Article
New York should update its guidance to address unintended tax consequences on common trust and LLC structures. In the meantime, here’s what to do.
Across New York City, high-value real estate is commonly held through trusts and limited liability companies, which serve important purposes: from estate planning to privacy and liability protection. Yet many families are discovering that the ownership arrangements their advisors recommended for these purposes now trigger the City’s pied-à-terre (“PAT”) tax, even when the “owner” or a family member is the primary, full-time resident.
The Trust with Multiple Beneficiaries
Consider a common scenario: Parents establish a trust to hold a Manhattan apartment for their three children. One child makes the apartment her primary residence. The other two live elsewhere (perhaps at college, or beginning their own young-adult lives). On its face, the property appears exempt from the PAT tax. After all, someone lives there full time as a primary resident.
In actuality, when a trust has multiple beneficiaries, the beneficial interest in trust property is shared among them. The resident child is not the sole beneficial owner; she holds an undivided interest alongside her non-resident siblings. And the trust itself, not being a natural person, cannot have a “residence.” The result is the PAT tax would apply.
The practical impact extends beyond the tax itself. Friction may develop among beneficiaries over who should bear a tax triggered by one beneficiary’s occupancy, leaving the trustees in a difficult position over whether to use trust funds to pay a tax that benefits only one beneficiary.
The Stacked Structure: Trust Over LLC
A second common arrangement is the “stacked” structure, in which an LLC holds title and is wholly owned by a trust. This layering offers the liability shield and anonymity of the LLC (whose sole asset is the property), along with the estate tax benefits of the trust.
From a PAT tax perspective, however, the extra layer is a problem. The legal owner is the LLC, which, like a trust, is not a natural person and cannot have a residence of its own. Looking through the LLC to the trust, and then to the resident beneficiary, requires disregarding two levels of ownership, which the PAT Tax Rules do not authorize. Thus, even if the trust’s sole beneficiary resides in the unit as his or her primary residence, the arrangement fails to qualify for the primary residency exemption because the LLC, not the trust, owns the property.
The Case for Regulatory Guidance
Neither of these outcomes appear to reflect deliberate policy. The PAT tax was designed to reach absentee owners of high-value residential property, not families who have a member living in the apartment every day. Trusts and LLCs are the “bread and butter” of New York real estate ownership, and penalizing their use was almost certainly not the law’s intent.
Yet the New York City Department of Finance has not meaningfully addressed these structures, and the PAT Tax Rules remain silent on key questions. Should a single-member or disregarded LLC owned, in turn, by a trust, be treated as transparent for purposes of the exemption? Should grantor trust status matter? Could a multi-beneficiary trust qualify on a pro-rata basis, or through a modified beneficiary-occupancy rule?
Without answers, practitioners are left guessing, and clients are left paying. The Department of Finance should update its guidance to clarify the tax’s application to trust and LLC ownership consistent with the law’s intended policy. Doing so would reduce disputes, improve voluntary compliance, and ensure the tax reaches its intended population, not families whose members call New York City home.
Practical Steps Owners Can Take Now
Regulatory guidance may take time. In the interim, owners and their advisors should consider two pragmatic strategies to position their structures for an exemption from the PAT tax.
Carve Out a Sub-Trust for the Resident Beneficiary.
Where the governing trust instrument and applicable state law permit (e.g., through the trustee’s distribution or division powers, or through a statutory or non-statutory decanting into a new trust), the trustee can transfer the apartment into a separate trust or sub-trust for the sole benefit of the resident beneficiary. By isolating both the asset and the beneficial interest in a single individual, that beneficiary should satisfy the primary residence requirement and avoid the PAT tax.
Collapse the Stacked Structure.
For owners with a trust over LLC structure, dissolving the LLC so the trust holds direct title eliminates the most problematic entity layer. The dissolution of a single-member LLC owned by the trust should not give rise to adverse income tax or transfer tax consequences, but owners should confirm this with their tax advisors. Points to address include any required NYC or NYS real property transfer tax filings, mortgagee consent, cooperative board or condominium approvals, and title insurance effects. The trade-off is real: collapsing the LLC means giving up its liability shield and privacy benefits. But simplifying ownership may allow the trust to access an available exemption, which may well justify the costs.
Looking Ahead
Clarity from the Department of Finance would serve both taxpayers and NYC. A well-crafted set of look-through rules and beneficiary-occupancy standards would reduce administrative burdens and disputes and ensure that the PAT tax operates as intended. Until then, owners of high-value NYC apartments held through trusts and LLCs should not wait. Review your ownership structures now, consult experienced tax and estate-planning counsel, and determine whether restructuring today can avoid an unnecessary, and potentially unintended, tax bill tomorrow.