California's Proposition 19, billed as "The Property Tax Transfers, Exemptions, and Revenue for Wildfire Agencies and Counties Amendment," takes effect on February 16, 2021. You may not know that Proposition 19 changed the law regarding how children can inherit their parents' property. These changes may be significant, depending on your situation.
Previous Law - Proposition 58
Prior to Proposition 19, Proposition 58 allowed property taxes to be excluded from reassessment when transferred between parents and children:
- Transfer of a primary residence between parents and children was not subject to reassessment. no matter the fair market value of the home; and
- Transfers of property other than a primary residence between parents and children were subject to reassessment only on the amount above $1 million of assessed value (not fair market value). This amount could be doubled if both parents left "other" property to their children.
Key Changes
With the passage of Proposition 19, the new law restricts the parent to child exclusion as follows:
- Transfer of a primary residence between parent and child is not subject to reassessment if the child uses the property as his or her primary residence, but only up to $1 million of fair market value (child must file for the homeowner's exemption within one (1) year of the transfer).
- Transfers of all other property between parents and children are subject to reassessment
Generally, Proposition 19 affects individuals who own vacation homes, rentals, or commercial property, and/or have a primary residence with a low base year value that the children would want to keep as a rental property and not a primary residence. In all such cases, the property will be reassessed to current fair market value on the death or transfer of title between parents and children.
The financial impact of this law may dramatically affect your loved ones. These reassessments could possibly add up to many thousands of dollars in tax obligations, which could then lead to decisions on items such as: rent increases to cover the additional tax burden; which child should receive the property and can he/she afford the higher taxation; asking children if they would be willing to move and change primary residence; keeping vacation properties that now have much higher taxes; and buy-or-hold strategies, etc.
What Can You Do?
There are some planning options to consider before the law takes effect in February, including:
- Gifting property directly to child
- Selling property directly to child
- Providing a life estate
- Gifting or selling property to an Intentionally Defective Grantor's Trust ("IDGT)
- Transferring property Interest to an IDGT and creating an LLC
- Transferring property to an LLC and gifting or selling LLC interest to an IDGT
Further, if you choose to not make these changes prior to the new law, your estate planning may need to change to adjust to the cost implications of potentially higher property taxes. Taxation is always an important aspect of estate planning but now with Proposition 19 (and other possible federal law changes to come), it is likely to increase in significance compared to current law.
These strategies require careful consideration and legal advice. If you are interested in learning about one of these options, please call or email to set up a appointment with a Mortensen & Reinheimer, PC attorney to determine how Proposition 19 potentially affects your estate plan and your options going forward. Contact us before the new law takes effect!
Our Best Wishes for a Happy and Prosperous New Year!