Property Transfer in California Between Parent and Child

California Parent to Child Property Tax Transfer

California Parent to Child Property Tax Transfer

Ability to Transfer Property Taxes to Children

Let’s say you’re inheriting an aging but beautiful home from your parents, with a terrific pool, and fireplaces everywhere… with a wooden deck the family has conducted so many marvelous surf & turf barbecues on – with that brand new grill, with your favorite smoked hickory-flavored charcoal… And plenty of ice-cold drinks.

Just walking around the backyard near the grill brings back wonderful emotional family memories when you and your siblings inherited the entire property from your parents and – as your lawyers referred to it – the property was “transferred” to a new owner – in this case you…. despite the fact that your siblings are determined to sell out their property shares.  While you are determined to avoid triggering crippling property tax  reassessment!  At all costs.  So you talk to your family lawyer, and call a reliable trust lender to discuss your ability to transfer property taxes to children… Like the well known Commercial Loan Corp in Newport Beach. 

In which case a parent-to-child exclusion is secure, and makes a lot of sense – working with an irrevocable  trust loan, in conjunction with Prop  19, which has basically replaced the Proposition 58 parent-child exclusion. And simply requires a careful, but determined, step-by-step process – to reach the desired outcome – to avoid current property reassessment; while buying out property shares inherited by siblings, and nailing down sole ownership of that wonderful old inherited home with all those lovely old  dreamy family memories!

How to Avoid Triggering Property Tax Reassessment

It’s terribly important to pay attention to good advice from your attorney,   and your trust lender, on mistakes to avoid when transferring a property tax base… In most cases, your inherited property is generally reassessed by your friendly neighborhood CA County Assessors Office; while the new owner pays a higher property tax. The parent-child exclusion was voted into law on Nov 6, 1986… enabling beneficiaries to inherit property from parents, smoothly and quickly – avoiding property tax reassessment and     keeping a low property tax base when inheriting a home.

Thankfully,  new rules for property tax transfers in California  are  still  giving parents the ability to transfer property taxes to children without any issues – and enables a family/parent oriented beneficiary (usually the favorite child!) to  buyout siblings’ share of inherited property and transfer parents’ property taxes through a standard property tax transfer – getting a transfer of property between siblings accomplished without a miserable property tax hike slamming you out of the blue. 

Transferring a Family Home to Beneficiaries

As most of us know by now, given the publicity Proposition 19 has received – at the root  of all this, it’s simply a matter of inheriting property taxes at a profoundly lower rate from parents… with the ability to transfer smoothly from parent to child,  and keep parents property taxes basically forever – for that inherited family home at least. And possibly more, if you have the right lawyer, and the situation  merits it.

In other words, as estate and real property attorneys used to put it, “Avoiding property tax reassessment is why people take advantage of exclusions from tax reassessment under Proposition 58 .” And as they phrase it now, “Avoiding property tax reassessment under Proposition 19 property tax exclusions ”.  C’est la vie.

Skipping a generation, if property transfer is managed from a grandparent to a grandchild, as long as the the beneficiary’s parent is not alive, inheriting or transferring property will thankfully not increase property taxes.

For a free benefit analysis on transferring a property tax base from a parent to a child on an inherited home, you can complete the following form, in just a few minutes….

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.