16 Oct If I put my house in a trust, what happens to the Senior Freeze?

Q. If I put my house in a third-party supplemental benefit trust for my disabled daughter will I still be able to claim the Senior Freeze property tax discount? Also, can my name be on the third party supplemental benefit trust with my other children and after my passing will it go to them? Is there any way they can avoid paying capital gain taxes on the property if and when they sell it?
— Senior

A. There’s a lot to unpack with your question.

First, we strongly recommend you meet with an estate planning attorney who specializes in these trusts so they can go over your goals and what documents would be most appropriate for your situation.

Here’s what you should know going in.

A third-party supplemental needs trust, also known as a third-party special needs trust, is a great option for parents, grandparents or legal guardians to set aside their assets for the benefit of a disabled individual who is — or intends to be — a recipient of means-tested benefits such as SSI and/or Medicaid, said Donald A. Dennison, an attorney in the Elder Law department at Mandelbaum Barrett PC in Roseland.

Generally, he said, assets of a parent, grandparent or legal guardian transferred into a third-party supplemental needs trust are not counted as “available assets” to the trust beneficiary, thereby preserving the funds in trust while the beneficiary continues to receive means-tested benefits.

This money can be used for things such as vacations, furniture, and expenses other government benefits don’t usually pay for, he said.

“Despite these awesome benefits, third party supplemental needs trusts do have some drawbacks,” Dennison said. “The answer to your question highlights one of those drawbacks. In short: you will no longer be entitled to your senior freeze discount if your house is transferred (re-titled) into the name of the third-party supplemental needs trust.”

The Senior Freeze property tax discount applies to natural persons owning property, not legal devices controlling the disposition of assets, such as a trust, he said. Therefore, one of the many considerations a parent, grandparent or legal guardian must make in these situations is whether they can afford to drop their property tax discounts, whether they come in the form of a Senior Freeze, ANCHOR benefit, or VA benefit.

Dennison said generally, a third-party supplemental needs trust has four necessary classes of people: Beneficiary, Trustee, Grantor and Death Beneficiaries.

The beneficiary is the special needs individual who the trust is established for.

The trustee oversees and manages the assets held in trust.

The grantor is the person who establishes and funds the trust. In third-party supplemental needs trusts, the grantor is typically a parent, grandparent or legal guardian who transfers their assets into trust for the benefit of a disabled child or ward.

“Because these funds originate from a third party (hence the name) a third-party supplemental needs trust provides the flexibility of nominating beneficiaries, other than the State of New Jersey, to receive the remaining trust assets following the death of the beneficiary,” he said. “The same cannot be said about first-party special needs trust, which are required to nominate the State of New Jersey as the primary beneficiary of the remaining funds held in trust, following the death of the beneficiary, and to the extent government benefits have paid out to or for the benefit of the beneficiary during their lifetime.”

In terms of capital gains taxes, Dennison said assets owned by a third-party supplemental needs trust enjoy a step-up in basis to the date of death value of the property as measured by the grantor’s life.

“In other words, if mom transfers her real property into a third-party supplemental needs trust for her disabled adult daughter, upon the death of both mom and daughter, the tax basis is measured by using the value of the property as of mom’s date of death,” he said. “This often results in the minimization — or complete negation, in some cases — of capital gains tax.”

Once again, you should meet with an elder law attorney who can review all of your options.

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This story was originally published in October 2024.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.