What is an Opportunity Zone Investment?
Qualified Opportunity Zone investments and Qualified Opportunity Funds were created by the Tax Cuts and Jobs act in 2017. The legislation created an incentive for investors to reinvest capital gains into designated areas known as Qualified Opportunity Zones (QOZs). By supporting these economically disadvantaged localities, the investors benefit from the chance to defer and reduce the obligation to pay taxes on the capital gain.
Sustaining the investment over a more extended period brings a more substantial reward to the taxpayer by increasing the deferral period and the reduction potential. The investment can potentially be any number of things, from multi-family housing or commercial office buildings, clean energy assets, aquaculture, storage, industrial or distribution buildings, or improvements.
Why Move the Investment Into a Trust?
Investors have various reasons for placing assets into trusts. The question is often what is the appropriate trust vehicle to choose.
As an investor, you can establish a living trust (also called a revocable trust) which transfers your assets from you (the grantor) to the beneficiary. The assets become the property of the trust, although they remain under your control and taxable to you. The primary advantage of a living trust is in avoiding probate after your death. However, a living trust does not accomplish any reduction in taxes.
In addition to bypassing potentially costly probate proceedings, the advantages of establishing a trust include preserving your ability to make changes to it as long as you are alive. You also maintain privacy about your assets following your death since nothing needs to go into the public record. In addition, because a trust eliminates the need for a standard will, it can easily avoid disputes and challenges over your distribution of assets to beneficiaries. Finally, a living trust can also help a married couple maintain separate property apart from community property (for example, in the case of a second marriage).
In contrast, an irrevocable trust (as implied by the name) can’t be changed or terminated unless the beneficiary agrees or a change is ordered by a judge. The grantor (you) gives up their rights to the assets in the trust when you create it. Irrevocable trusts may have some tax advantages. However, given the high threshold for triggering estate taxes (currently $11.58 million at the federal level, although some states impose taxes on smaller amounts), this is not a great incentive for the action.
Still, experts seldom recommend irrevocable trusts unless the grantor is seeking to protect assets from creditors. Even then, the trust must benefit someone unrelated to the grantor in most cases and be established in one of a tiny number of states with suitable trust laws. Even then, the protection is not guaranteed.
Some individuals may benefit from placing assets in an irrevocable trust if they need federal health and disability benefits.
When considering placing a QOZ investment into any trust, the investor may want to reflect on whether controlling the investment is an ongoing goal. The answer to that question may influence the decision and the type of trust to use.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities.