We're trustees of two charitable lead annuity trusts, created under the same family trust instrument with currently identical beneficiaries, that co-own New York real property as tenants-in-common. We're proposing to combine them into one 'Surviving Trust' because declining income no longer covers required annual charitable payments. To protect the separate remainder beneficiaries' interests, we're setting up a detailed 'Pro Forma Account' formula (tracking what each set of beneficiaries would have received had the trusts stayed separate, adjusted annually for investment gains/losses and a liquidity test comparing available assets against the discounted present value of future charitable obligations). Will combining the trusts 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, currently 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. This is the first (earliest, April 1995) of three related advisory opinions the same trustees sought from the Department about the same proposed trust combination -- followed by TSB-A-96(1)R (January 1996) and, after the actual facts changed, TSB-A-96(10)R (September 1996, addressing the completed transaction).

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. The trustees proposed petitioning a California court to combine the trusts into a single "Surviving Trust," which would assume all the combined obligations to the Foundation.

Protecting the separate remainder interests. Because Annuity Trust I and Annuity Trust II had different termination dates, the trustees proposed a detailed mechanism to ensure the combination didn't shortchange either set of remainder beneficiaries: a "Pro Forma Account," a bookkeeping record valued as of the combination's effective date and adjusted annually -- increased by a formula-based share of the Surviving Trust's investment income (including capital gains) and reduced by both distributions to the Foundation (up to what Annuity Trust I alone would have owed) and a formula-based share of expenses (including capital losses). As of February 10, 2003, the account would be further adjusted for previously unrecognized appreciation or depreciation, and a distribution to the Annuity Trust I beneficiaries would only occur if the trustees determined -- through a liquidity test comparing the Surviving Trust's available liquid assets ("Net Value") against the discounted present value of its remaining Foundation obligations (with a built-in 10% safety margin, called "Discounted Payments") -- that sufficient assets would remain. If the test failed, the computation would repeat annually until it passed or the Surviving Trust itself terminated.

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 -- 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 currently identical and, per the trustees' representations, would remain identical at the time of combination, with the same proportional interests preserved: the Foundation would keep the same aggregate distribution rights, and the remainder beneficiaries would keep the same vested/future rights to the same portions of trust corpus on the same schedule as before. Because no one's beneficial ownership interest in the underlying real property would actually change, the Department held the proposed trust combination would qualify for the mere-change exemption from both the transfer tax and the gains tax.

What this means for you

Trustees seeking advance clarity before combining or merging trusts that hold New York real property

This ruling -- the first of three the Department issued on the same evolving transaction -- shows the value of getting advance tax certainty on a complex trust restructuring before committing to it. But it also illustrates that if material facts change (as they did here, prompting two follow-up rulings), a fresh opinion on the current, actual facts is the safer path rather than relying on an earlier prospective one.

Estate planners structuring complex remainder-interest protections with built-in liquidity tests

A bookkeeping mechanism like a "Pro Forma Account," combined with a formal liquidity test before any distribution, doesn't itself create a taxable transfer -- the Department looked past the mechanics to the economic reality that no one's beneficial share of the property would change.

Accountants and tax professionals researching this specific trust combination

Because this is the earliest of three related rulings on the same transaction, always check for later opinions (TSB-A-96(1)R and TSB-A-96(10)R) addressing the same trustees and trusts before relying on this one's specific facts -- the final ruling on the completed transaction is the most authoritative.

Common questions

Q: Why did the same trustees get three separate advisory opinions on what appears to be the same trust combination?
A: The Department issued a first opinion (this one) based on the trustees' initial plan, a second opinion (TSB-A-96(1)R) roughly nine months later after the transaction was still pending, and a third (TSB-A-96(10)R) after the trustees reported that the combination's actual facts had changed from what was described in the earlier opinions -- each reflecting the Department's analysis as of that stage.

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: 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.

Q: Which of the three related rulings should I rely on for understanding what actually happened?
A: The most recent one, TSB-A-96(10)R (September 1996), which addresses the completed transaction with updated facts -- this earlier opinion reflects only the trustees' initial proposal.

Citations and references

Statutes 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(a)(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")
• Sections 1441, 1443.1 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
• Later related rulings on the same trust combination: TSB-A-96(1)R, January 30, 1996; TSB-A-96(10)R, September 10, 1996

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/real_estate_tran_ao_1995.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/multitax/a95_2r.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-95 (2)R
Real Estate Transfer Tax
Real Property Transfer
Gains Tax
April 4, 1995

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. M941109B

On November 9, 1994, 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 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 Stein
Family Trust dated 4/20/82, are:
1.

Whether the combining of Annuity Trust I and Annuity Trust II, ..... two
charitable lead trusts, will be exempt from the Real Estate Transfer Tax
(hereinafter the "transfer tax") as a mere change of identity of ownership or
organization.

2.

Whether the combining of Annuity Trust I and Annuity Trust II, two
charitable lead trusts, will be exempt from the Real Property Transfer Gains
Tax (hereinafter the "gains tax") as a mere change of identity of ownership
or organization.

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, provides 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 are each required to make certain annual charitable
payments until their respective termination dates, at which time any remaining assets are to be
distributed to trusts for the benefit of certain heirs of the Trustor or their appointees.
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

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Real Property Transfer
Gains Tax
April 4, 1995
Trustor's death according to the terms of the Family Trust instrument. There are at present ten living
grandchildren of the Trustor and none of the grandchildren have died. Since none of the Trustor's
grandchildren have died leaving issue, no Issue Trust has been established.
The terms and provisions of Annuity Trust I and Annuity Trust II are substantially identical
except that they pay different annual amounts to charity and have different termination dates.
Annuity Trust I terminates on February 10, 2003 and Annuity Trust II terminates on April 7, 2012.
The annual payments for the Trusts are 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 are currently
identical. Births, deaths and the naming of appointees hereafter could change the identity of the
beneficiaries of either Trust. However, it is anticipated that if the Trusts are combined, the
beneficiaries of the Trusts will be 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 consists of
stocks and securities. In addition, Annuity Trust I and Annuity Trust II are 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. Recently, both the value and the rental
income of the New York Properties have declined. Moreover, due to current economic conditions,
the income of the Trusts from their portfolios of stocks and securities has been lower than was
foreseen at the time of their creation. As a result of these developments, the Trusts' obligation to
make annual contributions to the Foundation are substantially greater than their current income.
Due to the financial difficulties facing the Trusts, the trustees have 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 to be filed with the Los Angeles County Superior Court, and
an Order Authorizing Combination of Trusts and Amending Trust Instrument to Effectuate
Combination to be signed by the Los Angeles County Superior Court (the "Order").
The Agreement and the Order provide that, on the effective date specified in the Agreement
(the "Effective Date"), Annuity Trust I will be combined with Annuity Trust II. The Surviving Trust
will succeed to all of the assets and will assume all of the liabilities of the Trusts existing on the
Effective Date. The Surviving Trust will have an obligation to make 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 will be required to distribute an amount to
the Foundation equal to the total of the amount 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 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 will effect no change in the identity of the trustees. In addition, the trustees will have the same
powers with respect to the Surviving Trust that they currently have with respect to the Trusts.

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Real Property Transfer
Gains Tax
April 4, 1995
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 the
Agreement as the "Pro Forma Account." The Pro Forma Account will be set up so that the remainder
interests of the Annuity Trust Beneficiaries and the Foundation's right to distributions will not be
affected by the combination of the Trusts.
The Pro Forma Account will function as follows: all of the assets of Annuity Trust I and
Annuity Trust II will be valued at their fair market value as of the Effective Date. The Pro Forma
Account will be credited on the Effective Date with the then fair market value of the principal and
current and accumulated income contribution to the Surviving Trust by Annuity Trust I, less the
liabilities, if any, of Annuity Trust I (other than the liability to make annual payments to the
Foundation). Ail liabilities of the Annuity Trust I on the Effective Date are to be assumed by the
Surviving Trust. Thereafter, until February 10, 2003, the Pro Forma Account will be reduced by
distributions when and as made to the Foundation by the Surviving Trust, but only up to the amount
which would have been distributed by Annuity Trust I had Annuity Trust I remained in existence.
Until February 10, 2003, the Pro Forma Account will be increased by an amount of the income of
the Surviving Trust equal to the sum of (1) one-third of the gross income from the New York
Properties when and as received by the Surviving Trust, plus (2) the remaining gross income of the
Surviving Trust when and as received, excluding gross income from the New York Properties,
multiplied by a fraction, the numerator of which is the balance of the Pro Forma Account (excluding
one-third of the value of the New York Properties) and the denominator of which is the value of the
Surviving Trust (excluding the entire value of the New York Properties). Both the numerator and
denominator of such fraction shall be determined as of the Effective Date. The Pro Forma Account
will also be reduced by (3) one-third of the amount of the expenses of the New York Properties when
and as paid, and (4) a portion of the Surviving Trust's expenses unrelated to the New York Properties
when and as paid determined by multiplying such expenses by the same fraction as is used for
allocating trust income other than income from the New York Properties under clause (2) as
aforementioned. In accordance with the Agreement, such computation of the Pro Forma Account
will be made not less frequently than annually. Additionally, gross income will include capital gains
and expense will include capital losses, such gains and losses to be determined by reference to the
carrying value of the Surviving Trust's capital assets.
As of February 10, 2003, the balance of the Pro Forma Account as determined above will be
further adjusted by (1) one-third of any previously unrecognized appreciation or depreciation in the
New York Properties, (2) one-third of any accrued but unreceived or unpaid income or expenses with
respect to the New York Properties, (3) the same fraction as provided in the preceding paragraph of
any previously unrecognized appreciation or depreciation in the Surviving Trust's assets other than
the New York Properties, and (4) the same fraction of any accrued but unreceived or unpaid income
or expenses with respect to assets other than the New York Properties. This determination will
require an appraisal of the real property and other non-liquid assets of the Surviving Trust as of
February 10, 2003. There will be a distribution to the Annuity Trust I Beneficiaries on

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Real Property Transfer
Gains Tax
April 4, 1995
February 10, 2003, or as soon as practicable thereafter, equal to the positive (but not negative)
balance of the Pro Forma Account, but only if the trustees determines that the Surviving Trust will
have sufficient liquid assets remaining after such distributions to continue to meet its obligations to
the Foundation through the termination date of the Surviving Trust. This determination will be made
by the trustees first valuing all of the assets of the Surviving Trust (including the New York
Properties) as of February 10, 2003. This amount will be reduced by (1) the balance of the Pro Forma
Account as of that date and (2) the value of any real estate and any other nonliquid assets of the
Surviving Trust. The resulting balance, referred to in the Agreement as the "Net Value," will reflect
the value of the available liquid assets of the Surviving Trust as of February 10, 2003. The trustees
will then determine the present value of all future payments required to be made to the Foundation,
using a discount rate equal to the average return on investment realized by the Surviving Trust over
the immediately preceding five years. This amount will then be increased by 10%. The resulting
amount, referred to in the Agreement as the "Discounted Payments," is intended to reflect the present
value of the obligation of the Surviving Trust to the Foundation, with a 10% safety factor added. If
the Net Value equals or exceeds the Discounted Payments, then a distribution equal to the positive
balance of the Pro Forma Account will be made to the Annuity Trust I Beneficiaries on February 10,
2003, or as soon thereafter as practicable. If the Net Value is less than the Discount Payments, then
no distribution will be made as of February 10, 2003.
If the Net Value does not equal or exceed the Discounted Payments as of February 10, 2003,
the Pro Forma Account will thereafter be credited with interest at the legal rate on judgements under
California law, but shall not be increased or reduced by any income, expenses, gains or losses of the
Surviving Trust accrued after February 10, 2003. The Annuity Trust I Beneficiaries will receive
notice of their respective interests in the Surviving Trust, if any, which will be their respective shares
of the positive balance of the Pro Forma Account that would have been distributed to them on
February 10, 2003, but for the fact that the Surviving Trust did not have sufficient liquid assets to
meet its future obligations to the Foundation at that time. The Annuity Trust I Beneficiaries will be
informed in writing that their interests in the part of the Surviving Trust represented by the Pro
Forma Account are fully vested as of February 10, 2003, and are fully transferable.
If no distribution is made to the Annuity Trust I Beneficiaries as of February 10, 2003, the
trustees of the Surviving Trust will make a similar computation to that described above as of
December 31, 2004, and as of December 31st of each succeeding year until the Net Value equals or
exceeds the Discounted Payments, so that a distribution equal to the Pro Forma Account may be
made. If no distribution is made to the Annuity Trust I Beneficiaries prior to the termination of the
Surviving Trust, then upon termination of the Surviving Trust, the Annuity Trust I Beneficiaries will
receive a distribution equal to the positive balance of the Pro Forma Account, if any, as of the date
of termination, and the Annuity Trust II beneficiaries will receive a distribution equal to the balance
of the Surviving Trust.

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TSB-A-95 (2)R
Real Estate Transfer Tax
Real Property Transfer
Gains Tax
April 4, 1995
In accordance with Section 1402 of the Tax Law, a real estate transfer tax is imposed on each
conveyance of real property or interest therein at the time that the instrument effecting the
conveyance is delivered by a grantor to a grantee 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 or 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:
Sec. 1405. Exemptions. - - (a) The following shall be exempt from payment
of the 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;
   In addition, pursuant to Sections 1441 and 1443.1 of the Tax Law, a tax is imposed on gains
   derived from certain real property transfers (the gains tax) where the property is located in New York
   State and where the consideration received or the transfer is $1 million dollars or more.
   Section 1440.7 of the Tax Law defines 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.
   Section 1443 of the Tax Law provides, in part, as follows:
   Sec. 1443. 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, Adv Op Comm T&F, November 3, 1992, TSB-A-92(7)R, the
   Commissioner held that the transfer of real property to a revocable grantor trust was not subject to
   gains tax or transfer tax since the transfer of the property did not result in a change in beneficial
   ownership of the property but rather constituted a mere change in form of identity or form of
   ownership.

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TSB-A-95 (2)R
Real Estate Transfer Tax
Real Property Transfer
Gains Tax
April 4, 1995
In the instant case, the beneficiaries of Annuity Trust I and Annuity Trust II are currently
identical, and following the combination will remain the same along with their respective interests.
In addition, immediately after the combination of the Trusts, the charitable annuitant will have the
same rights to distributions that it had prior to the combination. Likewise, the remainder
beneficiaries of the Trusts will be entitled to the same portion of corpus to which they were entitled
before the combination. Annuity II will terminate upon the same date as before the combination, and
the 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 "1", since the beneficiaries of the Trusts will remain the same and will
have the same beneficial interest in the Surviving Trust as they held in the Trusts prior to their
combination and the charitable annuitant will have the same rights to distribution that it had before
the combination, there is no change in the beneficial ownership of the real property following the
conveyance. Accordingly, the combination of the Trusts is deemed a mere change of identity
pursuant to Section 1405(b) of the real estate transfer tax. Therefore, pursuant to Section 1405(b)
and Hilles Timpson, supra, the conveyance of the interests in real property through the combination
of the Trusts will not be subject to the real estate transfer tax.
Moreover, concerning issue "2", since the beneficiaries of the Trusts will remain the same
and will have the same beneficial interest in the Surviving Trust as they held in the Trusts prior to
their combination and the charitable annuitant will have the same rights to distribution that it had
before the combination, there is no change in the beneficial ownership of the real property following
the conveyance. Accordingly, the combination of the Trusts is deemed a mere change of identity
pursuant to Section 1443.5 of the gains tax. Therefore, pursuant to Section 1443.5 of the gains tax
and Hilles Timpson, supra, the transfer of the interests in real property through the combination of
the Trusts will not be subject to the gains tax.

DATED: April 4, 1995

/s/
PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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