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. 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 if you would like to gain a full exclusion from property tax reassessment. The most important requirements are:
- The distribution of the assets must be equal.
- 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).
In the event there are not enough liquid assets to make an even distribution, the irrevocable trust or probate estate can obtain an Equalization Loan from a 3rd party to equalize the distribution. Here is an example of how an equalization loan works. For this example the family home is the only asset of the trust or estate and is valued at $750,000. Let’s assume that there are no liens on the property, there are three child beneficiaries, only one child will keep the property and the other two beneficiaries want cash:
The trust or estate would be valued at $750,000
Each beneficiary would be entitled to $250,000 ($750,000 divided by the 3 children)
The trust or estate would obtain an Equalization Loan in the amount of $500,000
Beneficiary 1 would receive $250,000 in cash
Beneficiary 2 would receive $250,000 in cash
Beneficiary 3 (Acquiring Beneficiary) would receive a $750,000 property with a $500,000 loan against it or $250,000 in equity ($750,000 minus $500,000)
This is a simplified example but gives you an idea of how the equalization loan works. The actual calculations may be different when factoring in loan costs and other expenses of the trust or estate. Most lenders are unwilling to lend to an irrevocable trust or an estate involved in probate, but we specialize in it and helping clients qualify for California Proposition 19 and providing Equalization Loans. If you, a family member or a client is in need of a Proposition 19 Equalization Loan to avoid reassessment on an inherited home, please call us at (877) 464-1066.
More information on Proposition 19 can be found at https://proposition19.org/