How can I transfer my rental properties into a trust without triggering double taxation? – North Carolina

Short Answer

In North Carolina, moving rental properties into a revocable living trust does not by itself create a new layer of income tax; a revocable trust is typically ignored for income-tax purposes. Double taxation usually comes from holding real estate in a C‑corporation. To avoid it, keep rentals in pass‑through entities (like LLCs or S corporations) and have your trust own those interests, or deed personally held properties into your trust. Record deeds properly, avoid consideration if possible, and ensure the trustee manages rentals prudently.

Understanding the Problem

You want to know how, under North Carolina law, you can place your rental portfolio into a trust without causing double taxation. You and your spouse currently hold properties through a corporation that creates double taxation, and you also want probate avoidance and a long‑term legacy for your family. This article explains how to structure title and trust ownership to meet those goals under North Carolina law, and where to file the needed documents.

Apply the Law

Under North Carolina law, a revocable living trust can hold real estate directly or can hold interests in entities (such as LLCs) that own the real estate. A revocable trust is typically a “grantor” trust for income tax, so simply titling property to the trust does not add a second layer of tax. Double taxation usually arises when rental properties sit in a C‑corporation, where corporate income is taxed and shareholder distributions are taxed again. To avoid that, North Carolina owners often keep rentals in pass‑through entities and have the trust own the entity interests. Transfers of North Carolina real property into a trust are done by deed and recorded with the Register of Deeds in the county where the property is located. If no consideration is paid, the state excise tax is typically not due, but recording fees still apply.

Key Requirements

• Choose the right owner: Use a revocable living trust for probate avoidance; hold rentals in pass‑through entities (LLC or S‑corp) and have the trust own those interests to avoid corporate double tax.
• Title and recording: For properties you own personally, prepare and record a deed into your trustee’s name at the county Register of Deeds; if spouses own as tenants by the entirety, both should join the deed and consider titling to both spouses as co‑trustees.
• Entity interests vs. deeds: If rentals sit in an LLC, assign the LLC membership interests to the trust rather than deeding out each property; update the operating agreement and internal records.
• Consideration and excise tax: Keep the transfer a no‑consideration estate‑planning conveyance to avoid state excise tax; expect normal recording fees.
• Trustee duties: The trustee must manage rentals prudently, keep records, and inform beneficiaries as required; use a certification of trust with third parties to protect privacy.
• Spousal and family protections: Structure spousal interests to preserve protections and elective‑share compliance; beneficiary designations can direct retirement and life insurance outside probate while coordinating with the trust plan.

What the Statutes Say

• N.C. Gen. Stat. § 36C-10-1013 (Certification of trust) – Lets you prove trust authority without disclosing the full trust.
• N.C. Gen. Stat. § 36C-9-901 (Prudent investor rule) – Sets the trustee’s investment standard for income‑producing assets.
• N.C. Gen. Stat. § 39-13.6 (Tenancy by the entirety) – Describes how spouses hold and convey property together.
• N.C. Gen. Stat. § 105-228.30 (State excise tax on conveyances) – Excise tax applies to deeds when consideration is paid.

Analysis

Apply the Rule to the Facts: Because a revocable living trust is typically ignored for income tax, deeding personally held North Carolina rentals into your trustee’s name will not itself create a second tax layer. Your double taxation arises from a corporate owner. To avoid it while still using a trust, hold each rental in an LLC or S‑corp and assign those ownership interests to your revocable trust; record deeds only if you currently hold title personally. Your trustee will then manage the rentals under the prudent‑investor and recordkeeping duties.

Process & Timing

1. Who files: You (or your attorney). Where: County Register of Deeds in North Carolina where each property sits. What: Prepare and record a deed from you to “[Your Name], Trustee of the [Trust Name]” for personally titled properties; for LLC‑held rentals, execute an assignment of membership interests to the trustee and update the LLC records. When: Before death and ideally before refinancing or sales to avoid lender delays.
2. Notify lenders and insurers; some mortgages require consent for transfers to a trust. Update property insurance to reflect the trustee as insured and confirm liability coverage. Use a certification of trust when dealing with banks, tenants, and closing attorneys.
3. For retirement accounts and life insurance, update beneficiary designations (often to individuals or to a properly drafted trust share). Keep a written trust asset schedule and store recorded deeds with the trust records.

Exceptions & Pitfalls

• Leaving rentals inside a C‑corporation continues double taxation. Consider a pass‑through structure owned by the trust; entity changes can be taxable, so coordinate with tax advisors before acting.
• Due‑on‑sale and insurance issues: Some loans or policies require notice or consent for transfers to a trust or changes in LLC ownership.
• Tenancy by the entirety: Spouses should both join any deed and consider titling to co‑trustees to preserve spousal protections.
• Excise tax and fees: If consideration is paid on a deed, state excise tax applies. Even without consideration, expect recording fees.
• Trust administration: The trustee must keep rentals well‑managed, maintain separate records, and provide beneficiary information as required; court accountings are generally not required unless the trust says so.

Talk to a Estate Planning Attorney

If you’re dealing with moving rentals into a trust and want to avoid double taxation while protecting your family, our firm has experienced attorneys who can help you understand your options and timelines. Call us today at [919-341-7055].

Disclaimer: This article provides general information about North Carolina law based on the single question stated above. It is not legal advice for your specific situation and does not create an attorney-client relationship. Laws, procedures, and local practice can change and may vary by county. If you have a deadline, act promptly and speak with a licensed North Carolina attorney.