PART THREE: Loans to Irrevocable Trusts and Equalizing a Trust Distribution

Lending to an Irrevocable Trusts

Improving Family Security With Low Property Taxes

When beneficiaries in California are inheriting real property and looking to transfer parents property taxes, it’s typically a house possibly with some land from parents… and yet when they are involved in emotional and/or financial conflict with co-beneficiaries, generally siblings – revolving around the issue of retaining an inherited property, or selling it to an outside buyer, one or more beneficiaries who prefer to keep the property in question frequently will attempt to buyout the beneficiaries looking to sell their shares in an inherited property.

One increasingly popular method of being able to transfer parents property taxes, while accomplishing an inherited property buyout, involves the hiring and collaboration of a trust lender that is experienced in loans to irrevocable trusts, as well as the expert use of California Proposition 13 and the Proposition 58 property transfer tax break measure. As is the case in this particular account involving the Smith family in Southern California, and the Commercial Loan Corporation.

If qualified, and over 55 years of age, many property owners involved in this exact process can also apply a significantly lower tax rate to a secondary dwelling, as long as they own the initial inherited property for 2 years or more.

Rules, regs and steps regarding the trust loan process – in conjunction with California Proposition 58:

1. Determination of who will keep the property
2. Determination of the loan amount
3. Loan to trust/estate is implemented
4. Trust lender equalizes cash distribution to beneficiary or beneficiaries
5. Property is transferred into the acquiring beneficiaries name
6. Parent child exclusion is filed, avoiding property tax reassessment
7. Five to seven day funding turnaround
8. The trust loan is repaid, concluding a win-win family arrangement
9. No Up-Front Costs
10. No Hidden Fees

An Alternative Financial Solution for Beneficiaries

One member of the Smith family found the Commercial Loan Corp firm on Google.com, while the other three family members were referred to the trust lender by their attorney. Interestingly enough, all members of the Smith family ended up finding and calling the trust lender at their Newport Beach office separately on the exact same day. They all were extremely motivated to get this transaction closed as rapidly as possible.

The personal issue that appeared to motivate the call to the trust lender, referred by the Smith family’s attorney, was concern that all four Smiths had for tax savings derived from applying a trust loan; involving their inherited property valued at $900,000 – in conjunction with tax breaks made possible by California Proposition 58. Only one of the siblings was interested in selling their inherited property, as it happens. The amount of the trust loan applied was for $675,000. Estimated Annual Tax Savings for the Smith family was calculated to be $6,064.

Fortunately, the Smith family got along well, and all agreed their main interest was to retain the low tax base their parents had paid yearly, thanks to California tax break Proposition 13, which makes it possible for folks to keep parents property taxes, transfer parents property taxes at the low rate they used to pay, and basically enjoy the benefit of inheriting property taxes that are as low as they should be.

The Smiths wanted to avoid property tax reassessment… and to take advantage of Proposition 13 and Proposition 58 protected property tax transfer and parent to child transfer; commonly known as parent to child exclusion (from present day property tax reassessment).

The three siblings looking to keep their parents’ home all agreed they should buy out the one sibling looking to sell as quickly as possible. Buying out a siblings share of house, or buying out a sibling’s property shares is also referred to as sibling to sibling property transfer, which is where an estate loan working with Proposition 58 comes in to play. Beneficiary buyout of a sibling’s property shares was made possible in this scenario by the Smith’s $675,000 trust loan.

Bottom line outcome is that the cost of actually selling the $900,000 property to an outside buyer would have been $54,000. Not selling the property and using the loan to a trust to buyout the one sibling, and process entire transaction, cost the family only $20,764, This meant an extra $33,236 in cash to the trust in savings for the Smith family.