Trusts & Estates

California Proposition 19 Trusts and Estates

California Proposition 19 Trusts and Estates

A property that is a candidate for the parent to child exclusion under Proposition 19 will almost always be held in a trust or an estate. If there is only one beneficiary or all of the child beneficiaries are keeping the property together; the process is fairly simple.

Go to the FILING A CLAIM > HOW TO FILE A PROP 19 PARENT TO CHILD TRANSFER CLAIM found on this website. After answering three questions, the recommended documentation will populate. This is the documentation that should be submitted to the assessor in the county where the property is located.

If there are multiple child beneficiaries and one or more will not be taking the property as part of the distribution; there are some requirements that must be met to gain a full exclusion for reassessment. The most important requirements are:

  1. The distribution of the assets must be equal.
  2. The will or trust may not have language prohibiting a non-pro-rata distribution (a non-pro-rate distribution permits the administrator or trustee to divide the assets among the beneficiaries using different assets. A pro-rata distribution means each beneficiary receives their entitled percentage of each asset).

Use an attorney or property tax specialist to make sure this is done correctly.

Illiquid Trusts and Estates

In the event there are not enough liquid assets to make an even distribution, the trust or estate can obtain an “Equalization Loan” from a 3rd party to equalize the distribution. For example;

The property is the only asset of the trust or estate and is valued at $900,000.
There are no liens on the property.
There are three child beneficiaries.
Only one child will keep the property.
The other two beneficiaries want cash.

The trust or estate would be valued at $900,000
Each beneficiary would be entitled to $300,000 ($900,000 divided by 3)
The trust or estate would obtain an Equalization Loan in the amount of $600,000
Beneficiary 1 would receive $300,000 in cash
Beneficiary 2 would receive $300,000 in cash
Beneficiary 3 (Acquiring Beneficiary) would receive a $900,000 property with a $600,000 loan against it or $300,000 in equity ($900,000 minus $600,000)

This is a simple explanation. The actual calculations may be different when factoring in loan costs and other expenses of the trust or estate.

Rules for Equalization Loans (to gain a full exclusion for reassessment)

Strategies not allowed when trying to obtain a full exclusion for reassessment

  • Taking the property out of the trust or estate to obtain a conventional loan – Most banks and mortgage companies are not able to lend to an irrevocable trust due to their underwriting guidelines. They will loan to individuals and usually require the property to be taken out of the trust or estate before funding the loan. The loan is usually made to the acquiring beneficiary and the proceeds of the loan and title to the property are returned to the trust or estate after the loan is completed. This would be considered a sibling buying out the other siblings instead of a parent to child transfer.  (Annotation 625.0235.005) (Annotation 625.0260) (Board of Equalization Letter 7-9-19)
  • Structuring the transaction as a purchase by the acquiring beneficiary from the trust or estate This would be considered a sibling-sibling transaction as opposed to a parent-child transfer.  (BOE Letter – Structuring as a Purchase)
  • Creating Promissory Notes to use as Assets in the Distribution Ultimately, the acquiring beneficiary will be contributing the money to equalize the distribution and would be considered a sibling-sibling transfer as opposed to a parent-child transfer. (BOE Letter – Promissory Notes as Assets) (Annotation 625.0235) (Annotation 625.0235.005) (Annotation 625.0260)
  • Using an Entity like an LLC or Corporation to Make the Equalization Loan when the Funds are coming from the Acquiring Beneficiary. The Board of Equalization views this as a sham transaction since the legal entity was created for the sole purpose of avoiding property taxes. (BOE Letter – Using an LLC as 3rd Party Lender)