In Bohnett v. County of Santa Barbara, the California Court of Appeals, Second District, Division Six, considered whether the purchase of real property by a trust beneficiary from his siblings and co-beneficiaries was a parent-child transfer exempt from reassessment for property tax purposes.
The Facts of Bohnett v. County of Santa Barbara
In 1999, Bernard C. Wehe and Sheila F. Wehe created the Wehe Family Trust (“the Trust”) and recorded a grant deed transferring their California home (“the Property”) to themselves as trustees. The Trust provided that after the death of the surviving spouse, the estate (other than furniture, furnishings, and personal effects) “shall be distributed in equal shares” to Sheila’s thirteen children, including Joseph Bohnett.
Sheila died in 2003. Bernard died in 2008. The thirteen siblings initially rented out the property, with all siblings entitled to share the rental receipts. The rent was deposited into the Trust’s bank account.
The First Proposition 58 Claim
In January 2012, the successor trustee filed a Claim for Reassessment Exclusion for Transfer Between Parent and Child (first Proposition 58 claim). It listed Sheila and Bernard as transferors, Sheila’s thirteen children as transferees, and the date of Bernard’s death as the date of transfer of the California property. The County of Santa Barbara, California allowed the claim.
Transfer to Bohnett and The Second Proposition 58 Claim
On May 16, 2013, a grant deed was recorded transferring the property from the successor trustee to Bohnett and his wife (the Bohnetts).
A second Claim for Reassessment Exclusion for Transfer Between Parent and Child (second Proposition 58 claim) was filed. It was signed by the successor trustee of the Trust and the Bohnetts, listed Sheila and Bernard Wehe as transferors, the Bohnetts as transferees, and left blank the date of purchase or transfer.
The County found that on May 16, 2013, there was a 92.3 percent (i.e., twelve-thirteenths) change in ownership. The County reassessed the property from a previous value of $157,731 to $962,873 for 2012/2013, and $963,114 for 2013/2014.
Bohnett filed an Application for Changed Assessment for each of the two tax years. The County’s Assessment Appeals Board denied the applications. Bohnett then filed a complaint seeking a refund of taxes, claiming that the County should have allowed exclusion from reassessment as a transfer between parent and child. Following a court trial, the court entered final judgment in favor of the County.
When Does a Change In Ownership of California Real Property Trigger Reassessment For Property Taxes?
Proposition 13 provides that the tax on real property shall be based on “the appraised value of real property when purchased, newly constructed, or a change in ownership has occurred.” Cal. Const., art. XIIIA, § 2, subd. (a).
An exception for parent-child transfers was added by Proposition 58, approved by the voters on November 4, 1986. It provides:
For purposes of subdivision (a), the terms “purchased” and “change in ownership” do not include the purchase or transfer of the principal residence of the transferor in the case of a purchase or transfer between parents and their children…
Cal. Const., art. XIIIA, § 2, subd. (h)(1).
When Does a Transfer By Death Of Trust Real Property Legally Occur Under California Law?
As a “general principle[,] . . . transfers by reason of death occur at the time of death.” Rev. & Tax. Code, § 63.1, subd. (g). A transfer includes “transfer of the present beneficial ownership of property . . . through the medium of an inter vivos or testamentary trust.”
A transfer of ownership occurs when a revocable trust including an interest in real property that vests in persons other than the trustor or their spouse becomes irrevocable. Rev. & Tax. Code, § 61, subd. (h).
For Purposes of Change of Ownership, It Matters Who Has Beneficial Or Equitable Ownership, Not Who Holds Legal Title
With the creation of an irrevocable trust, trust beneficiaries acquire a vested and present beneficial interest in the trust property. Thus, beneficial ownership of the property was transferred to the thirteen children when Bernard died and the trust became irrevocable.
Bernard’s death in 2008 resulted in the transfer of the “property’s primary economic value” to the thirteen children. By the filing of the first Proposition 58 claim, the parties recognized and ratified this transfer. The change in ownership occurred then, not when “a deed [was subsequently] recorded transferring title out of the trust,” and not when possession was transferred.
While the trustee held “bare legal title,” the beneficiaries held equitable title.
Bohnett purchased the interests of his siblings. This was not a parent to child transfer. The transfer to the thirteen children was excluded from reassessment, but the subsequent transfer to Bohnett was not.
California law includes protections for transfers of trust property at death. However, beneficiaries need to be mindful of subsequent transfers and the resulting impact on reassessment for property tax purposes.
