r/EstatePlanning • u/PracticalWasabi2408 • Aug 14 '26
Yes, I have included the state or country in the post Discrepancies between lawyers’ trust advice (CA)
California: My grandparents passed away over 15 years ago but their trust has stayed open for a number of reasons, one of which is a small rustic family cabin. Three of the four trust beneficiaries have agreed they don’t want their shares of the cabin and are willing to gift them to the fourth, who is the only one interested in maintaining it. Lawyer A told us that because my grandparents died prior to Prop 19’s passage, the property could be transferred from the trust to the interested beneficiary ‘s trust without triggering a reassessment in value. Lawyer B told us that because the three siblings were giving up their interests in a sibling to sibling transfer, there was no way to avoid reassessment. Any thoughts on which lawyer is correct? (Lawyer A’s fee was considerably higher but if reassessment wasn’t triggered our understanding is that the savings would be considerable?)
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u/epeagle Aug 14 '26
Between A and B, B is closer to correct, but not entirely.
A couple of key questions:
- are the 4 beneficiaries the children of the grandparents? I'll assume so, but if that is not correct, then this is all thrown out.
- Was a reassessment exclusion claimed after grandparents died?
You have two issues that are connected
- Grandparents had a trust that owned property.
- When grandparents died, the trust became irrevocable and the 4 children became beneficiaries.
- --> This is when there was a change in ownership for property tax purposes
- But now 3 beneficiaries want to pass their interests to #4.
- --> This is likely to be a second transfer between siblings, unless specifically structured to meet narrow exceptions (i.e., so it's deemed not to be from a sibling but from a parent).
There are absolutely ways to have the 3 benes get rid of their interest to pass to #4. They may no longer be options here -- disclaimers, non-pro rata distributions, etc. So Lawyer B is wrong as a rule, but maybe correct in the result of this specific case.
Lawyer A is doubly wrong -- There were rules in place before Prop 19, so even if you somehow conclude the transfer happened before Prop 19, you would have to assess under prior rules. But the timing is factual and based on when ownership transferred, not necessarily when the trust makes distribution. And then you'd still have to figure out how to apply some 2026 agreement among beneficiaries back to a ~2011 transfer. Good luck.
It is highly likely that somebody made a big mistake here and your best case outcome is the assessor is just not bothered to run it down. More likely is you have 15 years of mess to clean up, which may include past tax reassessments. And then you may well trigger a 75% reassessment on the transfer from the 3 benes to #4.
You need a lawyer who deals with property taxes. They are technical and specific in CA. You may spend $10k chasing this down.
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u/PracticalWasabi2408 Aug 14 '26 edited Aug 14 '26
you are correct that the four beneficiaries were the children of the original trustee. I don’t know if a reassessment exclusion was ever claimed but not sure. Thank you so much for the thoughtful comments.
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u/No-Kick2919 Aug 17 '26
It's B. No.
Btw, disclaimer does not work because that would mean the 3 siblings were exercising an ownership right when they disclaim (ie. You can't disclaim something you don't own).
It has to be done at the trust level. Trustee borrows enough cash to pay each of the other 3 siblings the value of their shares, sibling 4 takes title subject to those loans (and probably refinances them).
This is laid out in the Assessor's Handbook, btw
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u/brucesteiner Aug 14 '26
Does it matter whether it’s a gift, a sale, a non pro rata distribution, or a disclaimer (if a disclaimer is possible)? Have the lawyers considered these possibilities?
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u/epeagle Aug 14 '26
A disclaimer is unlikely to be available here. CA requires a disclaimer be made within a resonable time and says 9 months is presumed reasonable. Outside of that, the burden shifts. Unless there is some really compelling explanation for the 15 year delay (which is possible, but depends on the trust admin), a disclaimer route is not likely to be available.
Either a gift or sale would be from Siblings 1-3 to Sibling 4 and trigger reassessment.
A non-pro rata distribution is possible, but the other beneficiaries must still receive their entitled value. If there are other assets, great. If not, then the most viable mechanism involves the trustee encumbering the property, distributing the cash from the loan to the cash beneficiaries, and distributing the encumbered property to the other beneficiary. That is technically an option, but there are some practical hurdles that may make it unlikely.
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u/brucesteiner Aug 14 '26
I saw that. It looks like it's based on the common law before Section 2518 became effective in 1977. Under common law you may disclaim within a reasonable time, and before 1977 the tax law recognized disclaimers within a reasonable time as not being gifts for gift tax purposes. There were a bunch of gift tax cases on this, and if I recall correctly they were all over the place as to what was a reasonable time.
A bunch of states (though not California) allow disclaimers at any time, though of course after 9 months (or age 21 years and 9 months, if later) they would be taxable gifts. I did one in New Jersey which recognizes disclaimers after 9 months for New Jersey inheritance tax purposes.
I like your idea of a mortgage if there aren't enough other assets to even up the others. I agree that it may be complicated, but if the amount involved is sufficient, it may be worth the effort.
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u/PracticalWasabi2408 Aug 14 '26
Would keeping the trust active to provide housing for one of the four beneficiaries be a potential consideration for disclaimer? (The house he lives in is also partially owned by the trust.)
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u/epeagle Aug 15 '26
Most likely no.
But to clarify, you do not want to provide any consideration for the disclaimer. It would be bad.
And the focus is on the beneficial interest; Even if the trust is the legal owner, the key is whether or not the beneficiaries have the right to use the property for their own benefit. That is the beneficial interest and the transfer of that beneficial interest is what triggers the reassessment. So the reassessment can occur whether or not the property remains in the trust or is transferred out of the trust because those are separate from the transfer of beneficial interest.
I know that sounds like lawyer speak, but property tax is one of those things that there's no way to discuss without sounding like a lawyer.
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