How the Role of a Trust Lender Can Impact Beneficiaries in California

Trust Loans in California

How to get a trust loan in California

As most Californians know, property tax measure Proposition 13, voted into law in 1978, capped property tax rates at 1%–2%. Property could now be reassessed on a property transfer from parent to child, with the right to transfer parents property taxes protected by the parent-to-child exclusion which was folded into tax measure Proposition 58, voted into law in 1986, and as you know is now revised, having morphed into 2021 Proposition 19 property tax law, with new rules for property tax transfers in California…

This continued the exemption for property transfers between parent and child, avoiding property tax reassessment with the right to transfer parents property taxes when inheriting property taxes from a parent; with the ability to keep parents property taxes long-term with this type of standard Proposition 19 protected property tax transfer, parent to child transfer and of course parent to child exclusion.

When there is only one heir, child of the parent, property transfer is relatively simple, knowing you have the right to transfer parents property taxes involving only one heir.  Conflict typically surfaces only when there are two or more siblings inheriting property shares… with one heir looking to retain the parent’s home, while the other heir or heirs insist on selling off their inherited property shares; generally calling for a “non-pro-rata” trust distribution, meaning that each heir with an interest in the inherited property receives an equal proportion of the entire estate with the help of a trust lender and a Prop 19 trust loan – however not necessarily of each asset. It’s important to note that non-pro-rata distribution by a trustee can have a major impact on property taxes.

Not using a Prop 19 trust loan solution, the use of personal funds to pay off a sibling co-beneficiary’s interest in a home would be viewed as a “change in ownership” therefore the outcome of this transaction would trigger property reassessment of that beneficiary’s inherited property share. If there are two heirs, each having inherited 50% of the property, the remaining 50% would be open to property tax reassessment. On the other hand, if there were three beneficiaries and only 1/3 of the property were retained, 2/3 beneficiary interest being bought out – 2/3 of the property would be vulnerable to property tax reassessment.

However, with the help of a trust lender funding an irrevocable trust, buying out the beneficiary or beneficiaries looking to sell off inherited shares – the fact that the trust is actually borrowing the funds to equalize distribution to the siblings that are selling out, and funding is not in fact distributed to the sibling or siblings themselves – property tax reassessment is successfully avoided.

For example, let’s examine the Anderson family in North Hollywood, who owns a home valued at $800,000, free and clear of any debt. In other words the family owns the house outright. Assessed value is $100,000. Let’s say, for the sake of argument that sibling Nina insists on selling the home, and wants a cash for her share; while another sibling, Jasper, is determined to keep the home.

(Option A) Jasper cleans out his savings account and pays out $400,000 to buy out Nina’s inherited property shares. This results in a “change of ownership” with respect to Jasper’s 50% property buyout, and the assessed outcome is a 50% property tax reassessment with a significant increase in property taxes.

(Option B) Jasper enlists the help of a trust lender, who provides a $400,000 loan to an irrevocable trust, along with getting approval to allow the trust loan to work in conjunction with Proposition 19; enabling Jasper to keep his parent’s low Proposition 13 protected property tax base. The third-party trust lender also sees to it that that funds are distributed equitably to Nina – in fact with more cash than any outside buyer would be likely, realistically, to offer – with no change in ownership, and no property reassessment; and therefore no property tax hike. The trustee at this point transfers the entire property to Jasper who plans to pay off the $400,000 loan to the irrevocable trust by cashing out a life insurance policy.

Thad Farrell, Proposition 19 / trust loan account manager (Commercial Loan Corporation at 877-756-4454) at the Commercial Loan Corp trust lending firm in Newport Beach, sums up the process as follows:

Usually siblings that want to retain inherited property from parents come to us first, generally after being referred to us by a law firm. Middle class families that can’t afford to pay reassessed taxes on an inherited home… Which pretty much sums up most families these days! Siblings inheriting a home have two options. They can sell or keep their inherited property. In other words, your family has to make up their mind – what they want to do, sell or keep. Selling it is far more expensive. By keeping the home, each beneficiary looking to sell out receives approximately $15,000 extra in a cash trust distribution when compared to selling the home to a regular buyer; because they avoid costly realtor and real estate sale expenses. A realtor typically charges 6%, there can be costs to prepare the home for sale and closing costs such as title, escrow or assistance with buyer closing costs on top of that… Each beneficiary keeping the inherited home winds up saving on average $6,200 (each) in yearly property taxes. So do the math, for starters. Whereas, if the property is reassessed – the cost can be very high.

At the end of the day, there are positive emotional outcomes from this process as well as financial savings and extra funds… However the key result is the fact that when everyone walks away from using a trust loan to take advantage of the proposition 19 parent to child property tax transfer, they all understand that they have just completed a win-win transaction… In other words, unlike most business transactions where there is often a winner and a loser – in this scenario everybody wins and no one loses.

 

Proposition 13 and Proposition 19 in CA 2021 ~ Q & A

Property Tax Information

Inheriting A Home From A Parent in a Trust or Probate

In June of 2021, we looked into the well known California estate law firm Cunningham Legal, who specializes in Estate Planning, Trust Administration, Asset Protection and Advanced Tax Planning — to see how they interpret and answer questions regarding property tax relief benefits in California in 2021, in a Q & A format. 

As the firm points out, were it not for Proposition 13, and now Proposition 19, in terms of protecting your property from reassessment, all properties in California would be immediately reassessed at full current market value when a change of ownership occurs either by death, gift, or sale.  When a property is “transferred,” or what the California State Board of Equalization calls a “change in ownership.” Which is why the parent-to-child exclusion is so crucial, with respect to protecting your property from reassessment.

Question: How does Proposition 13 affect the amount of property taxes California property owners have to pay every year?

Answer: Proposition 13, an amendment to the California Constitution which passed overwhelmingly in 1978, rolled back residential property taxes on a principal residence to 1975 levels, capping them at 1% of assessed value (plus some local additions by county). Assessments were allowed to rise at a maximum of 2% a year — even though real estate prices in California continued to skyrocket.

Question: How can heirs inheriting property from a parent still claim a limited exclusion from reassessments under Proposition 19?

Answer: If you don’t take pre-emptive action, such as establishing a Family Property LLC, then whether you give your child a home or they inherit it you must apply Proposition 19 rules and regulations to a principal residence, unless it is a farm.

Question: What Prop 19 regulations are now in effect for new homeowners inheriting a home from a parent?

Answer: The child of a parent leaving property must move into a transferred or inherited home (or family farm) as their principal residence within one year. Assuming the child does occupy the home — if the value is less than the factored base year value plus one million dollars (indexed for inflation), the base year value will not change.

Question: Who can take advantage of a limited exclusion from property reassessment under Proposition 19 inherited property transfers, moving a low property tax base over to a new home?

Answer: If you’re over 55, protecting your property from reassessment has actually gotten easier… You can now do this three times during their life instead of just once. Other eligible people include those with severe disabilities as well as victims of natural disasters and wildfires.

Question: What happens with multiple children under Prop 19? Must all the children move into the home as their principal residence?

Answer: This still remains to be seen…The California courts are still determining how a lot of details will be handled under Prop 19.

Question: Do you have to occupy an inherited house forever? How long must you live there as your principal residence before a reassessment is triggered?

Answer: Again, we don’t yet know, and further guidance is needed from the CA Legislature.

Question: Does this mean that all properties, principal residences or otherwise, are subject to possible reassessment when ownership is transferred by inheritance or otherwise, so the math can be done on new property taxes?

Answer: Probably yes. This will greatly increase the workload on assessment offices, and possibly create a significant backlog in cases.

This is why law firms such as Cunningham Legal are not simply waiting for answers from the California Courts and the Legislature. Estate law firms like this are proactively building programs to aid in  protecting your property from reassessment — such as their Family Property LLC to help middle class families save on property taxes. Lawyers like Rachelle Lee-Warner, Esq., Partner at Cunningham Legal, are always closely watching legal and legislative opinions to devise the best possible outcomes for their clients.

According to Cunningham Legal, these days even regular middle class families in California need an attorney to guide them regarding inherited property, to make sure Proposition 19 and Proposition 13 are being taken advantage of correctly; to avoid common errors.  The firm stresses the avoidance of common mistakes with grave consequences…

Question: What are some examples of mistakes people make with Prop 13 when it comes to the title of inherited property?

Answer: If you change the title of a house, you are possibly triggering property tax reassessment.

Question: What is a big mistake people make when they leave property in a Living Trust?

Answer: You name multiple beneficiaries in a Living Trust, which includes your house. Some of the beneficiaries are your children and some are not. As a result, the possibility of your children avoiding a reassessment may be lost.

Question:  Are forms a potential area for mistakes?

Answer: Certainly.  For example, you move your industrial property into an LLC so you can protect yourself while renting it out, accidentally triggering a reassessment because you didn’t file the right form on time.  This is precisely why a good attorney is so important, to protect your properties from reassessment.

Question: What paperwork mistake can parents make with respect to leaving property to their children?

Answer: They do not consider creating a Family Property LLC to protect your properties from reassessment when you die.

Question: What else would be a common paperwork error?

Answer: Your heirs simply don’t know they have to file a claim for reassessment exclusion under Proposition 13 within three years, or they may lose it.

Question: What is another common mistake many beneficiaries  make after inheriting a home from a parent?

Answer: Many beneficiaries do not realize that under Prop 19 they must reside in your primary home to claim an exclusion after your death, never establishing clear residency.

Question: Are there other frequent mistakes people make after inheriting property, with a home transferring from parent to child?

Answer: A transfer occurs without proper registration with the state—and 20 years later, the new owner owes 20 years of “supplemental” back taxes at an enormously higher rate. 

Question: What is a common error often made by parents leaving property to children?

Answer: People think that they are passing on a “principal residence” but they haven’t lived there for years, and the state objects.

Question: What about avoiding fair market rates on the transfer of a residential multi-unit property?

Answer: People think they can pass on the parent-to-child exclusion for a multi-unit property, but they only occupy part of it, and the state objects. There are no simple solutions. That’s why folks involved in any of these issues require legal support.  They need a good lawyer!

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Families and individual property owners can set an appointment for Estate Planning, Trust Administration, Asset Protection, or Advanced Tax Planning by calling their office at 1-866-988-3956. You can also contact Rachelle Lee-Warner, Esq., Partner at Cunningham Legal; Office: (805) 342-0970 Web: http://www.cunninghamlegal.com


 

Can an Irrevocable Trust Get A Loan?

Can An Irrevocable Trust Get A Loan

Can An Irrevocable Trust Get A Loan?

As many of us who have traversed the complex trail of real estate loans and long lines of credit know – there are certain non-traditional financing options, such as loans to irrevocable trusts and probate estates, that are generally denied by virtually all lenders – with the exception of certain licensed trust lenders… or more specifically, irrevocable trust lenders.

Conventional lending organizations such a credit union or your friendly local bank, will typically deny any loan request of this kind and will rarely approve a loan like this to an irrevocable trust – until the trust has been dissolved and the home title has been converted to the financial interest of a borrower, or individual.

California trust beneficiaries and trustees find out very quickly that funding for a trust is not the type of financing your standard bank or conventional lending firm will deal with. We find that most niche financing can be accomplished for high net worth individuals, or for individuals with an extremely high credit rating… Not so in this case.

Even if you have a fabulous credit score or credit report, most lending organizations will still not fund an irrevocable trust for you.  For example, when you buyout beneficiaries that are instigating family conflicts by insisting that the family sell off inherited property  and wind up selling their inherited property shares to one or more siblings looking to keep the property in the family – and keep a parent’s low property tax base… This will make the sellers happy to do so when they find out that by avoiding a realtor to sell their inherited parental home plus other hidden costs they end up with a lot more cash in their pocket having their sibling or siblings buy them out through a trust loan.

In fact, no matter how urgent or important our situation is, we discover very quickly that the only type of firm that will fund an irrevocable trust is a trust lender, with genuine expertise in property tax relief, and in the subtle measures contained in Proposition 19, and Prop 13. As long as a loan to an irrevocable trust is structured properly by your trust lender, you should be OK buying out sibling property shares while keeping your inherited home at a low Proposition 13 tax base – what property tax professionals refer to as “equalizing the distribution of a trust…”

So, in other words, the party or parties keeping the parent’s home and low property tax base, as well as the beneficiaries selling off their shares, soon realize they are entering into a win-win transaction, where everyone walks away in better shape than when they began!

And that is the unique upside and tremendous benefit that a good trust lender brings to the table… in particular the well known trust lender, Commercial Loan Corp irrevocable trust loan financing, which focuses on helping beneficiaries to keep a parent’s low property tax base, long-term, through the parent-to-child exclusion, and ability to avoid property tax reassessment, through Prop 13 and now Proposition 19, which still protects and breathes life into property tax relief in the state of California. Commercial Loan Corporation can be reached at 877-756-4454.  They have a flawless record for assisting clients avoid property tax reassessment on an inherited home and their testimonials can be viewed on Google with this link.

Noted property tax relief consultant Michael Wyatt addresses this in his usual articulate fashion:

These property tax benefits from Proposition 13 came about in California because people didn’t want property tax increases of 25% or 30%, or whatever. It really was out of control. And property tax rates were particularly high and unpredictable and unstable in California, for whatever reason, prior to 1978 when Prop 13 passed. So, as you know, property appreciates let’s say on average 20% per year. For the sake of argument, let’s say 20%. But property tax values are only going up by 3%…

People know intuitively that they can’t rely on the Assessors evaluation. Property value goes up 10% or more let’s say, as opposed to assessed value going up by 2%. That’s a significant difference. Was California really that bad before 1978, when Proposition 13 tax relief went into affect? Yes. California was raising taxes more than any other state, before 1978.

Most seniors – before Prop 13 – were reassessed at present-day rates. And many, many were forced out of their home. They simply could not afford the property tax hikes descending on them. Period. People, especially older people, were being impacted with higher property taxes year after year. And in many cases – with catastrophic results, obviously.” Michael Wyatt can be reached at (951) 264-6152.

While at the same time providing the beneficiaries selling off their inherited property shares with more cash than any outside buyer would want to offer them. A definite upside of working with a trust lender, in conjunction with Proposition 19. Obviously, beneficiaries in this sort of equation would have their own attorney or law firm looking over their shoulder, and advising them on the paperwork.

Trust and estate needs are varied and sometimes complex, but taking an experienced view toward the real estate component can offer superior results. One common situation occurs when one heir wants to keep the “old family home,” but the trust entity does not have enough cash or investments to “even the equities” among the beneficiaries. That same heir may want to eventually live in the home, or convert it to a rental property in the future and hold it as a  long-term investment. Either way it is a profitable return.  

Helpful Advisors During a Property Tax Transfer on an Inherited Home

California Property Tax Transfer

California Property Tax Transfer

Transferring A California Property Tax Base On An Inherited Home

If you’re a member of one of the many families who owns real property in California – it would be wise to understand how much Prop 13 and Proposition 19  can affect property tax reassessment, no matter where you live in the state. 

In fact, it’s never been more important than now to understand how profoundly these property tax relief measures can impact your life – plus how important it is to do everything correctly when dealing with property tax breaks like Proposition 19 and Proposition 13.

Number One Strategy: Avoid Making Mistakes!

For whatever reason, a fair amount of residents do not fully understand how these tax breaks work, and how to make them work.  The problem is, families often trigger reassessment of their property taxes by accident, due to a variety of reasons – refusing to hire an estate attorney simply to save money; faulty data; or mistakes filing information; missing document deadlines… so on and so forth.

Consequently, what can be lost can be significant… such as the ability to avoid property tax reassessment, to miss out on property tax breaks such as parent-child transfer and the parent-to-child exclusion; the right to transfer parents property taxes, to keep parents property taxes after a CA property tax transfer, when inheriting property taxes.

It’s not difficult to mishandle a transfer of property when inheriting a home, or mishandle the drafting of a trust in such a way that expectations towards a cap on property taxes are disappointed. Of course, these types of errors and subsequent property tax  reassessment brings great happiness to the parties responsible for collecting property taxes all over California.

Families that are concerned with making sure these processes go smoothly generally enlist advice and/or the services of a real estate law firm or estate attorney such as Rachelle Lee-Warner, Esq. at Cunningham Legal, or a property tax consultant like Michael Wyatt Consulting, or perhaps a Trust Lender such as Commercial Loan Corp.

Proposition 19 and Revisions to California Property Tax Relief

It is difficult to avoid the fact that property tax breaks in California have been impacted, one way or the other, by Proposition 19; which was voted into law Nov 2020, becoming active on Feb. 16, 2021.

Under Proposition 19, a parent can transfer their primary residence and low property tax base to their children (i.e., heirs) — allowing  offspring to move into an inherited home rather quickly, within 12-months, as a principle residence.  Although, if the home is valued at more than $1,000,000 it may be reassessed, with an impact on the parent-to-child exclusion from current tax rates.  On the other hand, if you’re over 55, physically impaired, or a victim in some way of the frequent wildfires California has been experiencing, or some other natural disaster such as a flood or earthquake — you can be a recipient of numerous property tax breaks on top of CA property tax transfer (discussed in detail elsewhere within this Blog).

However, beneficiaries of parental property have other options, such as working with a trust lender such as Commercial Loan Corp, for example, in addition to having expertise in CA property tax transfer,  the ability to provide funding to an irrevocable trust, in order to buyout co-beneficiaries looking to sell off their inherited property shares, as well as establishing a permanently low property tax base. If you think you may benefit from a Proposition 19 property tax transfer on an inherited home, you can reach Commercial Loan Corporation at 877-464-1066 for a free benefit analysis.

New Rules For Property Tax Transfers In California

Rules for California Property Tax Transfer

The new rules for California Property Tax Transfer in 2021

To Transfer Property Taxes: New Rules & Regulations 

When Proposition 19 was voted into law in Nov 2020, taking affect in Feb of 2021 – a learning curve was suddenly in effect for new homeowners and beneficiaries inheriting property from parents. It became essential, especially for middle class and upper middle class families, to quickly learn about changes to tax relief laws that would impact both existing trusts and inherited real estate.

For example, a “qualified personal residence trust” (QPRT), which is a trust that is established with the intent of allowing parents to continue to live in a house; and once that period of time has ended the balance of the interest is transferred to beneficiaries.

Put simply, a QPRT is a special kind of irrevocable trust that allows the person who created it to remove a primary residence from his, or her, estate so gift taxes can be reduced when transferring assets to a beneficiary.

Buying Out Sibling Property Shares While Keeping Your Inherited Home at a Low Proposition 13 Tax Base

As many Californians know, a loan to an irrevocable trust can also be used to buyout siblings’ property shares, inherited from a parent… while allowing beneficiaries who wish to retain that property, to transfer property taxes and keep that home at their parents’ low Proposition 13 protected tax base. It’s essentially a home equity loan on inherited property, made to the trust.

What a lot of people don’t know is the fact that the trustee and beneficiaries who are intent on keeping their inherited property will frequently borrow money to have their trust funded by a qualified trust lender licensed in the state of California so that an equal distribution of the trust can be made in order to meet California Proposition 19 Board of Equalization requirements.

Typically, beneficiaries enlist funding from a trust lender when a trust does not have sufficient cash to make an equal distribution to all the beneficiaries who are looking to sell their inherited property. Hence, the ability to transfer property taxes, mainly to transfer parents’ property taxes; and avoid property tax reassessment of an inherited home. Usually a savings of over $6,200 per year in property taxes. 

Avoiding ‘Fair Market Rates’ with Proposition 19 Trust Loan Exclusion from Property Reassessment

Changes to California property tax relief in 2021 are a challenge to  understand.  Trusts, Californians have discovered, are now used for more purposes than merely deferring property taxes for a few months. Californians have also discovered that they can avoid being reassessed at fair market rates by moving into inherited property as their principle residence  – bearing in mind a $1,000,000 cap on an exclusion from existing property tax rates.

The benefits of making a lifetime transfer of inherited property has to be compared to a transfer at the passing of a parent, which may cause you, as an heir, to inherit a “stepped-up basis” in transferred property. In other words, when you inherit assets that increased in value from when your deceased parent owned it, the asset’s “basis” is increased to the property’s current or “fair market” value on the date of the parent’s passing.  Unless you take steps to avoid this increase, to be able to transfer property taxes successfully, and avoid property tax reassessment altogether!

Saving Money on Property Taxes With Help From Experts!

When purchasing a new home or inheriting your parents’ residence
it makes sense to call a specialist experienced in the use of irrevocable trust loans to maintain your parent’s low property tax base, for example like the Michael Wyatt Consulting firm out in Corona, CA.  If you are inheriting a home, or expect to inherit a home and plan to transfer the low property tax base to a new home down the road, through an irrevocable trust loan in conjunction with Proposition 19, or Prop 58.

If you’re inheriting a home from a parent and wish to avoid property tax reassessment you still have all the tools to do so, as long as all new requirements are met.  If you’re a beneficiary, a brand new homeowners, you can  transfer parents property taxes when inheriting property and thus inheriting property taxes; with the ability  to keep parents low property tax base, as long as you live in your inherited home. 

Michael Wyatt, an Expert on CA Tax Savings for Homeowners Shares His Viewpoint on  Keeping a Low Property Tax Base

As Michael Wyatt of Michael Wyatt Consulting, tells us: 

When it comes to keeping a low property tax base, with Prop 58 [or now Prop 19] and a trust loan, I always bring my clients to Commercial Loan Corp.  Their loans to trusts give my clients several invaluable benefits. Their terms can be a lot more flexible than an institutional lender like Wells Fargo or Bank of America.  They’re self funded, and that’s why they can extend easier terms to clients…

When your parents die, and your trust agreement says ‘equal shares’  –  That means equal shares!  People basically just get the overall concept of getting money from a trust loan even if it doesn’t sell. It makes more sense all around to get a trust loan; and everyone gets more money.

Regarding the ever-present issue concerning families deciding to either sell inherited property; Or opting to keep property inherited from their parents – Mr. Wyatt  weighs in, telling us: 

More heirs and beneficiaries end up not wanting to sell their inherited property. And  if they did want to sell, a lot of people can be easily convinced, with more cash from a trust loan and trust lender than an outside buyer would come up with, ‘equalizing’ things for them…

You have to look at it this way: there are always  one or two, minimum, who  insist on selling their shares in an inherited property. And there is our initial client contact, with those who want to sell.  And that is where these family estate or trust conflicts begin.  If they sell their property, capital gains tax always hits them. That’s where a trust loan comes in, to avoid that.

A trust lender like Commercial Loan Corp, that doesn’t charge any fees up-front, that’s another great benefit.  Plus, they don’t charge interest on their trust loan in advance. Not only that, there is never a “due-on-sale” clause… that requires the mortgage to be repaid in full when sold; or that all or some of the interest owed must be paid up-front to secure the mortgage. No “alienation clause”… in the event of a property transfer, stating the borrower has to pay back the mortgage in full before the borrower can transfer the property to anyone. 

Going with a firm like that – all costs are offset, unless you plan to keep a property for 2, 3 years or less. Then it doesn’t make sense. But generally you’re looking at keeping that property for seven or more years, as a rule...”

To learn more about your options when inheriting a home from parents – transferring a low property tax base to your new primary residence – contact Michael Wyatt  Consulting, or the Commercial Loan Corp, at (877) 756-4454 to speak with a Trust Loan or Property Tax Savings specialist. Chances are the end result will be a much lower property tax bill.

For more information on California Property Tax News, visit the PropertyTaxNews.org website for all of the latest information and updates.