What Is a Proposition 19 Trust Loan?

A Proposition 19 trust loan is financing made directly to an irrevocable trust and secured by real property held in the trust. It can provide the liquidity needed to equalize distributions among beneficiaries when one beneficiary wants to receive the inherited home and the other beneficiaries want to receive cash.

When properly structured and when all Proposition 19 requirements are satisfied, a trust loan will allow the trustee to distribute the property to one beneficiary while using loan proceeds to equalize the distributions to the other beneficiaries—without requiring the beneficiary receiving the property to personally purchase the other beneficiaries’ interests.

This distinction can be critical to preserving an available parent-child reassessment exclusion.

Understanding Proposition 13 and Proposition 19

Proposition 13 generally limits annual increases in a property’s factored base-year value to no more than 2% per year, unless there is a change in ownership or new construction. Because of this, a property that has been owned by a parent for many years may have a taxable value substantially below its current market value.

When ownership changes, the property is generally reassessed to its current fair market value unless an exclusion from reassessment applies.

Proposition 19, which became operative for parent-child transfers on February 16, 2021, significantly changed the rules for inherited property.

Under current law, the parent-child exclusion generally applies only to a qualifying family home or family farm. For a family home, the property must have been the parent’s principal residence, and at least one eligible child must make the property their own principal residence.

The child must move into the property within the required one-year period and file for the Homeowners’ Exemption or Disabled Veterans’ Exemption. The Proposition 19 parent-child exclusion claim is generally filed separately with the County Assessor.

Proposition 19 Does Not Always Preserve the Entire Original Taxable Value

Another important distinction is that Proposition 19 places a value limitation on the exclusion.

For transfers occurring from February 16, 2025 through February 15, 2027, the applicable exclusion amount is the property’s factored base-year value plus $1,044,586.

If the property’s fair market value at the time of transfer does not exceed that amount, the existing factored base-year value may generally be preserved.

If the property’s fair market value exceeds the applicable limit, the excess is added to the property’s factored base-year value, resulting in a partially increased taxable value.

This means Proposition 19 can still provide substantial property-tax savings even when the entire existing taxable value cannot be preserved.

Why a Trust Loan May Be Important

Consider a trust that leaves an estate equally to three children.

One child wants to keep the family home and make it their principal residence, while the other two children want to receive cash for their shares.

If the child who wants the property personally purchases the siblings’ interests, those interests may be treated as transfers between siblings, rather than as transfers directly from the parent. Because there is no sibling-to-sibling Proposition 19 exclusion, those transferred interests may be subject to reassessment.

A properly structured trust loan can provide another approach.

When permitted by the trust and applicable law, the trustee may obtain a loan secured by the trust property and use the loan proceeds to equalize the beneficiaries’ distributions. The trustee can then make a non-pro-rata distribution, with one beneficiary receiving the property and the other beneficiaries receiving cash.

This structure can help preserve the characterization of the property distribution as a transfer from the parent to the beneficiary rather than a purchase of the other beneficiaries’ interests.

How a Proposition 19 Trust Loan Works

1. The trust obtains the loan.
   The irrevocable trust is the borrower, and the inherited property serves as collateral for the loan.
2. The trust receives the loan proceeds.
   The proceeds provide liquidity within the trust or estate to equalize beneficiary distributions.
3. Other beneficiaries receive cash.
   Instead of selling their interests in the property directly to the beneficiary who wants the home, the other beneficiaries receive their distributions from the trust.
4. The property is distributed to the retaining beneficiary.
   The trustee distributes the property to the beneficiary who will retain it, consistent with the trust terms and the beneficiaries’ respective interests.
5. The beneficiary satisfies Proposition 19 requirements.
   To qualify for the parent-child exclusion for a family home, at least one eligible beneficiary must make the property their principal residence and satisfy the applicable occupancy and filing requirements.
6. The trust loan can later be paid off or refinanced.
   After the property has been properly distributed, the beneficiary may refinance the trust loan into longer-term financing in their individual name, subject to qualification and the circumstances of the transaction.

Who May Benefit From a Proposition 19 Trust Loan?

A trust loan may be appropriate when:

• Multiple siblings inherit a parent’s home and one wants to keep it.
• The trust does not have enough cash to equalize beneficiary distributions.
• The trustee needs liquidity to make a non-pro-rata distribution.
• A beneficiary intends to make the inherited family home their principal residence and pursue the Proposition 19 parent-child exclusion.
• The family wants to avoid selling the property solely because there is insufficient cash to distribute to the other beneficiaries.