In many cases California’s property tax rules automatically penalize insufficiently counseled individuals who inherit interests in real estate-owning legal entities from a family member upon their death. To avoid this penalty, recipients of these interests need to ensure that Form BOE 100-B is filed within 90 days of their family member’s death, a task few are prepared to undertake at that time.

Individuals who acquire real estate often do so using legal entities they control, such as corporations, LLCs, or partnerships to protect themselves from any personal liability that could arise with respect to the real estate.

California’s property tax rules require that individuals who hold interests in real estate-owning legal entities notify the Board of Equalization (“BOE”) when they transfer interests in those legal entities in two situations:

• The BOE must be given notice when a person or legal entity comes to own more than 50% of the relevant class of equity interests[1] in a legal entity that owns real property—a “change in control.”[2]
• If a person, or persons, contribute real estate to a legal entity, they must give the BOE notice of when they cumulatively have transferred more than 50% of the interests in the entity to other persons or entities. In this latter case, no single person or entity needs to come into possession of more than 50% of the relevant interests in the entity by virtue of the transfers.

The required notice is provided by filing Form BOE-100-B within 90 days of the transfer that triggers the notice requirement. The purpose of this form is to alert the BOE that a reassessment of the property held by the legal entity is required for property tax purposes.

One alarming issue that arises on the death of a family member is that often the assets of the family member who has passed are not actually transferred to the deceased’s family members until well after the 90-day window for filing the form has passed. This frequently occurs because the deceased family member has placed the assets in trust and the administration of the trust is a prolonged process. Consequently, family members frequently do not even contemplate legalities associated with the death of their family member, especially something as obscure as a property tax filing, before the 90-day window has passed.

One might reasonably think that the Form BOE-100-B should not need to be filed until interests in the relevant real estate owning legal entity have actually been transferred. However, this is not the case. California’s property tax rules treat the legal entity interests as having been transferred on the date the deceased family member died. This problem is compounded by the fact that because it takes some time to determine which family members, or other persons or entities, will receive the deceased’s assets, it may be impossible to know within the 90-day window whether transfers of interests in a legal entity will be sufficient to trigger the filing requirement. Nevertheless, the California property tax rules require a Form BOE-100-B to filed and to include as much information as the parties have available to them to avoid the penalty.

When the form is not filed within the 90-day window, the BOE imposes a penalty on the entity that owns the real estate. The penalty is equal to 10% of the property tax imposed on the real estate after it has been reassessed as a result of either of the triggering transfers discussed above under the two 50% rules. Or, if an exception to reassessment applies, the penalty is equal to 10% of the property tax imposed on the current assessed value of the property. Because most people have no knowledge of these rules and do not receive appropriate counsel, or do not receive appropriate counsel within the 90-day window, this penalty is virtually automatic in many cases. Consequently, when the death of a family member occurs and that family member held interests in real estate owning legal entities, counsel from a knowledgeable practitioner should be sought as quickly as possible following the family member’s death.

[1] Voting stock in the case of a corporation and capital and profits interests in the case of an LLC or partnership.

[2] This can occur when less than 1% of the interests in an entity are transferred, provided that a person or entity transitions from owning 50% or less of the entity interests to more than 50% of those interests.