Barring any assistance from a Kraken tentacle or two, it looks like California’s Prop 19 passed. Many families will be negatively affected and you should contact us right away for preliminary legal advice on whether you might benefit from taking immediate urgent steps, or from other estate planning workarounds.
Although Prop 19 provides a benefit to older Californians of increased flexibility in moving around California without having to worry about an increase in property tax, it mostly eliminates the Prop 58 exclusion from reassessent when real property is given to children. Most of the time, children who receive a house after their parents die do not want to live in that house, and if they don’t sell it they simply rent it out or keep it as a vacation home. That’s a problem, because in order to be excluded from reassessment under the new law (fully or at least partially, depending on values), the child needs to move into the property and actually reside there. This is not going to happen, typically.
There are several action steps you might want to consider urgently with the advice of counsel:
- Depending on family dynamics, consider self-defense training. We offer free training and you might want to take advantage of it because inheriting kids can avoid a huge increase in property tax if their parents kick the bucket by February 15, 2021. (Haven’t had to recommend this since the return of the estate tax after repeal in 2010. Tongue in cheek, but can actually be an issue in some families!) Anyway, we always encourage folks to take advantage of the free training even though you might want to bring the kids along later, say March when the weather is nicer.
- Consider whether Prop 19 is an issue for your family at all. Will your kids likely sell the property or will they likely retain ownership? If retaining the property, will they want to reside at the property? If multiple kids inherit but only one moves in, there will likely be a partial reassessment. Consider devising the house solely to the child who will live there, and adjusting your plan accordingly. As always, communication during life can increase success in estate planning. If the intent of your kids is to hold onto the property as rentals, or if your intent is for a trust or entity (like an LLC) to hold onto the property as rentals to benefit your kids, then you need to see us to discuss alternatives. For example, you may want to execute a deed now (or no later than 2/15/2021) transferring ownership to your kids but with an occupancy agreement allowing you to keep living in the property. But you lose control with a simple gift like that, and the property could be lost if your child divorces or has other creditor issues. With more sophisticated planning, you can better meet tax and asset protection goals, while retaining control. For example, with special trust planning you can have the change in ownership to your child for property tax purposes, yet structure it as a grantor trust to preserve the step up in basis at your death, just in case the child does eventually sell at some point down their road (in creating the grantor trust, be sure to use a power — such as a power to borrow without adequate security — which will not itself cause another change in ownership at grantor’s death). Or you may decide it’s better to have the transfer considered (under gift tax law) a completed gift now, to take advantage of the current huge gift tax exclusion which under current law is scheduled to be cut in half soon, and may be reduced even further by new currents in Washington (not to mention Sacramento, which keeps talking about bringing back estate/gift tax). Or you may want to use an LLC depending on number of kids and your appetite for risk of further changes in the law on property tax, and how that is applied by county assessors. Many issues to consider and as your estate planning attorney we can guide you, so contact us if you think Prop 19 may be an issue for your family.
- Consider an update to your foundational estate plan. Many basic, foundational family estate plans (typically revocable trusts in California) include one or more irrevocable subtrusts to benefit the surviving spouse. These are used for tax planning, asset protection, and sometimes blended family or remarriage planning. While a marital deduction (or QTIP) trust is not likely to be a problem since it must benefit only the surviving spouse during life, credit shelter (or bypass) trusts are drafted more flexibly and may be a problem if they allow sprinkling of income or assets to children or descendants. (Prior to this new law, sprinkling to kids was considered ok.) You definitely don’t want property taxes going up during life of the surviving spouse! As always, have your estate planning documents reviewed and updated periodically.
- Review any advanced estate planning. Advanced estate planning arrangements (for example, Qualified Personal Residence Trust or Medi-Cal Asset Protection Trust, or any other irrevocable trust) may need to be terminated and/or updated to avoid a disastrous reassessment.
Hope this helps. Contact us now! (Half hour consultation only $240!)