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.)
Proposition 19, which went into effect February 16th of 2021, created a far more narrow property tax exclusion for inherited properties. However, for situations with date of death (or transfer) prior to February 15th of 2021, the rules for Proposition 58/193 will remain in effect. For situations where the date of death (or transfer) occurs before February 15th, 2021, trusts and estates can still retain their Prop 13 property tax base. In all other date of death, or transfer situations after February 15th, 2021, California’s new Proposition 19 applies. Click Here to learn more about Proposition 19 and whether it affects you.
Private Loan Process
Determine who will retain property
Oftentimes one or more beneficiary wishes to retain the property and it’s tax base
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
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.
Equalization and distribution
Cash or property are distributed as mutually agreed upon by the beneficiaries
Change of ownership
Change of ownership and exclusion from reassessment are filed
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