Avoiding the Tax Trap: Navigating Property Transfers and Trusts
ATTENTION: Following the passage of Proposition 19 in California, the only way to avoid reassessments on properties transferred from parent to child is if the property is the primary residence of BOTH the parent AND the child.
The topic of property tax reassessments when transferring property through a trust has been the subject of many discussions, particularly when the transfer involves parent-child relationships. Every time a property is transferred, it is subject to a reassessment for property taxes, however, certain situations allow a property to be excluded from that reassessment. Today we delve into the complexities of these exclusions.
The most prevalent instances concern the transfer to a trust and a transfer between parents and children. These transfers have been explored in our prior posts, specifically the one on Proposition 19 here in California. However, today's focus is on the parent-to-child transfer, often through inheritance in a trust.
Read more: Prop 19, Higher Taxes and Your Estate Plan
To illustrate the scenario, we refer to a real-world example from a 2021 case: Barnet V County of Santa Barbara. The California Court of Appeals found that a son who purchased a property from his parent's trust after their demise, was subject to a reassessment on that transfer because his siblings all had a beneficial interest in the property.
The facts of the case revolve around a trust set up by parents for their rental property. After the parents passed away, the trust became irrevocable, and their children became the beneficiaries. Despite filing a parent-child tax reassessment exclusion form after the trust became irrevocable, and again when the son bought out his siblings and took over the property, the county reassessed the property for taxes.
This case highlights the complexities of transferring properties through a trust and the potential tax implications. While the trust legally owns the property, the beneficiaries have a beneficial interest. In this situation, this interest was used against the brother, leading to a reassessment of property taxes.
There are strategies to avoid such scenarios. One way is to specify particular asset distributions in the trust. For example, if a parent knew that a child wanted a particular property, it could be specified in the trust that the child will receive this property. If there aren't enough funds in the trust to distribute equally, the parents could purchase a life insurance policy, making the trust the beneficiary, which would provide instant liquidity.
If you find yourself in a similar situation, it is crucial to consult an attorney before making any decisions. Having the right legal guidance can prevent unwanted tax reassessments and ensure a smooth property transfer process.
Read more: How to Fund a Trust with Real Estate
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