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Quote of the Day - Taxes are the chief business of a conqueror of the world. - George Bernard Shaw

Government Derails Prop 13 Benefits For Testamentary Trusts

The voter revolt otherwise known as Proposition 13 just took a major hit.  Essentially, it used to be that if a property owner remains the same, then the government couldn't increase your taxes.  Long ago, lawyers had figured out how to accomplish that task by placing a property in a trust. 

Now, however, the Courts have put a stop to that technique.  Under the Court's ruling in that last link, testamentary trusts where there's no direct family relationship between successive trustees will be taxed when a new beneficiary inherits under the trust.   Here's how this train wreck happened:  The City and County of San Francisco contained a parcel of property owned by the Francis O'Reilly Testamentary Trust.  Mr. O'Reilly died in 1966 and the property was placed in the Trust, naming his Grandneice. 

In the event the Grandneice died with children, then the Trust was to be dissolved and the real property distributed to her children.  In that case, the property would fall prey to property tax.  If she died without children, then the Trust would stay in place and Mr. O'Reilly's Nephew would become the new beneficiary of the Trust, and the property would presumably dodge the property tax.

Or so everyone thought.

The Grandneice died without children, so the Trust stayed in place and the Nephew became the new beneficiary.  He filed the appropriate notice with the County Recorder, who promptly reassessed the property from under $400,000, increasing the assessed value up to $1,800,000 and taxed the daylights out of it.

Not to be outdone, the Nephew paid the taxes and filed a challenge to the reassessment and tax seeking a refund, ultimately ending up in Court. 

Here's the basic rules about property transfers , at least as they generally apply to these circumstances (if you want the particulars, the case linked above provides a more detailed and specific list than this post).  Transfers between direct descendants are generally excluded from reassessment.  If you were paying careful attention to the facts, then you may have noticed that there's no direct family relationship between the Grandneice and the Nephew. 

So the Court held that the Tax Assessor properly reassessed and taxed the property, reasoning that the ownership of the property had changed between non-family (directly related) family members.

Now the government has one more way to walk around Prop 13. 

Beware kiddies.  It's a jungle out there. 

Posted by J. Craig Williams on 8/29/2006 at 01:02 Comments (0)


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