Irrevocable Trusts and Parent to Child Property Tax Transfers

Positive Property Tax Relief Changes for California Families

California homeowners over the age of 55 or with severe disabilities (which is still not defined as to what the exact definition of “severe” is) will have the ability to transfer their current property tax assessed value (i.e., “base year value transfer”) of their primary residence to another primary residence anywhere in California.

Therefore, various expanded property tax exclusions have become available to Californians in all 58 counties in the state – to get approved for a base year value transfer. Other new property  tax relief breaks in California include tax relief opportunities  for homeowners badly impacted by wildfire or other natural disasters.

Of course to take advantage of a parent-child exclusion, inheriting property taxes in California through a property tax transfer with the right to keep parents property taxes basically forever… one has to be inheriting a home used as a primary residence by parents, and must move in within a year also as a primary residence. But that’s  hopefully a small price for families to pay to avoid property tax reassessment, to continue inheriting property taxes in California, which otherwise would be financially crippling for most middle class and upper middle class Californians.  

How Do CA Families Take Advantage of an Irrevocable Trust?

Simply stated, an irrevocable trust is a trust that features terms and conditions that can’t be revised. This is quite different than a revocable trust, which permits a grantor to revise a trust, and to take property back whenever one wishes.

However, California families can use an irrevocable trust not only to list beneficiaries for a trustee, but also define assets that are to be inherited, by exactly whom, and what the timeline of each inherited asset is to be… Along with the Proposition 58 originated ability to execute a buyout of inherited property from co-beneficiaries looking to sell – to beneficiaries looking to buy them out…

This usually takes place with the help of an experienced trust & estate lender, such as Commercial Loan Corp in Newport Beach, and most likely a law firm experienced in Proposition 19 and property tax relief matters, such as the well respected and well known firm Cunningham Legal in Pasadena – who can also draft an irrevocable trust, and advise a family in naming an appropriate trustee, who is both honest and committed to the trust agreement and it’s benefit to the family being served.

The family-trustee relationship going forward does not always work out in perfect terms, however these are the noted and generally accepted objectives for both family and trustee.

The Family’s Trustee

As you probably already know, a trustee is required to act in the best interest of the trust beneficiaries and implement inheritance distributions to all trust beneficiaries according to the terms of the trust, whether they get along or not… and they often do not.  But the trustee must understand that he or she is there to serve the beneficiaries and the trust — not themselves.  Many trustees miss that fact, and must be reminded of this repeatedly sometimes, until it sinks in.

All family members work with their trustee to utilize Proposition 19 in concert with an irrevocable trust loan to minimize property reassessment and estate tax, to protect assets from creditors… and to keep under-age or special needs family members far away from legal and/or financial responsibility.

Protecting the Family From Creditors and Tax Hikes

Setting up an irrevocable trust, working with an irrevocable trust lender can help take advantage of the significant estate tax savings this sort of trust provides. An irrevocable trust also furnishes meaningful protection from creditors. As soon as assets and real property transfer to an irrevocable trust, they no longer are property of a grantor – who generally are parents of the grantees, or beneficiaries – and these assets now become legal property of the trustee to hold in safe-keeping to later distribute to the beneficiaries – who are typically family members. 

So future creditors can’t place a lien on assets transferred to the trust because those assets no longer belong to the grantor (often the parent or parents).  Creditors of beneficiaries generally can’t place a lien against trust assets until those assets are distributed to the beneficiaries, often the grown children of the deceased parents. So these trust protections are certainly worth examining carefully and discussing with your attorney, as are all new rules for property tax transfers in California.