Avoiding Reassessment of Inherited Property in California
The property reassessment solution featuring CA Proposition 19’s parent-child exclusion (or exemption), in conjunction with an irrevocable trust loan, is really quite simple… It just sounds exotic and complex. The outcome of this solution is generally similar to a tax rate, for example, that you and your spouse might pay every year, residing in the same house for 40 years – at relatively low property tax rate. However, if you ignore your CA Prop 19 parent-child exclusion, and your property tax burden is based on a fair market (i.e., current) property tax assessment – the difference could be crippling to your bank account…
Examining the Process with “Real-Life” Examples
Let’s say you have a fairly large family, with three children; and your attorney drafted an estate plan that divides your assets equally among these three beneficiaries.
If you leave it up to your successors as to how your family property and assets get divided, you might have all three beneficiaries deciding to be sole inheritors of the family home, and reside there as a primary residence. But the more realistic scenario, if you were to look at the statistics, is one beneficiary wanting to retain the family home… with the rest of the siblings insistent on selling off their inherited property shares. With significant tax consequences.
However, a family attorney hopefully will have their attention, and point the beneficiary, who wishes to retain the family home, in the direction of a good trust lender, who will open their eyes to Proposition 19 working in conjunction with an irrevocable trust loan – to minimize the property tax reassessment affecting their tax burden with a CA Prop 19 Parent-Child Exclusion. For the sake of argument, families do have other options to minimize reassessment of inherited property…
As an inheritance without any last minute revisions, beneficiaries that inherit a family home once both parents have passed away frequently face taxes on that family home that are stepped up” to current reassessment per each parent’s death. Beneficiaries caught in this type of tax scenario could be in line to inherit a significant, even devastating, property tax burden – if they decide to keep that family home.
Under Proposition 19, if the market value of the family home is more than the assessed value plus $1,000,000, property taxes would increase – if beneficiaries retain the family home, and a minimum of one of the beneficiaries moves in as a “primary residence” – property taxes would increase. Of course, if the market value is less than the assessed value, this would not occur.
Structuring Transactions That Won’t Increase Property Taxes
As we mentioned a moment ago, there is a quick list of tools and solutions one can use, depending on the situation, the people involved, and exactly what you’re trying to accomplish…
a) Using the “Legal Entity Exclusion” to avoid reassessment
b) Using the “Domestic Partner Exclusion” to avoid reassessment
c) Using the “Proportional Interest Exclusion” avoid reassessment
d) Using the “Original Transferor Rule” to delay reassessment
e) Using the “Cotenancy Exclusion” at death. The Cotenancy Exclusion from reassessment allows a transfer from one cotenant to another that takes effect on the death of one transferor cotenant to be excluded from property tax reassessment.
Prop 19 Parent-Child Exclusion & Irrevocable Trust Loan
f) Lastly – the solution we touched on above, which is perhaps the most popular property tax reassessment minimization tool in California – is the property reassessment solution favored by many estate attorneys and trust lenders – taking advantage of the (formerly CA Proposition 58) CA Prop 19 parent-child exclusion – to avoid reassessment. Despite new limitations and challenges, eligible California homeowners are moving quickly on new CA property tax relief opportunities in 2022
It always makes good sense to work with a first-rate, top-notch trust and estate lender, specializing in loans to trusts and estates, to minimize or completely avoid property tax reassessment through an irrevocable trust loan in conjunction with Proposition 19; if a beneficiary inheriting property from parents also wishes to buyout siblings inheriting the same home… to retain sole ownership of that home; and is willing to live in that house as a primary residence – and establishes that within 12 months of the death of the remaining parent. It’s crucial for California beneficiaries, and as a matter of fact all homeowners, to stay in contact with a good estate attorney and a reliable trust & estate lender… to always remain updated on new rules for property tax transfers in California
Many parents want their adult children to retain sole ownership of inherited or gifted property – and assess the original cost of the purchase (the tax basis) along with their inherited home’s assessed value – after Proposition 13 tax breaks, getting them a yearly property tax rate you can live with! The ideas is to look at no or low income taxes due on a typical inherited property transfer.
Fortunately, there is no California estate tax. However, federal taxes are a different matter altogether. If property parents leave to their children exceeds their lifetime gift and estate tax exemption of $12.06 million, they’ll owe a federal estate tax on the portion that exceeds these “thresholds”.
Working With the Right Professionals to Avoid Certain CA Tax Hikes
Estate taxes can climb as high as 40%. However, working with a good attorney, we can look at tax breaks we could access by being a married couple – shielding oneself from federal taxes. There are other ways one can avoid a possible estate-tax burden simply by working with an experienced tax attorney or CPA.
The best route overall, looking at this from a high level vantage point, is typically to take advantage of all tax relief measures under Proposition 13… while carefully establishing an accurate assessed value of one’s inherited home, if that’s the scenario – plus establishing a step-up in basis upon the death of one’s parents.
The key is having excellent inheritance or property counsel and tax advisors to work with all the way down the line. Trying to escape taxes by yourself, just to avoid spending a few dollars, is definitely penny wise and pound foolish.