Following the distribution in 2003, if any, there may (and most likely will) be a need for the
Surviving Trust to borrow back some or all of the Distributed Assets in order to provide sufficient
cash flow to meet the remaining annuity trust obligations to the Foundation. The distributees of the

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Distributed Assets (the Trustees of the Grandchild Trusts) have agreed at this time to lend back from
the Distributed Assets in 2003 such amount thereof, having a type and value reasonably required by
the Trustees of the Surviving Trust, as will enable the Surviving Trust to complete its obligations
to the Foundation without the need to distribute undivided interests in the New York Properties. The
loan-back will be accomplished pursuant to the terms of a Loan-Back Agreement which was
executed by the Trustees of the Grandchild Trusts.
To the extent liquid assets are not available in 2003 to satisfy the amount of the Pro Forma
Account to be distributed, the Trustees of the Surviving Trust would deed interests in the New York
Properties to the Trustees of the Grandchild Trusts at that time. If the loan-back of all or any part of
such interests is required by the Trustees of the Surviving Trust pursuant to the Loan-Back
Agreement, the trustees of the Grandchild Trusts will execute deeds in favor of the Trustees of the
Surviving Trust, which deeds will be recorded immediately following recordation of the deeds from
the Trustees of the Surviving Trust to the Trustees of the Grandchild Trusts. The Trustees of the
Grandchild Trusts would jointly execute a Distributee's Receipt by which (i) the Trustees of the
Grandchild Trusts acknowledge the distribution and loan-back of the assets, and (ii) the Trustees of
the Surviving Trust would acknowledge the loan-back and value of the property being lent to the
Surviving Trust. A loan back account for the assets which have been loaned back, and for the
income, gains, losses, and distributions therefrom, will be maintained. The Loan-Back Agreement
prescribes a valuation method for the assets to be loaned back.
In summary, the mechanics of the loan-back will be (1) an actual distribution to the
Grandchild Trusts of all assets in 2003 which are reflected in the Pro Forma Account (if positive);
(2) a loan-back of assets to the extent required by the Trustees of the Surviving Trust; and (3) the
Grandchild Trusts (and their respective beneficiaries to the extent of the beneficiaries' interest) will
be treated as the owners of the Distributed Assets (including the assets that are loaned back) for legal
and tax purposes.
Discussion
Section 1402 of Article 31 of the Tax Law, imposes the real estate transfer tax on each
conveyance of real property or interest therein when the consideration for the conveyance exceeds
five hundred dollars.
Section 1401(e) of the Tax Law provides, in pertinent part, that the term "conveyance" means
the transfer or transfers of any interest in real property by any method. This would include a
conveyance upon the combination of trusts with an interest in real property.
Section 1405 of the Tax Law provides, in part, as follows:

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Transfer Tax
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Section 1405. Exemptions.-- (a) The following shall be exempt from payment of real
estate transfer tax:
*

*

*

6. Conveyances to effectuate a mere change of identity or form of ownership or
   organization where there is no change in beneficial ownership, other than
   conveyances to a cooperative housing corporation of the real property comprising the
   cooperative dwelling or dwellings ....
   Section 1441 of the Tax Law imposed the gains tax on the gain derived from the transfer of
   real property or an interest therein, where the real property or interest therein is located in New York
   State and where the consideration for the transfer is $1 million or more.
   Chapter 309 of the Laws of 1996 repealed the gains tax for transfers of real property that
   occurred or occur on or after June 15, 1996.
   Section 1440.7 of the Tax Law defined the term "transfer of real property", in part, to mean
   the transfer or transfers of any interest in real property by any method. This would include a transfer
   upon combination of trusts with an interest in real property.
   Also, Section 1443 of the Tax Law provided, in part, as follows:
   Exemptions.-- A total or partial exemption shall be allowed in the following cases:
   *

*

*

5. If a transfer of real property, however effected, consists of a mere change of
   identity or form of ownership or organization, where there is no change in beneficial
   interest.
   In Hilles Timpson, Add Op Comm T&F, November 3, 1992, TSB-A-92(7)R, it was held that
   the transfer of real property to a revocable grantor trust was exempt from the transfer tax and the
   gains tax pursuant to the exemptions provided at Sections 1405(a)(6) and 1443.5 (the "mere change
   exemption") respectively.
   In this case, the beneficiaries of Annuity Trust I and Annuity Trust II were identical, and
   following the combination remained the same along with their respective interests. In addition,
   immediately after the combination of the Trusts, the charitable annuitant has the same rights to
   distributions that it had prior to the combination. Likewise, the remainder beneficiaries of the Trusts
   are entitled to the same portion of corpus to which they were entitled before the combination. The

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Annuity Trust I Beneficiaries will be entitled to a distribution, or they will have a vested interest in
a future distribution, on the same date that Annuity Trust I would have terminated had the
combination not occurred.
With respect to issue no. 1, since the beneficiaries of the Trusts remained the same and have
the same beneficial interest in the Surviving Trust as they held in the Trusts prior to their
combination and the charitable annuitant has the same rights to distribution that it had before the
combination, there is no change in the beneficial ownership of the real property as a result of the
conveyance. Accordingly, the combination of the Trusts resulted in a conveyance which is exempt
from the transfer tax pursuant to the exemption provided at Section 1405(b)(6) (the "mere change
exemption").
With respect to issue no. 2, the transfer of real property resulting from the combination of
the Trusts was exempt from the gains tax pursuant to the exemption provided at Section 1443.5 of
the Tax Law for the same reasons.
The method of funding the Pro Forma Account and the execution of the Loan-Back
Agreement does not affect the availability of the exemptions.

Dated: September 10, 1996

/s/
John W. Bartlett
Deputy Director
Technical Services Bureau

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.