Proposition 58 and Trusts & Estates, Bottom Line: Equalize the Distribution
The correct process when filing a claim for reassessment exclusion (BOE Form BOE-58-AH) when the property is held in a trust involves equalizing the distribution of the trust assets. This is not an issue when there is only one child beneficiary, but can be trickier when there are multiple children-beneficiaries. In many cases, the value of real property in the trust will make it difficult to equalize the distribution. Revenue and Taxation Code 63.1 allows for the trustee of the trust to borrow money in order to equalize the distribution of the trust. The only caveat is that the child receiving the property in the distribution cannot be the one that contributes the money used to equalize the distribution (They can’t even personally guarantee a loan used to equalize the distribution).
What about Estates?
The data presented in this article focuses on trusts. However, estates should be handled the same way according to Revenue and Taxation Code 63.1 (Annotation 625.0260):
625.0260 Wills – Share and Share Alike. A mother bequeathed real property in her will to three children in equal shares. As such, the children held the property as tenants in common. One child contributed $140,000 to the estate in order to receive a 100 percent interest in the real property, rather than a one-third interest. The contribution was made in order to equalize the shares of the beneficiaries for the purpose of distribution. When a beneficiary makes a money contribution in order to equalize the shares of the beneficiaries, such contribution constitutes payment for the interest of the other sibling beneficiaries and results in a purchase of that interest from the sibling beneficiaries. As such, the transfer of the two-thirds interest in the property does not qualify for the parent-child exclusion and is subject to reassessment. C 2/19/2009.
My understanding is that an estate governed by a will without specific language to the contrary will be distributed on a share and share-alike basis. The same should hold true for an estate without a will. I believe California laws on intestate succession will have a share and share-alike distribution when the surviving parent has passed and there are multiple children. It seems to me that between the trust claims for exclusion and claims for exclusion from estates; the grand majority of the claims for reassessment exclusion would need to prove the ability to make an equalized distribution.
How many trusts/estates can show an equalized distribution?
The following chart shows how much would be needed in “other assets” to equalize distributions based on property value and number of children-beneficiaries.
- The median California home value is $548,000 (Zillow)
- Average Retirement Savings in California is $399,684 (msn.com)
- Average life expectancy after retirement is 18 years (statista.com)
- Average Number of Children per family in 1970 was 2.33 (https://www.statista.com/statistics/718084/average-number-of-own-children-per-family/)
- Chen notes that 70% of households in the U.S. headed by people ages 55 to 64 have approximately $100,000 in savings outside of home equity, and only 9% have $500,000 in savings. (https://www.thestreet.com/story/13633587/1/how-and-why-home-equity-is-playing-a-much-bigger-role-in-retirement.html)
Based on the amount of other assets necessary to make an even distribution and the percentage of people that have enough other assets to make an even distribution; the data leads one to believe that a very small percentage of trusts and estates would have the ability to make an equal distribution of assets. These trusts/ estates would need to obtain a loan from a 3rd party lender in order to equalize the distribution of the trust/estate if the acquiring beneficiary desired a full exclusion for reassessment of property taxes.
What if the system is being “gamed” or the assessors’ offices are not really looking that closely at exclusions needing 3rd party loans to equalize distributions?
There has been testimony at the May 29, 2019 Board of Equalization board meeting regarding some techniques used to deceive the assessors’ offices and gain the exclusion for reassessment without the actual funding of a 3rd party loan. Evidence was presented that questioned the assessors’ offices’ understanding and their requirement for proof that 3rd party loans are funded to equalize distributions. With some diligence at the assessor’s offices, we should expect that many of these approved (full) exclusions would be denied or given partial exclusions. The following calculator was used to quantify the under assessment of California properties.
Estimate of Under-Assessment Calculator
The following is an illustration of a calculator used to determine what the under-assessment of property taxes related to Proposition 58 could be costing California. I put in the numbers I feel are conservative based on the following:
Percentage of Grandparent to Grandchild and Child to Parent Transfers
I really have no data for this, but I believe this percentage is very low. I used 10% to be very conservative.
Percentage of Exclusions with both Parents Deceased
The people I have talked to with experience in Assessor’s offices state that this percentage should be 99%. I used 80% in order to be conservative. You may be able to get a better number, but I am guessing that number will be higher than 80%. The Child to Parent cases should be ignored since they were eliminated already.
Percentage of Full Exclusions
Again, my sources that have worked in Assessor’s offices tell me this number is 99%. I used 80% to be conservative. This number might be very telling. There should be a very large number of partial exclusions at every Assessor’s office based on the numbers needed to make an even distribution. If we check the percentage of partial exclusions in relation to all exclusions, we might learn something.
Percentage of Exclusion Grantees that could show and Equalized Distribution without a 3rd Party Loan
Based on the chart showing what is needed in other assets, the average number of children in 1970 and average retirement savings; it is hard to believe that more than 15% of the trusts/ estates could show an equalized distribution. I used 25% to be conservative.
Percentage of Applicants that are able to get a Family/Friend 3rd Party Loan
Based on what would be needed to equalize distributions (see chart), the number of people in the United States that have enough cash to equalize a distribution and the willingness of an individual to make a loan like this; I believe this number should be 2%. I used 10% to be conservative.
The remaining applicants are the ones that would require a 3rd party loan from a professional lender.
Percentage of Applicants that would qualify for a 3rd Party Loan
A trust loan lender we talked to is funding 48.3% of the clients that are referred to them by trust and estate attorneys. These referrals were trusts that needed 3rd party funding to equalize the distribution of the trust.
Dollar Amount difference between a Full Exclusion and a Partial Exclusion
The lender we spoke with had done this calculation for every one of its clients. Their average client saves $6,262 each year in property taxes by obtaining a 3rd party loan. I used $5,000 to be conservative.
Estimate of Under-Assessment of California Property Taxes
Based on these numbers, California is under-assessing $56,912,544. Send us an email at admin@CaliforniaProposition58.org if you would like us to email you this calculator. You can change the data in the yellow boxes if you think one of more of my calculations is off.