Loans to Trusts To Avoid Property Tax Reassessment

Trust Loans, Probate Loans and Estate Loans

At Commercial Loan Corporation we specialize in providing our clients with trust loans and estate loans. These trust loans are mortgages on real estate in a trust that provide liquidity to an otherwise illiquid trust at the time of distribution. This allows our clients to utilize Proposition 58 or Proposition 193 to transfer the property from a parent to child or grandparent to grandchild to avoid a property tax reassessment and maintain the existing low Proposition 13 protected tax rate. The following trust loan blog article provides information on California Proposition 13, Proposition 58, Proposition 193 and how Commercial Loan Corporation can assist you. For additional information or to begin the process of receiving a loan for your trust, please call us at 877-464-1066 or complete the trust loan information request form located here.

Proposition 13

Proposition 13 was passed by California voters on June 6, 1978. Property values were escalating in the 1970’s due to inflation. Property taxes were going through the roof because people were re-assessed annually at current market values. Proposition 13 froze property tax rates at 1976 levels and limited the increase in tax rates to 2% per year. Once a property was sold, the new tax rate was established at approximately 1% of the sales price and could go up no more than 2% per year.

Proposition 58 (and 193)

Proposition 58 became effective on November 6, 1986. It is a constitutional amendment approved by California voters which excludes from reassessment transfers of real property between parents and children.

Proposition 193 became effective on March 27, 1986. It is a constitutional amendment approved by California voters which excludes from reassessment transfers of real property from grandparents to grandchildren, providing that all the parents of the grandchildren who qualify as children of grandparents are deceased as of the date of transfer.

Why is this important?

Prop 58 and Prop 193 allows a child receiving a property from a parent (or grandparent) to avoid property tax reassessment. The child receiving the property will preserve the Prop 13 tax rate paid by their parents (or grandparents). The property tax savings for the child receiving the transfer of real property can be significant. Let’s say Mom and Dad has owned the family house for 20 years. If the parents bought the property for $200,000, their property taxes would probably be $2,900. That property could be worth $700,000 today. The property taxes would probably be $7,000. The difference is $4,100 per year.

What if the property being transferred is in a trust?

It doesn’t really matter that a property is in a trust. The transfer from a parent to a child will be viewed that same as a property not in a trust. The tricky part is when both parents have passed and there is more than one child (beneficiary). If the trust has assets other than the real property being transferred and those assets can be split among the other beneficiaries so that everyone gets an equal share; the child (beneficiary) taking the real property can probably qualify for the parent-child transfer exclusion afforded by proposition 58.

In the event that there are not enough other assets in the trust to equally divide the trust assets among the beneficiaries, the trust will need to borrow money so that there are enough assets to distribute equally to all the beneficiaries. This is called a 3rd party trust loan. This is where Commercial Loan Corporation comes in. CLC is a California Trust Loan provider and CLC loans help preserve a low property tax rate when taking a property out of a trust.

Even though the child beneficiary taking the real property may have enough cash to lend to the trust so an even distribution can be accomplished, it is viewed as a buyout of the other beneficiaries and the real property will probably be assessed at the current sale price. The trust is required to borrow from a 3rd party in this situation.

Pro Rata Distribution versus Non Pro Rata Distribution

A pro rata distribution of an estate is when each heir receives an equal portion of each asset in the estate. A non pro rata distribution of an estate is when each heir receives an equal proportion of the entire estate but not necessarily of each asset.

$1 million exclusion limit

There is no limit on the transfer of a personal residence.

There is a $1 million dollar limit for all other real property. This is based on the assessor’s value of the other properties as opposed to current market value. A parent may have used part of this exclusion in the past. The State Board of Equalization keeps track in a state-wide database. This can be checked by writing to:

State Board of Equalization
County Assessed Properties Division, MIC: 64
P.O. Box 942879
Sacramento, CA 94279-0064

For additional information on trust loans, probate loans and estate loans or to begin the process of receiving a loan , please call us at 877-464-1066 or complete the trust loan information request form located here.

Parent to Child Transfer and Exclusion for Reassessment of Property Taxes

When a Property is Held in an Illiquid Trust

When the time comes for the distribution of a family trust, often times one of the children-beneficiaries wants to hold on to real property held in the trust. Usually, the property can be transferred along with the Proposition 13 tax base. This can save several thousand dollars in property taxes. If the trust has multiple beneficiaries and there are enough liquid assets to make an even distribution, it is a relatively easy process to obtain the exclusion for reassessment by filing the proper paperwork with the county assessor (Form BOE-58-AH).

What if the Trust is Illiquid?Keeping the exclusion for reassessment when transferring real property to a child-beneficiary can be trickier if there are not enough liquid assets in the trust to make an even distribution. The acquiring beneficiary may want to contribute personal funds to provide liquidity in the trust for an even distribution. This may not be a good idea. The Board of Equalization (BOE) may view this as a sibling buying out the interests of another sibling(s) as opposed to a parent to child transfer. The BOE may reassess the property in this situation. So what do we do? I am glad you asked me that. The BOE allows the trust to borrow from a 3rd party (not one of the beneficiaries) to provide liquidity. The loan must be to the trust without a personal guarantee by the acquiring beneficiary. The BOE may view a loan with a personal guarantee by the acquiring beneficiary the same way it views a contribution of capital to the trust by the acquiring beneficiary.

Getting a 3rd Party Loan
You would think this would be easy. Unfortunately, conventional lenders (banks, mortgage companies)

do not like to lend to trusts and their Deeds of Trust are written with alienation clauses. That means when title to a property changes, the lender can call the loan due. When a trust is distributed, the title to the property will change from the trust to the acquiring beneficiary and the alienation clause would be triggered.

Another option is private money lenders (hard money). These are lenders that have investors, usually individuals, willing to lend their money for a certain rate of return. These individual investors frequently have a requirement that at least 90 days of interest be paid. Some private money lenders charge a prepayment penalty to insure their investors receive 90 days of interest. Private money lenders will typically charge 2 to 3 points on top of the interest rate. This can get expensive.

Finding a family friend or relative that is not a beneficiary and is willing to lend money to the trust may be the best option (least expensive).  Unfortunately, this may be just as difficult as finding a conventional lender willing to lend to a trust.


Commercial Loan Corporation will make these 3rd Party Loans?

There are not many companies doing these loans currently (October 2019). Commercial Loan Corporation in Newport Beach, California is actively lending to trusts. We do not charge prepayment penalties, so loans can be repaid quickly to avoid paying above market interest rates. These loans are not cheap and we provide a cost/benefit calculator on our website. It is important to determine how much one will save in property taxes each year versus the loan costs. The calculator will show how many years it would take to recoup all of the loan costs with property tax savings. If the property will not be held long enough to recoup all of the loan costs, it does not make sense to get a 3rd party loan. In most circumstances the property will be held much longer than the break-even point and the property tax savings will be a great benefit.


What are Commercial Loan Corporation’s Lending Criteria?

  • Property must be non-owner occupied.
  • Preferred loan amount does not exceed 65% of the property’s appraised value (Exceptions have been made for high credit score borrowers with liquid assets greater than the loan amount).
  • There is a plan for repayment by refinance or verified liquid assets (If refinancing, an approval letter is needed from an approved conventional lender).
  • Loans are recorded in the 1st lien position (Loans in the 2nd position are considered on a case-by-case basis).
  • Title insurance is required on all loans
  • Third party escrow is required on all loans
  • Appraisals completed for the trust may be acceptable with a review by a third party appraiser chosen by Commercial Loan Corporation.