Information for Attorneys
California Property Tax Loans
Attorneys often encounter significant issues when administering a trust, estate, or probate that lacks liquid funds, which may include but are not limited to:
- Equalizing the trust distribution between beneficiaries.
- Settling expenses when there is little or no cash in the estate.
- Paying off a reverse mortgage that a parent or grandparent has taken out on the home. This can impact the borrower and the lender alike.
- Understanding how to best structure the trust or estate so that one beneficiary receives real property while ensuring that the other beneficiaries receive an equal share of the cash.
Often, there is little to no cash in the estate to achieve these goals, and the trustee or executor typically is forced to dispose of assets to quickly raise the required liquid funds; however, private third-party loans to trusts and estates provide the capital needed without resorting to selling the family’s real estate assets.
Property Tax Loans in California
Having access to private capital 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 save heirs thousands, or even tens of thousands of dollars, in property taxes each year.
Proposition 19, which went into effect on February 16th of 2021, created a far narrower property tax exclusion for inherited properties. However, for situations with the date of death (or transfer) before 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. For date of death or date of transfer occurring after February 16, 2021, California’s new Proposition 19 applies. Learn more about Proposition 19 and whether it affects you.
The California Board of Equalization has specifically sanctioned third-party loans to trusts can 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.)
Determine who will retain property
Oftentimes one or more beneficiary wishes to retain the property and its tax base
Determine loan amount required to equalize the trust
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 or an estate loan
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. That’s why a free consultation is often the best option if you’re looking for a loan from trust to beneficiary.
*This is for illustrative purposes only; HCS Equity does not provide legal advice or services
*This is for illustrative purposes only, HCS Equity does not provide legal advice or services