Leveraging Private Loans to Preserve Inherited Real Property

Trustees, executors, private fiduciaries, and estate and trust attorneys routinely encounter common problems when administering cash-poor trusts or probate estates after someone passes away. These problems include how to equalize the trust distribution between children so that everyone gets an equal share; how to pay expenses when there is little or no cash in the estate; how to pay off a reverse mortgage that a parent or grandparent has taken out on the home; or how to structure the trust or estate administration so that one beneficiary receives real property while ensuring that the other beneficiaries receive an equal share. Often, there is too little cash in the estate to achieve these goals, and the trustee or executor is forced to sell real property assets in the course of the trust or estate administration in order to raise the money needed.

Banks and credit unions offer little help in this regard, whether out of risk-averse policies or simple lack of knowledge regarding trust or estate administration. And wealthier beneficiaries cannot lend the trust or estate money because valuable property tax savings would be lost. Private loans provide trusts and estates with the cash needed to achieve the family’s goals without having to resort to selling the family’s real estate assets.

This advantage becomes even more important when considering the property tax advantages of retaining family real estate. Proposition 58, adopted in 1986, and codified in California Revenue and Taxation Code Section 63.1, provides that a transfer between parents and children of a principal residence, as well as an additional $1 million of the full cash value of all additional real property, is excluded from the definition of a “change in ownership,” which would ordinarily necessitate property tax reassessment. Proposition 193, adopted in 1996, and included in California Revenue and Taxation Code Section 63.1 by an amendment, further expanded this definition to include certain transfers between grandparents and grandchildren, but only if the grandchild’s parent is deceased. This law saves heirs thousands of dollars in property taxes each year.

Note that these exemptions are not automatic, and must be claimed by filing a “Claim For Reassessment Exclusion” and a “Preliminary Change of Ownership Report” with the applicable County Assessor’s office. These forms may be found on each County Assessor’s website.

Estates and trusts with limited liquidity may forfeit these important advantages if the estate or trust has no resources available which would allow the heirs to keep the family home. The California Board of Equalization has specifically sanctioned third party loans to trusts to equalize the value of beneficiaries’ interests in the trust assets while retaining the applicable property tax exemptions. (See Board of Equalization Letter to Assessor No. 2008/018, Q. 36.) California Probate Code Section 16246 provides that a trustee may distribute property and money in divided or undivided interests, and to adjust resulting differences in valuation, with in-kind distributions being either pro rata or non-pro rata pursuant to a written agreement. By leveraging cash from a private loan in conjunction with an agreement between the heirs, executors and trustees can provide a valuable service to families who otherwise would have to forfeit their valuable real estate in the course of trust or estate administration.

The Board of Equalization has specified that when a trustee has the power to distribute trust assets on a pro rata or non-pro rata basis, the distribution of real property to one child qualifies for the parent-child exclusion if the value of the property does not exceed that child’s interest in the total trust estate. (Board of Equalization Letter to Assessor No. 2008/018, Q.35.) A trustee who elects to make a non-pro rata distribution may equalize the value of the other beneficiaries’ interests in the trust assets by encumbering the real property with a loan and distributing the loan proceeds to the other beneficiaries. (Property Tax Annotation 625.0235.005.)

However, a private loan cannot be made by any of the beneficiaries of the real property to the trust in order to equalize the trust interests. Such loan would be considered payment for the other beneficiaries’ interests in the real property resulting in a transfer between beneficiaries rather than a transfer from parent to child, which would disqualify the transfer from the parent-child exclusion. (Board of Equalization Letter to Assessor No. 2008/018, Q.36.)

Since many banks will not make loans to trusts or estates, or make them so prohibitive that they are not worth the hassle, private loans by HCS Equity provide a convenient (and often more affordable) solution, offering swift review and approval, no prepayment penalties, flexible terms, and availability of funds within a short time. In order to take advantage of property tax exemptions and avoid problems caused by cash-poor estates or beneficiaries’ needs, trustees and executors should consider HCS Equity as a valuable resource in ensuring a smooth transfer of assets from one generation to the next. Additionally, we have an extensive network of conventional lenders to help secure take-out financing for beneficiaries retaining the property if necessary, providing an end-to-end solution for estates or trusts.

About HCS Equity:
HCS Equity provides private real estate loans throughout California. For more than 15 years we have used our own capital to provide heirs, probate/estate attorneys, guardians and conservators specialized financing. We are focused on being a financial resource for estates that are experiencing liquidity shortages. We work directly with the executor of the estate or estate attorneys to quickly create liquidity, in order to solve financial problems and to fund buyouts of heirs
and other beneficiaries.

For more information please contact:
Ben Heilig
CA DRE #02074311

About the author:
Mara M. Erlach is a Senior Counsel at Greene Radovsky Maloney Share & Hennigh, LLP, where she is a member of the firm’s Trusts and Estates practice group.


Recent Posts