Information for Attorneys

Attorneys often encounter significant issues when administering a trust, estate or probate that lacks liquid funds.  These issues frequently include:

  • How to equalize the trust distribution between beneficiaries.
  • How to pay expenses when there is little or no cash in the estate.
  • How to pay off a reverse mortgage that a parent or grandparent has taken out on the home.
  • How to structure the trust or estate administration so that one beneficiary receives real property, while ensuring that the other beneficiaries receive an equal share of cash.

Often, there is too little cash in the estate to achieve these goals, and the trustee or executor is forced to quickly dispose of assets in order to raise the required liquid funds.  Our private, third-party loans to trusts and estates provide the capital needed, without having to resort to selling the family’s real estate assets.

This advantage becomes even more crucial when considering the property tax advantages of retaining family real estate over the long-term.  California Proposition 58, adopted in 1986, and codified in CA Revenue and Taxation Code Section 63.1, provides that a transfer between parents and children of a principal residence (as well as an additional $1 million of the full cash value of all additional real property), is excluded from the definition of a “change in ownership,” which would ordinarily necessitate property tax reassessment. Proposition 193, adopted in 1996, and included in CA Revenue and Taxation Code Section 63.1 by an amendment, further expanded this definition to include certain transfers between grandparents and grandchildren (but only if the grandchild’s parent is deceased).  This law can saves heirs thousands, or even tens of thousands of dollars, in property taxes each year.

The California Board of Equalization has specifically sanctioned third party loans to trusts to equalize the value of beneficiaries’ interests in the trust assets while retaining the applicable property tax exemptions. (See Board of Equalization Letter to Assessor No. 2008/018, Q. 36.)

California Probate Code Section 16246 provides that a trustee may distribute property and money in divided or undivided interests, and to adjust resulting differences in valuation, with in-kind distributions being either pro rata or non-pro rata pursuant to a written agreement.  By leveraging capital from a third-party private loan in conjunction with an agreement between the heirs, executors and trustees can provide a valuable service to families who otherwise would have to forfeit their valuable real estate in the course of trust or estate administration.

The California Board of Equalization has specified that when a trustee has the power to distribute trust assets on a pro rata or non-pro rata basis, the distribution of real property to one child qualifies for the parent-child exclusion if the value of  the property does not exceed that child’s interest in the total trust estate. (See Board of Equalization Letter to Assessor No. 2008/018, Q.35.)  A trustee who elects to make a non-pro rata distribution may equalize the value of the other beneficiaries’ interests in the trust assets by encumbering the real property with a loan, and distributing the loan proceeds to the other beneficiaries. (See Property Tax Annotation 625.0235.005.)

However, a private loan cannot be made by any of the beneficiaries of the real property to the trust in order to equalize the trust interests.  Such a loan would be considered payment for the other beneficiaries’ interests in the real property, resulting in a transfer between beneficiaries rather than a transfer from parent to child.  This would then disqualify the transfer from the parent-child exclusion. (See Board of Equalization Letter to Assessor No. 2008/018, Q.36.)

As many banks will not make loans to trusts or estates (or make them so prohibitive that they are not worth the hassle), a private loan by HCS Equity provides a convenient and often more affordable solution.  HCS Equity offers swift review and approval, no prepayment penalties, flexible terms, and availability of funds within a short time.  Trustees and estate executors should consider HCS Equity as a valuable resource in ensuring a smooth transfer of assets from one generation to the next.

Private Loan Process

Step 1
Determine who will retain property

Oftentimes one or more beneficiary wishes to retain the property and it’s tax base

Step 2
Determine loan amount

The property value, other assets/cash in the trust, and the number of beneficiaries are used to determine the liquidity needs of the trust

Step 3
HCS Equity provides a loan to the trust

HCS Equity provides private capital directly to the trust to create liquidity needed for equalization, a necessary step to avoid reassessment under Proposition 58.

Step 4
Equalization and distribution

Cash or property are distributed as mutually agreed upon by the beneficiaries

Step 5
Change of ownership

Change of ownership and exclusion from reassessment are filed

Step 6
Trust loan is repaid

The beneficiary retaining the property either repays the trust loan with their own funds, or secures conventional financing to repay the trust loan

*This is for illustrative purposes only, HCS Equity does not provide legal advice or services