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Here are the facts, with approximate numbers:
Husband died, community property totalling $600,000 in a typical living trust. After death trust subdivides 50/50 into Survivor's Trust and Bypass Trust. Wife is sole trustee of Bypass Trust and receives Bypass income for health/education/support/maintenance. Trustee can distribute additional Bypass income and principal "if the trustee considers it advisable". No other person is entitled to receive Bypass principal or income during wife's life. Living trust property consists of $30,000 miscellaneous assets and $750,000 residence encumbered by $180,000 mortgage. Assume here that no mortgage payments have been made since death. Wife has other (mainly retirement) assets in her estate, but it seems highly unlikely that there will be any estate tax at her death.
My solution to this situation was to have wife purchase 40% of residence from Admin Trust for $300,000 with an interest-only note at appropriate AFR secured by residence. Admin Trust would then distribute the note to Bypass Trust with all other assets going to the Survivor's Trust. Wife would then contribute the purchased 40% interest in the residence to the Survivor's Trust to establish 100% ownership by Survivor's Trust.
The attorney doing the paperwork advises me he doesn't like my solution because he thinks the sale by the Admin Trust to wife will trigger property tax revaluation (this would be very expensive for this client). Can anyone help me with why the sale would be exempted from the revaluation rules?
Dan S.
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Power Member
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Last Login: 3/12/2011 12:58:57 PM
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| Your solution (if I'm following it) is what my clients do routinely. We initially fund the Bypass with a fractional interest in the residence then have the survivor buy it for an interest only loan secured by the property so that the interest is deductible. Before the transaction the residence is owned by the trust and afterwards it is also so there's no Prop 13 revaluation. I've seen this transaction with a number of attorneys. To make your attorney feel better about it, call your local assessor's office - they will usually give you an accurate though anonymous opinion. If you say that it's part of the same trust and the surviving trustee is still the trustee, there should be no problem. The good thing about this occurs if the survivor decides to sell the property. At that point he/she will qualify for the 250k exclusion and the trust will be funded with real dollars. Since the survivor isn't automatically getting all of the income, you may want to document the fact that the interest is necessary to provide for his/her welfare. That way the income/deduction will wash on the survivors's 1040. Good luck!
Mary Kay Foss
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Last Login: 6/25/2007 3:50:45 PM
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| My understanding is that for property tax purposes the beneficiary of the trust is considered the owner of the property. There was a change of ownership when the husband died which is exempted from reassessment by the interspousal exclusion. When the property is sold from the trust to the wife/beneficiary there is no change of ownership and therefore no reassessment. There is a good article on this starting on page 12 of the journal at this link. See section E on page 16. http://www.eastbaycf.org/news/givingadvice/CTEQ.pdf The assessors office in Sacramento is also good about answering questions regarding this. Try calling their Real Property Technical Services Unit at 916- 445-4982
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