Preventing the Gaming the System for California Proposition 58

CaliforniaProposition58.org is dedicated to ensuring the proper procedures are used when granting exclusions for reassessment. This may include educating assessors and the Board of Equalization on current tactics used to circumvent Revenue and Taxation Code 63.1 as well as procedures in the different assessors’ offices that may need to be addressed in order to comply with the above code.

We are aware of three strategies being used to circumvent Revenue and Taxation Code 63.1 when dealing with a property left in a trust or estate:

1. Creating an LLC or Corporation to fund (or not fund) the required 3^rd party loan to equalize the distribution.
2. Inflate the value of antiques and artwork to equalize the distribution.
3. Structuring the loan to the trust as a purchase money transaction

These basic strategies are easy to execute since very little documentation is required to support claims made on the BOE-58-AH form.

Create an LLC or Corporation

We have heard directly from an attorney that they use this strategy to avoid obtaining a 3^rd party loan. The acquiring beneficiary is directed to create an LLC. It is easy to do and costs $29 on Legal Zoom. Once this entity is in place (usually 3 to 5 weeks), a deed of trust can be created for filing with the county recorder. The recorder will want to see formation documents before allowing recordation of a deed or reconveyance of a deed. Otherwise, one would not need to bother with creating an LLC or Corporation.

The deed of trust is recorded showing the trust or estate as the trustor (borrower) and the LLC or Corporation as the beneficiary (lender). This recorded deed of trust can be used as proof that a 3^rd party loan was obtained by the trust when applying for exclusion for reassessment. The crazy thing is that NO LOAN HAS TO BE FUNDED IF THE ASSESSOR DOES NOT ASK FOR ANY SUPPORTING DOCUMENTATION. The trust distribution spreadsheet or reconciliation will show that the loan was distributed to the trust, but in reality, no such funds existed. The assessor grants the exclusion for reassessment. The acquiring beneficiary takes title to the property at distribution and refinances the property in order to pay the other sibling(s) their share.

In some cases, the acquiring beneficiary may put funds into the trust for his/her siblings using the LLC or Corporation as the 3^rd party lender. Unfortunately, since the owner of the LLC or Corporation is the acquiring beneficiary, this would be considered a sibling to sibling buy out as opposed to a parent to child transfer per the Revenue and Taxation code 63.1. NONE OF THIS IS UNCOVERED SINCE THE DOCUMENTATION REQUIREMENTS ARE MINIMAL.

Inflate the Value of Antiques and Artwork

I chose antiques and artwork, but inflating the value of any asset works. The concept is to inflate the value of other assets to show an equalization in the distribution of the trust or estate. SINCE NO SUPPORTING DOCUMENTATION IS REQUIRED, THE TRUST DISTRIBUTION APPEARS TO BE EQUAL.

Structuring the Loan to the Trust as a Purchase Money Transaction

We have heard from Conventional Loan Officers that deals are structured to show the acquiring beneficiary as the purchaser of the property from the trust. Apparently, this is slipping by some county recorders that are unfamiliar with Revenue and Taxation Code 63.1. This type of transaction should cause a reassessment of the other siblings’ portion of the property. The acquiring beneficiary is buying the interests of the other beneficiaries as opposed to a parent to child transfer. Revenue and Taxation Code 63.1 states that the trustee of the trust can obtain a 3^rd party loan to equalize the distribution. The trust must be the borrower without a personal guarantee by the acquiring beneficiary. The Board of Equalization views a personal guarantee by the acquiring beneficiary the same as if the acquiring beneficiary contributes the funds to the trust in order to equalize the distribution. It is considered a sibling(s) buying out the other sibling(s) and the other sibling(s) portion of the property should be reassessed.

The purchase transaction scenario is set up so that the acquiring beneficiary is the buyer and the seller is the trust. The beneficiaries of the trust would be considered the sellers. Since the distribution of the trust has not been equalized, the transaction is from sibling(s) to sibling(s) and not a parent to child transfer. The acquiring beneficiary would be entitled to receive an exclusion for reassessment for their share of the property, but the other sibling(s)’ share should be reassessed.

These strategies have been shared with the Board of Equalization and the California Assessors Association. It is unclear whether an audit of past transactions will be done and what that means for trustees of trusts and their advisers.