Tag Archives: Minimizing property reassessment

Avoiding Reassessment of Inherited Property in California

Posted on by
Reply
Avoiding Reassessment of Inherited Property in California

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.

Homeowners Make the Best of New Property Tax Measures in California

Posted on by
Reply
Property Tax News

Property Tax News

In Nov 2020 voters in California were presented with a new property tax measure… Proposition 19.  So in addition to a Prop 19 parent child exclusion, a mission was apparently added to help fire-fighters; providing seniors and disabled homeowners with property tax breaks,  along with folks over 55 who have suffered property damage from a natural disaster such as flooding, or an earthquake.

Californians Still Have Property Tax Relief to Turn To

Despite several limitations, parents in California can still transfer property they own to beneficiaries, with parent’s low property tax base since the parent-child transfer provides grown children with an exclusive property tax break that provides exclusion from property reassessment – thereby avoiding or minimizing property tax reassessment.

This also applies to grandparent to grandchild beneficiary transfers… However, necessitating that both parents of the beneficiaries must be deceased to qualify the grandparent-to-grandchild exclusion, or exemption.

Under new property tax requirements under Proposition 19, a parent must have lived in the residence being transferred, usually via inheritance to beneficiaries… as a primary residence. And must have filed a “homestead exemption” for the inherited property going to their beneficiaries.

An inherited home can be valued up to $1,000,0000; with the beneficiary prepared to move into the home within one year as a primary residence; plus claim a homeowners’ exemption – in order for the property transfer to be excluded from property tax reassessment.

Prop 19 Favors Seniors, and Folks with Bad Luck or Poor Health

Under Proposition 19 homeowners age 55 and up, severely disabled, or victims of wildfire or a natural disaster, can buy a new primary residence anywhere in California up to three times, and transfer their lower property tax basis from their existing property to their new property. The new property has to be of equal or lower value of the original property being sold.

This is all in addition to, not replacing, the old Proposition 58 property tax benefits that provide Californians with the ability to avoid a sibling to sibling buyout directly, while still being able to buyout siblings and retain sole ownership of inherited property… all the while managing to  avoid property reassessment with a parent-child transfer… with the right to keep parents property taxes (low property taxes) through a Prop 19 parent child exclusion in California.  A property tax transfer is still accessible for all Californians inheriting property from parents, while at the same time inheriting property taxes.  In other words, inheriting property while keeping a low property tax base

Even though a Prop 19 parent child exclusion is subject to certain new limitations… as long as one stays in compliance — the property tax breaks are there to take advantage of. Which is why many beneficiaries work with a trust lender to buyout co-beneficiaries,  retaining sole ownership of inherited property along with minimizing their property tax reassessment…. Moreover, so beneficiary property disputes can be resolved by a loan to a trust.

Estate Taxes

On the other hand, if a beneficiary sold his or her inherited property after the date of parental death, capital gains tax would be low, if any.  The estate tax for 2021 was capped at $11.7 million… Estates valued at less than $12.06 million in 2022 for individuals are exempt from an estate tax.

Every property owner in California resident is allowed to gift a certain amount of property per year, tax-free.  In 2021, this amount was $15,000, and in 2022 this amount is $16,000. There is a good chance estate taxes will not be imposed, looking ahead… unless the estate tax cap is revised… And that’s highly unlikely in the foreseeable future.

Loans to Trusts

Posted on by
Reply
Loans to Trusts

Loans to Trusts

Trust Loans & Prop 19: Minimize Property Tax Reassessment

As you probably know, a trust in California generally reflects a financial instrument, frequently associated with a family estate, usually created with an estate attorney — and if it’s an irrevocable trust, usually with a trust lender involved — where a “trustor” (the person who created the trust agreement) entitled someone with the authority to manage the trust, called a “trustee”… also able to hold title to property or assets for the benefit of any and all beneficiaries to the trust.

Besides the fact that trusts are known to be a financial instrument good for deferring or lowering income taxes and property taxes… a trust often allows a company or a person to own assets that belong to a group of people that would be called beneficiaries, a family that would officially be known as beneficiaries to the trust… or even just one person, that would be known as “the beneficiary to the trust”.

However, frequently much to the chagrin of the beneficiaries – a trust is always managed and controlled by a trustee, which can be a person or a company. Including the distribution of liquid assets, if there are liquid assets, to the beneficiaries. Often a source of contest or dispute between trustee and beneficiary, or beneficiary vs. beneficiary.

Trust Loans for Sibling Beneficiaries

Trust loans are often utilized by sibling beneficiaries who want to minimize property tax reassessment, buying out an inherited home from siblings who are looking to sell off their inherited property – generally to establish and retain sole ownership of an inherited home.

Here is where an irrevocable trust loan often steps in to resolve these differences in objectives with their inherited property shares. The solution involves a fast trust loan to fund a beneficiary property buyout – plus usually works in conjunction with Proposition 19 to help minimize property tax reassessment or completely negate property reassessment – saving inheritors thousands of dollars in the final analysis. Californians need to keep a close eye on these new rules and regs just as they must keep up with new rules for property tax transfers in California.

Moreover, using this property inheritance solution, the sibling beneficiaries selling out their inherited property shares end up, in seven to ten days usually, with at least an extra $14,000 or $15,000 in their pocket, as opposed to selling off their inherited property through a realtor, given the standard 6% property sales commission and other ancillary fees and charges.

It adds up. There’s no free lunch, working with a realtor. No matter how convincing the sales pitch is.  It’s certainly worth exploring other options.

If you are in need of a lost to a trust or irrevocable trust, we highly recommend that you call Commercial Loan Corporation at 877-464-1066. The are California’s #1 Trust & Estate lender and can provide you with a free cost benefit analysis on trust loan and parent to child transfer.