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Loans to Trusts and Estates
To retain the Prop 13 property tax base, we provide capital to the trust or estate to facilitate equalization of distribution to heirs. In order to take advantage of property tax exemptions and avoid problems caused by cash-poor estates or beneficiaries’ needs, trustees and executors should consider HCS Equity a valuable resource in ensuring a smooth transfer of assets from one generation to the next.
We work closely with both trustees and attorneys to comply with State Board of Equalization tax regulations. We use our own capital as a private lender, provide swift review and approval, present flexible underwriting and terms, implement no prepayment penalties or minimum months of interest, and provide availability of funds within 7-10 days in most cases.
- Proposition 58, adopted in 1986, provides 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, are excluded from the definition of a “change in ownership,” which would ordinarily necessitate property tax reassessment. Proposition 193, adopted in 1996, further expanded this definition to include certain transfers between grandparents and grandchildren, but only if the grandchild’s parent is deceased.
- 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.
- 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 cash from a 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 estate administration.
- Beneficiaries of the real property cannot simply make a private loan to the trust in order to equalize the trust interests because it would be considered payment for the other beneficiaries’ interests in the real property. This would result in a transfer between beneficiaries rather than a transfer from parent to child, which would disqualify the transfer from the parent-child exclusion. (Board of Equalization Letter to Assessor No. 2008/018, Q.36.)
- Estates and trusts with limited liquidity may forfeit these important advantages if the estate or trust has no resources available which would allow the heirs to keep the family home. The California Board of Equalization has specifically sanctioned third-party real estate 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.)
Additional benefits include:
- Competitive interest rates and terms for each loan applicant
- No personal guarantee or down payment required
- Interest-only payments
- No prepay penalties
- No minimum months of interest
- Funds are typically available within 7-10 business days
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 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