Yes, in most cases. The tax benefit goes with the estate.
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Can I transfer ownership of my OZ investment to a relative?
I’m interested in gifting my OZ investment to my grandchild. Is that possible? What are the tax implications?
Answers
You can transfer your OZ investment to a relative, but when you do, the deferred capital gain comes due.
The general rule is a gifted interest would be an inclusion event negating the QOZ benefits. However, doing so using a grantor trust is a possible work around. If you are not worried about the estate tax, it is possible to retain the investment and pass it to your heirs retaining the tax benefits. This is an area that still needs further guidance and it would be best to proceed with caution. Engaging both an estate and gift attorney as well as a tax professional (CPA or tax attorney) on QOZs would be advisable to work through the details.
Gifting causes loss of deferral.
Yes, you can gift an interest in a OZ investment. However, the April regulations state that transfers by gift are an "inclusion event" (meaning they would trigger recognition of your deferred gain). As an alternative to an outright gift, transfer of an interest in an OZ investment to a grantor trust is not considered an inclusion event, so that may be worth exploring.
You can do it at death. No negative income implications subject to generation-skipping tax implications
That’s a question you will have to ask a tax professional.
It depends. A transfer of a QOF interest by direct gift is treated as a so-called "inclusion event" that ends the deferral for the gain rolled into a QOF. That said, a transfer to a grantor trust where you are treated as the grantor is not an inclusion event. I believe this would include a transfer to a so-called "intentionally defective grantor trust," which is essentially a trust in which you are treated as the grantor for income tax purposes (so that you are treated as the owner of the property held by the trust for income tax purposes), but is treated as a gift to the beneficiaries (e.g., your grandchildren) for gift and estate tax purposes. Although complicated, intentionally defective grantor trusts are commonly used in estate planning.
Not while you are alive.
The second set of regulations provide a list of triggering events. Usually a change in ownership will trigger recognition of the deferred gain. A gift will constitute a change in ownership and with the exception of gift to a grantor trust, will trigger taxation.
That would be considered a gift, which is considered an inclusion event, meaning the deferred gain would become due upon the gift. It would not be an inclusion invent, however, if the grandchild received a distribution from your estate post mortem.
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