California Code of Regulations › Title 18 - Public Revenues › Division 1 - State Board of Equalization-Property Tax (California Department of Tax and Fee Administration - Timber Yield Tax, See Chapter 11) › Chapter 4 - Equalization by State Board › Article 4 - Change in Ownership and New Construction › Section 462.160 - Change in Ownership-Trusts

Current through Register 2024 Notice Reg. No. 28, July 12, 2024
(a) CREATION. General Rule. The transfer by
				  the trustor, or any other person, of real property into a trust is a change in
				  ownership of such property at the time of the transfer.
(b) EXCEPTIONS. The following transfers do
				  not constitute changes in ownership:
(1)
				  Irrevocable Trusts.
(A) Trustor-Transferor
				  Beneficiary Trusts. The transfer of real property by the trustor to a trust in
				  which the trustor-transferor is the sole present beneficiary of the trust.
				  However, a change in ownership of trust property does occur to the extent that
				  persons other than the trustor-transferor are or become present beneficiaries
				  of the trust unless otherwise excluded from change in ownership.
Example 1: M transfers income-producing real property to
					 revocable living Trust A, in which M is the sole present beneficiary. Trust A
					 provides that upon M's death, Trust A becomes irrevocable, M's brother B
					 becomes a present beneficiary, and income from the trust property is to be
					 distributed to B for his lifetime. Upon M's death, 100 percent of the property
					 in Trust A, representing B's present beneficial interest, undergoes a change in
					 ownership.
Where a trustee of an irrevocable trust has total
					 discretion ("sprinkle power") to distribute trust income or property to a
					 number of potential beneficiaries, the property is subject to change in
					 ownership, because the trustee could potentially distribute it to a
					 non-excludable beneficiary, unless all of the potential beneficiaries have an
					 available exclusion from change in ownership.
Example 2: H and W transfer real property interests to the
					 HW Revocable Trust. No change in ownership. HW Trust provides that upon the
					 death of the first spouse the assets of the deceased spouse shall be
					 distributed to "A Trust," and the assets of the surviving spouse shall be
					 distributed to "B Trust," of which surviving spouse is the sole present
					 beneficiary. H dies and under the terms of A Trust, W has a "sprinkle" power
					 for the benefit of herself, her two children and her nephew. When H dies, A
					 Trust becomes irrevocable. There is a change in ownership with respect to the
					 interests transferred to the A Trust because the sprinkle power may be
					 exercised so as to omit the spouse and the children as present beneficiaries
					 for whom exclusions from change in ownership may apply, and there are no
					 exclusions applicable to the nephew. However, if the sprinkle power could be
					 exercised only for the benefit of W and her children for whom exclusions are
					 available, the interspousal exclusion and the parent/child exclusion would
					 exclude the interests transferred from change in ownership, provided that all
					 qualifying requirements for those exclusions are met.
Example 3: Same as Example 2 above, except that "A Trust"
					 is without any sprinkle power. When H dies, A Trust becomes irrevocable. Since
					 A Trust holds the assets for the benefit of W, the two children, and the nephew
					 in equal shares, with any of W's share remaining at her death to be distributed
					 to the two children and the nephew in equal shares, there is a change in
					 ownership only to the extent of the interests transferred to the nephew,
					 providing that the parent/child exclusion of Revenue and Taxation Code section
					 63.1
					 and the interspousal exclusion of Revenue and Taxation Code section
					 63
					 apply to the interests transferred to the two children and to W respectively.
					 Upon the death of W, there is a change in ownership to the extent of the
					 interests transferred to the nephew, although the parent/child exclusion of
					 Revenue and Taxation Code section
					 63.1
					 may exclude from change in ownership the interests transferred to the two
					 children. If A Trust had included a sprinkle power, instead of specifying the
					 beneficiaries of the trust income and principal, then as in Example 2, none of
					 the exclusions would apply.
(B) 12 Year Trustor Reversion Trusts. The
				  transfer of real property or ownership interests in a legal entity holding
				  interests in real property by the trustor to a trust in which the
				  trustor-transferor retains the reversion, and the beneficial interest of any
				  person other than the trustor-transferor does not exceed 12 years in
				  duration.
(C) Irrevocable Trusts
				  Holding Interests in Legal Entities. The transfer of an ownership interest in a
				  legal entity holding an interest in real property by the trustor into a trust
				  in which the trustor-transferor is the sole present beneficiary or to a trust
				  in which the trustor-transferor retains the reversion as defined in subdivision
				  (b)(1)(B) of this rule. However, a change in ownership of the real property
				  held by the legal entity does occur if Revenue and Taxation Code section
				  61,
				  subdivision (i),
				  64,
				  subdivision (c), or 64, subdivision (d) applies because the change in ownership
				  laws governing interests in legal entities are applicable regardless of whether
				  such interests are held by a trust.
Example 4: Husband and Wife, partners in HW Partnership who
					 are not original co-owners, transfer 70 percent of their partnership interests
					 to HW Irrevocable Trust and name their four children as the present
					 beneficiaries of the trust with equal shares. Husband and Wife do not retain
					 the reversion. Under Revenue and Taxation Code section
					 64, subdivision (a) the transfer
					 of the partnership interests to HW Irrevocable Trust is excluded from change in
					 ownership because no person or entity obtains a majority ownership interest in
					 the HW Partnership.