In many inheritance situations, siblings end up owning a shared property together. One sibling may want to keep the property while another sibling just wants cash in exchange for their interest in the real estate. This scenario typically results in one sibling searching for a solution to buy out a sibling on the shared property.
Buying Out Sibling’s Share in an Inherited House
Buying out a sibling’s share in an inherited house can help beneficiaries divide assets of an estate or trust. If the title of the inherited property is still in the name of an estate or trust, a specialized loan may be required. These inheritance loans are commonly referred to as trust loans, irrevocable trust loans, probate loans or estate loans.
Traditional lenders are typically not able to provide loans to irrevocable trusts or properties currently owned by estates. Specialized lenders can lend directly to the trust/estate with an assumable loan secured by the real estate. The loan will transfer with the property when it is transferred to the new owner. Once the inherited house has transferred into the name of the individual, they will be able to apply for a traditional loan and refinance.
Sibling to Sibling Property Transfer (California)
A sibling to sibling property transfer in California will not prevent a property tax reassessment. The property transfer must be seen as parent to child to qualify for Prop 58 or Prop 19. While it may seem like a sibling to sibling property transfer, an estate or trust loan allows for the property transfer to ultimately be seen as parent to child. The trust is the borrower for the trust loan and the loan proceeds go directly to the trust’s bank account. Then the loan proceeds are distributed to the siblings who are being bought out and the property is transferred directly from the trust to the sibling who is keeping the property. This is a direct transfer of the real estate from parent to child and also achieves an equalized distribution of the trust assets.
Buying Out Other Beneficiaries – Prop 58 in California
Buying out other beneficiaries is easily and quickly accomplished with a short-term trust loan or estate loan. Obtaining these types of loans may also provide additional property tax benefits for the borrower.
In California, Proposition 58 allows beneficiaries to prevent a property tax reassessment for transfers of property from a parent to child. The transaction cannot appear as a transfer of property between siblings. Sibling to sibling transfers do not qualify for Prop 58.
California also has Proposition 193, which prevents property tax reassessments for transfers of property between grandparents and grandchildren. In order to qualify for Prop 193 the parents of the grandchildren cannot be living.
In order to achieve the parent to child transfer, the trust loan or estate loan needs to be made directly to the trust or estate, as the entity is the current owner of the property. The loan proceeds will go directly to the trust/estate bank account. Once the funds are in the bank account the cash can be distributed to the sibling(s) who is selling their interest in the shared property.
Once the sibling(s) has received their distribution in cash, the shared property can be transferred from the name of the trust/estate (parent) to the name of the individual (child). Then the new owner of the property must file the Prop 58 form with the county. The sibling who is keeping the inherited house can now pay off the loan with cash or refinance with a traditional lender to obtain a long-term and lower interest loan.
*Consult a trust or estate planning attorney or CPA prior to proceeding with a trust or estate distribution.