Property Taxes and Trusts -Federal and State Compliance Issues Involving Complex Trusts & Fiduciary Income Tax

Property transfers

Property taxes and trusts can be difficult to navigate. We have seen an increasing number of situations where a new trustee takes over and finds out that a property transfer might have previously occurred that would have resulted in a change of ownership. This requires a property to be reassessed for California property tax purposes.

Change of Ownership

California has a unique property tax regime. Property taxes are generally based on the property’s value when there is a change in ownership. California lets the counties increase the value by 2% per year or when a change of ownership occurs. When does a change in ownership occur? The rules are complicated. Sometimes there is a change in ownership when the beneficiaries of a trust change. Sometimes when entity interest changes hands. All changes in ownership must be reported.

What Happens When a Trustee Takes Over a Trust Involving Property?

A trustee should act a little bit like a buyer of a property and do some due diligence. They should go as far as asking about the history of the trust’s ownership of the property and look into the ownership of trust-owned entities. If there is some plain evidence the property should have been reassessed, then the trustee must come forward and report the change in ownership. Failing to file a Change in Ownership Report is a penalty. The penalty is the greater of $100 or 10% of the new base year tax, up to $5,000. Often, when a new trustee takes over, the new trustee will file an affidavit of change of trustee to show the new trustee on the title. Filing an affidavit of change of trustee is very similar to filing a deed.

Changing a trustee for California property tax purposes is just a name change and is not a change in ownership. However, if the trustee changes due to the settlor’s death, there is often a change in ownership. Generally, the assessor has up to 8 years to reassess. When they do reassess, they can go back 4 years and add interest. New trustees should seek the advice of qualified counsel to advise on their duties.

Want to learn more about property taxes and trusts in California? Call us today to schedule your complimentary consultation with one of Orange County’s expert attorneys at (949) 501-4800.