Trust Loans and the Parent to Child Exclusion for Reassessment

When California Proposition 19 went into effect on April 1st, 2021, it replaced Proposition 58. California Proposition 58 previously controlled how a person inheriting a home from a parent could avoid property tax reassessment. Under the newly passed Proposition 19, a few of the rules for obtaining an exclusion from reassessment have changed.

Under Proposition 58, a child inheriting a home from a parent could apply for an exclusion from property tax reassessment with no value limitation, providing it was a primary residence. With Prop 58 you could also keep an investment property with a 1 million dollar exclusion per parent. Under Proposition 19, there is a limit of the current taxable value plus $1,000,000 on a primary home. Additionally, Proposition 19 eliminated the ability to avoid reassessment on an inherited home that will not be used as your primary residence.

There are additional requirements when it comes to receiving an exclusion from reassessment on an inherited home. One key point for the Assessor’s Office is to show that everyone receives their equal share according to what the trust states. If an equal distribution is required, a loan cannot be made to the trust by any of the beneficiaries who intend on keeping the real property. Doing so would be considered a sibling to sibling buyout resulting in a transfer between beneficiaries rather than a transfer from parent to child. For example, if the only asset in the trust was a home worth $900,000 and one of the three child beneficiaries wanted to keep that home, a loan would need to be made to the trust for $600,000. In this situation the two beneficiaries who did not want the home would each receive their $300,000 cash and the other child receives the home with $300,000 equity left in it after the trust loan was made.

When there are insufficient cash assets for an equal distribution to be made from an irrevocable trust, a person will often require the assistance of a trust and estate lender. As documented by the California Board of Equalization, the acquiring beneficiary may not utilize their own funds or make a personal guarantee on the loan. Doing so would create a sibling to sibling buyout, disqualifying them for the full parent to child transfer exclusion. The loan will need to be made directly to the trust, without first removing the property from the trust or requiring a personal guarantee from the acquiring beneficiary. A qualified trust and estate lender will make a loan directly to the trust, providing enough cash for the equalized distribution to be made. The trust lender often works directly with an attorney or property tax consultant. A trust loan is typically a short term loan with no pre-payment penalty. Once the property has been transferred from the trust to beneficiary, the loan can be paid off or refinanced into a conventional mortgage.

Additional information on this is available on the California Board of Equalization website located here.

If you, a family member or client is in need of a loan to a trust or irrevocable trust, you may contact us at (877) 464-1066. One of our Trust Loan Account Managers can answer any questions you may have on the trust loan process and put you in contact with a Qualified Trust & Estate Attorney or California Property Tax Consultant in your area if you are in need of assistance. We will also provide you with a no cost trust loan benefit analysis that will estimate how much you can expect to save by using a trust loan to avoid property tax reassessment on an inherited home.