Q: My father recently passed away. He had a trust and in that trust he listed a property for me and my brothers to inherit. The property was a commercial building in Southern California. Two years ago, he did a 1031 exchangeA 1031 Exchange is a means used by investors to defer the payment of federal income taxes. The owner of an investment property will sell that property, deposit the funds with an intermediary company, later buy a replacement like kind property and defer the payment of all federal income taxes. There are many rules that apply to these type of exchanges. for a trailer park in Northern California. He did not update the Trust with the new property. Who is entitled to the exchanged property? The trustee or the kids?
A: First, the trustee isn’t entitled to the ownershipOwnership is the absolute right to use, enjoy, and dispose of property. You own it! of any of the property. The trust beneficiaries, subject to the terms of the trust, own any property that is held by the trust.
Several issues are important in answering your question. The first issue is what are the actual terms of the trust. If the trust specifically provided for you to receive ownership of a building at a pointA Point is one percent of a loan amount. in time in the future and that building is no longer in the trust, you can’t, of course, receive ownership of that building now.
Your father sold that building two years ago in a 1031 exchange. A 1031 exchange allows an owner of an investment property to sell that property, designate a replacement property and purchase that replacement property within 180 days or less to defer the payment of any federal income taxes due to the sale.
If the trust owned the property 2 years ago, the 1031 exchange would only have worked if the replacement property was also purchased by the trust. From your letter, it appears that the trust owned the old property and the trust now owns the replacement property. In selling the old property and buying the new property inside the trust, your dad deferred the payment of federal income taxes but failed to change the trust terms to provide for you to obtain ownership of the replacement property.
Once your father sold the property, you have to look at the terms of the trust. The trust will tell you what your ownership interestInterest is money charged for the use of borrowed funds. Usually expressed as an interest rate, it is the percentage of the total loan charged annually for the use of the funds. is in any property held by the trust. If the trust states that you get a share of the properties owned in the trust, then you own a share in the properties. If your only interest in the trust was to get ownership of the specific old property that is no longer in the trust and the trust did not provide for you in any other way, you may be out of luck and not entitled to any ownership in the properties held by the trust.
Now, if the trust document provided for you to be the owner of the building or any proceeds from the sale of the building, then you’d most likely be entitled to the ownership of the new building owned by the trust.
Frequently, trust documents have provisions for specific properties, but attorneys that draft these documents then also provide for a catch all provision to dispose of any properties that may have been left out of specific designations.
You should take the trust document with you, along with documentation from the 1031 exchange of the old for the new property, to an attorney in your area to look at. This attorney should be able to determine what your interest is in the trust now.