Parsonage Trust System


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Parsonage Trust System

Note: This system is designed for situations where ministers currently own their own homes and are paying property taxes on them. This is often the case with bivocational ministers. This system is especially helpful for ministers who are taking no compensation from their churches, and there are many ministers in such situations. Blessings to them.

A parsonage is the residence of a minister. In every state of the U.S., a parsonage qualifies for a property tax exemption. However, unless the parsonage is structured correctly, the minister will have to pay self-employment taxes of over 15% on the fair market rental value of the parsonage, which, in many cases, would be more than the savings on property tax.

Properly structured, a parsonage can obtain the best of both worlds:

  1. A property tax exemption, and
  2. No self employment taxes.

This is done by putting the residence into a grantor trust. A grantor trust is legally recognized in every respect, except for one — federal income tax purposes. The state or county will recognize the trust and the parsonage for the property tax exemption, but the IRS will not recognize the trust or the parsonage for federal tax purposes. For federal tax purposes, you still own your house and it is not a parsonage.

Here is what the IRS says about a grantor trust:

Q: What is a grantor trust?
A: “Grantor trust” is a term used in the Internal Revenue Code to describe any trust over which the grantor or other owner retains the power to control or direct the trust’s income or assets. All “revocable trusts” are by definition grantor trusts. If a trust is a grantor trust, then the grantor is treated as the owner of the assets, the trust is disregarded as a separate tax entity.

How the system works is that a revocable trust is established for the parsonage. Then, the property is deeded to the trust, as a gift, under the terms of the trust, which means that the deed is also revocable. The revocation is set up in advance, so that there are no tax consequences if one spouse dies before the other, and the property goes to the minister’s estate upon the death of the last surviving spouse.

To set this up, first prepare and record the trust and the deed. Then, apply for the property tax exemption. Prepare and sign the revocation form now, but do not file it. It will be recorded by the estate of the last surviving grantor.

Blank forms and answers to FAQ are provided in the links. Copy, paste, and edit the forms as you and your attorney see fit.