The California Board of Equalization Discusses Deceptive Techniques used on Parent to Child Transfers
The Board of Equalization (BOE) met on May 29-30, 2019 for their monthly board meeting. Testimony at this meeting covered some techniques used by trustees of trusts to circumvent Revenue and Taxation Code 63.1 in order to deceive assessors and receive exclusions for reassessment of property taxes. Two techniques discussed were:
- Creating deeds of trusts that were never actually funded
- Inflating “other assets” on Trust Distribution Statements to show equalized distributions
Revenue and Taxation Code 63.1 covers the transfer of property between a parent and a child and allows for an exclusion for reassessment of property taxes under certain conditions. The process is fairly simple when a parent has only one child, but can get more complicated when the property is held in a trust and there are multiple beneficiaries of that trust. The underlying factor in most cases involving exclusions for reassessment and trusts (or estates) is the equalization of the distribution. If all the beneficiaries receive the same value at distribution, the rest of the process can be easy to navigate.
Trusts and estates unable to make an equalized distribution are permitted to arrange for a loan from a 3rd party. This 3rd party can be anyone that is not the acquiring beneficiary. The loan to the trust or estate can be used to equalize the distribution. Some beneficiaries will receive cash and other assets and one or more beneficiaries will receive the property encumbered by the 3rd party loan. As long as all the beneficiaries receive an equal distribution, the qualification for an exclusion for reassessment can be accomplished by filing the proper paperwork.
Phantom Deeds of Trust
Testimony at the BOE board meeting in May discusses the technique of creating and recording a deed of trust against the property without actually funding a loan to the trust. The process used to deceive the assessors could be as follows:
- Trustee creates an LLC or Corporation
- Trustee creates a deed of trust in the name of the entity (No loan was actually funded)
- Trustee records the deed of trust against the trust property
- Trustee applies for exclusion for reassessment on property using the “phantom” deed as proof a 3rd party loan was received by the trust.
Inflation of the Value of Other Assets
Testimony at the BOE board meeting suggests that trustees may be inflating the value of “other assets” in order to show equalized distributions.
Clawback on Previously Granted Exclusions
It is unclear whether an audit will be done on previously granted exclusions for reassessment involving 3rd party loans and what the ramifications will be for trustees and their advisors.
The BOE and California Assessors Association (CAA) are now aware of the deceptive techniques and considering their options.