Steinhart v. Co. of Los Angeles: Transfer of Life Estate is a “Change in Ownership” of Real Property

The Supreme Court of California ruled that transfer of property to a revocable trust of which the transferor is sole beneficiary does not constitute a “change in ownership” triggering property reassessment under California law because the owner is still essentially the same person. However, if that trust subsequently becomes irrevocable due to the death of the original transferor, a change in ownership has occurred because the deceased transferor retains no property rights and the entire fee interest is transferred to the trust beneficiaries. In Steinhart v. County of Los Angeles, 47 Cal. 4th 1298, ___ Cal. Rptr. 3d ___ , 2010 WL 376021(2010) the plaintiff had to pay higher property taxes on a reassessed property even though she had been given only a life estate by the deceased; the Court found that since the entire fee interest was transferred to an irrevocable trust upon the prior owner’s death, a change of ownership had occurred warranting a reassessment.

BACKGROUND

Ester Helfrick established a revocable trust, made herself trustee and sole beneficiary during her lifetime, and transferred title to her Sherman Oaks, California, residence to the trust. Upon Helfrick’s death on March 24, 2001, the trust became irrevocable. Under the terms of the trust, Helfrick’s sister, Lorraine Steinhart, received a life estate in the residence provided that she pay all taxes, insurance, assessments, utilities, and repairs on the property. Upon Steinhart’s death, the residence was to be sold and the net proceeds distributed to those named in the trust – Helfrick’s remaining living siblings and the still-living issue of any deceased siblings.

When Helfrick died, the residence’s assessed value for tax purposes was $96,638, with taxes of $1,105.79. After she died, the County reassessed the property and increased its valuation for tax purposes to $499,000, which in turn increased the annual property tax bill to more than $5,000.

Steinhart paid the tax bill, but filed a claim for a refund with the Los Angeles County Auditor-Controller, claiming that her receipt of a life estate did not constitute a “change in ownership” that would trigger reassessment. In March 2005, the County denied Steinhart’s request.

Steinhart filed an action against the County in superior court contesting the reassessment and alleging that Helfrick’s death did not cause a change in ownership of the property. The County filed a demurrer, asserting, among other things, that the transfer of a life estate to Steinhart constituted a “change in ownership” under California Revenue and Taxation Code section 60.

The trial court sustained the demurrer and dismissed the complaint with prejudice. Steinhart appealed and the Court of Appeal reversed, finding that no change in ownership occurred upon Helfrick’s death, thus no reassessment was warranted. The County petitioned the Supreme Court of California for review.

Transfer of entire equitable estate constitutes change in ownership

The Supreme Court began by explaining that during Helfrick’s lifetime, there was no change in ownership of the residence even after she transferred title of the property to her trust. “Transfers into trust are not changes in ownership if either: a) The trust is revocable, or; b) The creator of the trust is its sole beneficiary during his lifetime.” Steinhart v. County of Los Angeles, 47 Cal. 4th 1298, ___ Cal. Rptr. 3d ___ , 2010 WL 376021, *13 (2010). Because Helfrick’s trust was revocable during her lifetime and she was the sole beneficiary, she was still regarded as the true owner of the property despite its being held in trust, so no change in ownership occurred upon her transfer to her trust.

However, upon Helfrick’s death, “the trust became irrevocable and the entire equitable estate in the residence… transferred from Helfrick to Steinhart and her siblings (or their issue) as beneficiaries of the irrevocable trust.” 2010 WL 376021,  *12 (emphasis in original). The fact that the ownership was split upon transfer to Steinhart for immediate possession and her siblings for a remainder interest was essentially irrelevant. Rather, it was only relevant that real ownership of the residence follows the equitable estate, which transferred in full from Helfrick to Steinhart and her siblings (collectively) upon Helfrick’s death, and that transfer constituted a “change in ownership.” Id.

Steinhart cited the Court’s previous opinion in Pacific Southwest Realty Co. v. County of Los Angeles, 1 Cal. 4th 155, 2 Cal. Rptr. 2d 536 (1991), for the proposition that the value of the life estate she received is less than the value of a full fee interest, and therefore no complete change of ownership took place that would trigger reassessment. Id. at *14. But the Court said that Steinhart’s argument missed the point “for the simple reason that it erroneously focuses only on the interest Steinhart received, rather than the total extent of the interest Helfrick transferred when the trust became irrevocable.” *15 (emphasis in original). In other words, Steinhart’s focus on the life estate that she received ignored the fact that upon Helfrick’s death, Helfrick retained no ownership interest and transferred the entire fee interest to Steinhart and their siblings – literally a change in ownership, which triggers reassessment. Id.

The Court reversed the Court of Appeals decision. Note that the decision included a significant discussion of procedural claims – the County claimed that Steinhart had not exhausted her administrative remedies before filing the lawsuit and the Court agreed that Steinhart’s claims failed as a matter of law as a result. Even though Steinhart’s case warranted dismissal on procedural grounds, the Court still elected to address the change in ownership issue in order to clarify this point of law.

CONCLUSION

Steinhart confirms that reassessment of property due to change in ownership is appropriate any time the previous owner transfers her entire fee interest in the property, regardless of what interest the plaintiff received. Moreover, transfer of property to a revocable trust, of which the transferor is the sole or primary beneficiary, does not constitute a “change in ownership,” while transfer to an irrevocable trust with non-transferor beneficiaries does. Here, under the terms of Steinhart’s life estate, she was bound to pay the property taxes on the property, which had risen substantially due to the reassessment, even though she did not individually receive the full ownership interest in the property.

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H. Jacob Lager

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