California Legal Implications: Property Reassessment Risks in Trust Administration
A 2021 California appellate court ruling highlights a critical pitfall in trust administration that can lead to significant property tax increases for heirs. In the case of *Bohnett v. County of Santa Barbara*, the court affirmed that transferring real estate from a family trust to a single beneficiary can trigger a property tax reassessment if not structured correctly. You can read the full opinion here..
For California families, this case serves as a vital reminder that beneficial ownership transfers the moment a revocable trust becomes irrevocable (usually upon the death of the settlers). If a trust instructs assets to be divided equally among children, but one child later buys the property from the trust, the county may view this as a taxable transfer between siblings rather than a protected transfer from parent to child. transfers the moment a revocable trust becomes irrevocable (usually upon the death of the settlers). If a trust instructs assets to be divided equally among children, but one child later buys the property from the trust, the county may view this as a taxable transfer between siblings rather than a protected transfer from parent to child.
Understanding Beneficial Ownership vs. Legal Title
The core legal issue in *Bohnett* was the distinction between legal title and beneficial ownership..
In this case, parents placed their home in a trust to be distributed equally among their thirteen children upon their passing. After both parents died, the successor trustee held the legal title to the home. However, the court ruled that the beneficial ownership had already passed to the thirteen children at the time of the second parent’s death. had already passed to the thirteen children at the time of the second parent’s death.
When one son later purchased the home from the trust, he argued he was buying it from his parents (via the trust), which would have been eligible for a reassessment exclusion under the law at the time (Proposition 58). The court disagreed. Because the thirteen children already held beneficial ownership, the court viewed the transaction as the son purchasing 12/13ths of the property from his siblings.
The Sibling Transfer Trap
In California property tax law, transfers between parents and children can often be excluded from reassessment (though these rules have tightened significantly under Proposition 19). However, transfers between siblings are almost always considered a “change in ownership” that triggers a reassessment of the property to current market value.). However, transfers between siblings are almost always considered a “change in ownership” that triggers a reassessment of the property to current market value.
Because the *Bohnett* court determined the siblings already owned the equitable interest in the property, the buyout was classified as a sibling-to-sibling transfer. Consequently, the property taxes were reassessed based on the current market value of the 92.3% interest being transferred, resulting in a much higher tax bill.
Planning for Non-Pro Rata Distributions
To avoid this outcome, trust documents must be drafted carefully, and trust administration must be handled with a clear strategy. must be handled with a clear strategy.
If the goal is for one child to keep the family home while others receive cash, the trust should usually include powers allowing for non-pro rata distributions. This allows the trustee to allocate specific assets to specific beneficiaries (e.g., the house to Child A and investment accounts to Child B) rather than giving every child a fractional interest in every asset.. This allows the trustee to allocate specific assets to specific beneficiaries (e.g., the house to Child A and investment accounts to Child B) rather than giving every child a fractional interest in every asset.
Had the trust in the *Bohnett* case been administered differently—potentially by equalizing distributions using other assets or loans within the trust before beneficial ownership was deemed “transferred” to all siblings—the reassessment might have been avoided.
The Impact of Proposition 19
While *Bohnett* was decided under previous tax laws, the principle is even more urgent under Proposition 19, which became effective in 2021. Prop 19 requires that a child must use the inherited home as their primary residence to qualify for any reassessment exclusion, and there is a cap on the excluded value., which became effective in 2021. Prop 19 requires that a child must use the inherited home as their primary residence to qualify for any reassessment exclusion, and there is a cap on the excluded value.
Misunderstanding when a “change in ownership” occurs can lead to the loss of the parent’s low Proposition 13 tax base. It is essential for successor trustees to consult with qualified attorneys immediately upon the death of a grantor to ensure asset distribution does not inadvertently trigger a tax hike.
About This Case
Source: Bohnett v. County of Santa Barbara (2021): Property Reassessment After Trust Inheritance
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Legal Disclaimer
This article is for informational purposes only. Consult with a qualified California estate planning attorney for advice specific to your situation.