The document creating the trust will typically designate who is responsible for paying any property tax due on trust property and may further specify the financial resources to be used for payment.
Most often, the named trustee, whose job it is to manage trust property, will be responsible for paying the tax. If property taxes go unpaid, a trust won’t protect the property from the consequences of local government tax enforcement, which can frustrate or even nullify the trust’s ownership of the property.
Estate planning trusts drafted by Plan Forward Legal include appropriate precautions to ensure property taxes are paid when due and to avoid unintended consequences.
How Responsibility for Paying Trust Property Taxes is Determined
Property taxes are the legal responsibility of the current owner named on the property deed. For property owned by a trust, the name of the trust will appear on the deed. Because trusts are legal entities, the documents that create them must specify who pays property taxes.
Trusts appoint trustees, who manage trust property. Trustees have broad general powers conferred by statute and more specific direction from the trust document.
A standard trust tax payment clause directs the trustee to pay all taxes, assessments, and other charges that come due against any real property held in the trust. The clause may specify the source of trust assets to be used to make such payments or may give the trustee discretion to select the most appropriate source for payment.
In some trusts, the beneficiaries using the property held in the trust are responsible for paying the property tax. An Illinois Land Trust is a statutory creature in which a land trust company holds title to real estate while the trust beneficiaries retain full control and rights to the property.
A land trust is similar to a revocable trust for property tax purposes. Because the beneficiaries retain control of trust property, they are responsible for paying the property tax. However, a land trust is unique in that the trust company is the titled owner and the property interests held by the beneficiaries are deemed personal property and may be transferred without the usual formalities.
What Happens When Taxes are Not Paid on Property Held in Trust
When the responsible party fails to pay the property tax on property held in trust, things can get complicated and more expensive in a hurry. The good news is that no one is going to jail, but penalty interest and fees begin to accrue immediately, which can lead to tax liens against the property and culminate in foreclosure if the tax debt is not resolved.
Cook County gets a bit of a break on the interest rate charged on the balance of unpaid property taxes thanks to a change in the Property Tax Code affecting tax years 2023 and beyond. While most of Illinois is charged 18% per year on delinquent property tax balances, Cook County property owners (with a qualifying population of 3,000,000) pay only an additional 9% annually if they fall behind.
The Cook County Treasurer’s office conducts an annual tax sale to recoup property taxes not paid the previous year. Tax buyers acquire a lien against the delinquent property, and tax debtors incur even greater interest and penalties. If the taxes are not redeemed by payment in full within the statutory period (up to 3 years) the owner can lose the entire property to the tax buyer.
Property Surplus will Go to Former Owner after Tax Sale
Losing equity in property to a tax buyer has been downright punitive since property owners could lose six-figure properties over four-figure tax liabilities. That ended this summer with the passage of Public Act 104-0553.
Going forward, instead of handing property over to the tax buyer if the taxes aren’t paid during the redemption period, it will be sold at public auction, and any surplus over the taxes, interest, and fees will be returned to the former owner.
Falling behind on property tax payments can quickly snowball into an extremely costly and time-consuming battle to redeem trust property. Strategic planning can effectively minimize the risk of losing trust property to satisfy tax obligations.
Trustee Liability for Not Paying Property Tax
A trustee responsible for paying the property tax is not liable for the tax if it is not paid, but can be liable to the trust beneficiaries for the resulting financial loss to the trust if the failure to pay was due to the trustee’s neglect or mistake.
Ways to Ensure Property Taxes Are Paid on Trust Property
The best approach to ensuring timely payment of trust property taxes depends on who has ultimate responsibility for paying them. Some ways to make certain there is sufficient liquidity to meet the tax debt include the following:
- Create a dedicated reserve fund to meet periodic expenses
- Set up automated tax payments
- Designate a specific portion of trust income for property tax payments
- Use an outside service, such as escrow, to manage tax payments
- Require trust beneficiaries to contribute toward property tax payments
Keeping the county assessor up to date on the property’s titled owner and current contact information is critical so tax bills don’t get lost in the shuffle. Requiring detailed record-keeping also promotes prompt payment and helps the trustee avoid errors.
You Can Rest Easy When Plan Forward Legal Drafts Your Estate Planning Trust
Many things in life are not within our control. However, ensuring the taxes get paid on property held in trust is not among them. With proper planning and built-in safeguards, liability for delinquent property tax payments is not a concern, and an estate plan will not be frustrated by local government enforcement actions.
Plan Forward Legal routinely drafts both revocable and irrevocable trusts for estate planning clients. We make sure our clients understand the potential risks to trust property and help them prepare an appropriate strategy to accommodate anticipated as well as unexpected circumstances. When you want it done your way and don’t want to worry about it, call Plan Forward Legal.
