In estate planning, transferring real property to one child while ensuring other beneficiaries receive their fair share can present unique challenges. For families aiming to keep the property in the family, a bridge loan can be an effective tool to equalize the distribution of assets without triggering the sale of the property. This post will explore the mechanics of bridge loans, California property tax rules like Propositions 13, 58, and 19, and how families can use these tools in their estate plans.

Understanding California Property Tax Rules

Proposition 13

Enacted in 1978, Proposition 13 limits property tax increases in California. Under this rule:

• Property tax assessments are based on the property’s purchase price, with annual increases capped at 2% regardless of market value.
• This has created a system where long-held properties often have significantly lower tax assessments than their current market value.

For families inheriting property, keeping the existing low property tax base is often a priority.

Proposition 58 (Repealed and Replaced by Proposition 19)

Proposition 58 previously allowed parents to transfer certain properties to their children without reassessment of property taxes. This parent-to-child exclusion applied to:

• The parent’s primary residence, regardless of value.
• Up to $1 million of assessed value for other real properties.

This allowed children to retain their parents’ lower property tax base after inheriting.

Proposition 19

In 2020, Proposition 19 replaced Proposition 58 with more restrictive rules. Key changes include:

• Primary Residence Transfers: The parent-to-child exclusion now only applies to the parent’s primary residence if the child continues to use the property as their own primary residence.
• Limit on Value Increase: If the property’s market value exceeds the assessed value by more than $1 million, the child will face a partial reassessment.
• The $1 million exclusion for other real properties (like rental homes or vacation properties) was eliminated.

The Parent-to-Child Exclusion from Reassessment

The parent-to-child exclusion under Proposition 19 can still provide significant tax savings when transferring property. However, families must carefully plan to meet the eligibility requirements. One key challenge arises when:

• One child wishes to retain the family home, while
• Other beneficiaries (e.g., siblings) need to receive their share of the estate’s value.

In these cases, liquidating the property by selling it is one option—but this may not align with the family’s goals of keeping the property in the family. This is where bridge loans can play a critical role.

How a Bridge Loan Works in Estate Planning

A bridge loan is a temporary loan taken out by the trust to “equalize” distributions among beneficiaries. Here’s how it works:

1. The trust borrows money using the real property as collateral.
2. The loan proceeds are used to pay the other beneficiaries their share of the estate.
3. The property is then distributed to the child who wishes to retain it.
4. The child assumes responsibility for repaying the bridge loan, often through refinancing or other financial arrangements.

This strategy ensures:

• The child inheriting the property does not need to sell it to buy out their siblings.
• The property can remain in the family while the trust fulfills its obligation to distribute assets equitably.

Example: A Family Home and a Bridge Loan

The Scenario

The Smith Family Trust owns a family home valued at $1,000,000. The trust has two beneficiaries, John and Sarah, and no significant liquid assets. Under the terms of the trust, each beneficiary is entitled to 50% of the estate’s value($500,000 each).

John wants to retain the family home as his primary residence. Sarah prefers cash and does not wish to co-own the property.

The Solution

The trust secures a bridge loan of $500,000, using the home as collateral. The proceeds of the loan are distributed to the Trustee who then distributes to Sarah to fulfill her share of the estate.

• John’s Distribution: The family home (valued at $1,000,000), subject to the $500,000 bridge loan, which John refinances or repays using personal funds.
• Sarah’s Distribution: $500,000 in cash, funded entirely by the bridge loan.

Tax Impact

• John applies for the parent-to-child exclusion from reassessment under Proposition 19.
• Since John plans to live in the family home as his primary residence, he retains the lower assessed value under Proposition 13.
• If the home’s market value exceeds the assessed value by more than $1 million, a partial reassessment may apply, but John still benefits from significant tax savings.

Key Benefits of Using a Bridge Loan

1. Preserves Family Property: Ensures the home stays in the family while still treating all beneficiaries fairly.
2. Simplifies the Process: Avoids the need to sell the property or negotiate co-ownership arrangements.
3. Maximizes Tax Savings: Allows the child retaining the home to take advantage of the parent-to-child exclusion and Proposition 13 protections.

Considerations and Professional Guidance

Using a bridge loan to equalize distributions requires careful planning to avoid unintended consequences. Families should:

• Consult an estate planning attorney to structure the transaction.
• Work with a financial advisor and lender to evaluate the child’s ability to refinance or repay the bridge loan.
• Ensure compliance with the parent-to-child exclusion rules under Proposition 19.

Conclusion

Bridge loans offer a practical solution for families looking to preserve real property for one child while ensuring other beneficiaries receive their fair share. With California’s complex property tax rules under Propositions 13, 58, and 19, it’s essential to approach these transactions with careful planning and professional guidance.

If you have questions about how a bridge loan or the parent-to-child exclusion might work for your family, contact us today to schedule a consultation. We’re here to help you achieve your estate planning goals while navigating California’s unique tax laws.