A common estate-planning tool is to transfer interests in limited liability companies (LLCs) to family members by gift or sale either outright or in trust. If the LLC (even a Minnesota LLC) owns California real estate, however, a transfer of the LLC interest may trigger adverse tax consequences. California Board of Equalization Property Tax Rule 462.160 (with reference to California Revenue and Taxation Code §§60-64) provides that if there is a change of ownership of California real estate (either directly or indirectly through an entity such as a sale or gift of an LLC interest that owns California real estate) it may trigger a reassessment of the California real estate for California real estate tax purposes. This may subject the LLC owners to both penalties for failure to report and increased real estate taxes. The tax could be significant because of California Proposition 13 and historic property tax freezes. This is true even if the transfer of the LLC interest is to a family member or trust for family members that does not qualify for exemption from reassessment. For example, a transfer of an LLC interest that owns California real estate to a “spray trust” having spouse and children as trust beneficiaries does not qualify for exemption from California reassessment.
William S Forsberg
Leonard Street and Deinard