When working with Trustees who sell trust real property, we often witness pressure by the trust beneficiaries on the Trustees to distribute all of the net sales proceeds as soon as escrow closes.

It is often forgotten that, about six months after the sale, the Trustees will receive a bill from the County Assessor seeking payment of supplemental property taxes – taxes above and beyond those that were remitted to the Assessor during escrow. This is often an unpleasant surprise, especially if the Trustee has distributed every last cent and has even closed the trust account. For the Trustee's protection, we advise Trustees to hold an adequate reserve and “wait out” as many expenses and bills as possible, including the Supplemental Property Tax bill.

What Is Supplemental Property Tax?

A supplemental property tax bill is usually received by a Trustee who sells real property owned by an irrevocable trust about 6 months after the sale takes place. The tax bill is generated as a result of the collaboration between three institutions: the County Recorder, County Assessor and County Auditor/Controller's Offices. It is important to underscore that, due to the “time lag” among these three agencies, ALL property taxes cannot be usually identified when closing escrow on an irrevocable trust real property.

A revocable trust (trust set up during one's life) becomes irrevocable upon the death of its creator(s). The supplemental tax bill usually reflects the increased property tax from date of death of the Trust Settlor to date of sale of the property by the Successor Trustee.

This is because the Assessor deems “death” as a “change in ownership” event, which brings about a new “base year” valuation of the property (usually equal to its date of death value), unless a reassessment exclusion applies. The property taxes paid in escrow are usually based on the amounts which the Settlor was paying during his or her life, but the property is generally reassessed at Settlor's death, and levied with property taxes applicable to the “new base year value.” Depending on the timing of the sale, that extra tax is usually not “captured” at close of escrow.

There are very limited number of reassessment exclusions that will overcome the “change in ownership event” presumption. It is therefore important to work with an Attorney to identify and timely file the applicable CLAIM for property tax reassessment exclusion, if one is available. If an exclusion is available but has not been timely claimed by filing the appropriate forms with the Assessor, it may be lost, and the property – reassessed.

It is also important to consider the date of death – whether or not it occurred Pre- or Post- the enactment of Proposition 19, which further limits the availability of reassessment exclusions for transfers between parents and children. Different rules (and claim forms) apply to deaths pre- and post- February 16, 2021, when Proposition 19 took effect.

Why are there Penalties on the Tax Bill?

It is a little known fact that the County Assessor demands that when a real property owner dies – whether that owner was an individual or a Settlor of a Trust and the trust was the “de facto” owner of the property, the Assessor must be notified within 150 days of the death. This is done by the filing of a CHANGE IN OWNERSHIP STATEMENT – DEATH OF REAL PROPERTY OWNER. Failure to file this document within 150 days following the death results in an automatic penalty in the amount of:

“either $100 or 10% of the taxes applicable to the new base year value of the real property or manufactured home, whichever is greater, but not to exceed five thousand dollars ($5,000) if the property is eligible for the homeowners' exemption or twenty thousand dollars ($20,000) if the property is not eligible for the homeowners' exemption if that failure to file was not willful. This penalty will be added to the assessment roll and shall be collected like any other delinquent property taxes and subjected to the same penalties for nonpayment.”

As such, the timely filing of documents with the County Assessor is a top priority for any Trustee, Executor, surviving spouse, or heir of a deceased homeowner, whether the property was owned in trust or not.

Our Office guides and assists with the administration of Trusts and Estates in fulfilling the numerous and time-sensitive Assessor requirements. We work with both Trustees and Beneficiaries to efficiently administer the sale and transfer of trust property, while remaining in compliance with all State and Government agencies to minimize property taxes and tax penalties.

For more information CONTACT US to schedule a consultation.