This week’s topic? Letting everyone know that it is NOT acceptable to simply leave assets in a trust when someone dies. For most of us, this means your parents’ trust.
Most of us will receive an inheritance from our parents. Yes, other people can leave you money, but today we’re talking about the huge pitfall relating to receiving an inheritance from your parents. Many (but not enough) people have created a revocable/living trust that will be the main vehicle for passing assets to their children.
As a trust is administered informally, which means without the necessity of a court proceeding, many people administering a trust don’t do so the proper way. Why? Not because they are nefarious or evil, but rather they are misinformed or unaware of many of the rules for administering a trust.
One very basic yet seemingly overlooked rule is, the trust must end and the assets must be distributed within a reasonable time frame. This means you can’t just let the trust continue on forever. There are many reasons for this, the main one being property taxes. When a piece of real estate is transferred from one person to another, the County Assessor will reassess the property taxes based on the fair value of the real estate at the time of transfer.
There are, however, specific exclusions from a property transfer from being reassessed. One of the most common is a parent-to-child transfer. Any child or children can claim that they are exempt from reassessment for an unlimited amount as it relates to your parents’ residence and up to a million dollars of pre-death assessed value on investment real estate (or basically any property that was not their residence). But this is not automatic. You must file specific documents to be exempt from reassessment. The county typically wants this exclusion in 90 days, but California law says you actually have three years, so you have plenty of time. Or do you?
If you decide not to distribute real estate from your parents’ trust to the kids (or grandkids) and don’t file the proper documents, soon enough the three years lapses and then you’re out of luck.
What happens is that eventually, some sort of transfer is needed; usually someone wants to sell the property, or possibly one of the beneficiaries dies. That’s when it happens… the county eventually finds out that your parents are dead, and since no exclusion was filed, the property must be reassessed. And there are penalties and interest, too. So now you’re stuck with a huge tax bill with no relief in sight. To make matters worse, if you were the trustee of your parents’ trust, you may be liable to your siblings for the taxes, penalties, and interest.
To avoid all this is simple. You must notify the county of your parents’ death and file the appropriate paperwork on or around the time of their death. If you sold or plan to sell property received by from your parents, then the issue is much less consequential.
I know legal advice is expensive and attorneys are not always the easiest to deal with, but sometimes it makes sense to go get some legal advice even when you think you can do it yourself. The cost of seeking advice may just pay off in the long run!