Prop 19, Property Taxes and Your Estate Plan
2020 brought us another round of elections, which meant another round of propositions for the California voters to decide on. Rarely do these propositions directly interfere with the estate planning needs of our clients. However, Prop 19 narrowly passed this year with merely 51% of the vote and it carries some large implications affecting how our clients will pass down property to their children and grandchildren.
At first glance, Prop 19 looks to have expanded the benefits to property owners under Prop 13, but these benefits came bundled with a partial erosion of other benefits put in place by Prop 13 by creating another instance wherein county assessors may reassess a property and increase property taxes. This has potentially large implications in the world of estate planning, whether a trust is in place or not. Below we have provided a relatively detailed discussion on what Prop 19 does and how it will impact the estate planning world. Feel free to use the section headers to jump to the area you wish to read more about.
The First Benefit - Relocation and Carrying Property Tax Basis
Firstly, property owners age 55+ may relocate anywhere in CA to a home of equal or lesser value and carry over their prior home’s Prop 13 assessed value to the new home. This allows movers to better estimate their living expenses when it comes to their property taxes and will likely benefit someone looking to downsize their home such as when children move out of the home. Previously, Prop 13 did allow for this transfer, but it was limited only to those who moved within the same county - not anywhere in CA.
The Second Benefit - Wildfire Relocation
Secondly, those who have lost their homes due to a wildfire may carry the property tax basis (the amount that determines their property taxes) on to the next home they live in.
An Erosion of Prop 13 Protection from Property Tax Reassessment
The other provision of Prop 19 - which flew under the radar in this election - limits how much property parents may pass down to their children or grandchildren without a tax reassessment. “These intergenerational transfer protections - placed in the California Constitution in 1986 and 1996 with overwhelming support from voters - have been sharply cut back,” as noted by Jon Coupal in his opinion piece in the Daily Breeze.
However, in order to best understand how significant of a change this will be, it would be beneficial to first look at what Prop 13 initially put in place.
A Brief Overview of Where We Were with Prop 13
Under the California Constitution and Prop 13, where a child receives property from their parents (such as by gift or inheritance), the property was exempt from being reassessed for property taxes (as is done when buying a home for example) even though there was a transfer of the property. This same protection was also in place for grandchildren receiving property from a grandparent, though only where the intervening parent has already passed away.
On top of this exclusion, the transferring party (parents/grandparents) could also transfer an additional $1 million of real property without a tax reassessment. This $1 million exclusion was not measured by the fair market value of each property but, rather, was based on each property’s assessed value according to the reported value on its property tax bill. In an extreme situation, that could amount to millions in property value passing to children with no reassessment.
While some may criticize these types of tax devices as being unfair or creating, what Len Tillemand and Rosie McNichol call in their article for the Santa Cruz Sentinel, “property tax dynasties”, intergenerational transfers of real property (land) are an excellent way to build intergenerational wealth. In order to create a better life for your children, creating a safety net (or bump) for them is the best way to ensure that ideal as they are being given a substantial investment asset and allowed some tax benefits on top of that.
Where We are Headed with the Passage of Prop 19
Beginning on February 16, 2021, the parent to child (or grandparent to grandchild) transfer exclusion, as outlined above, (i) will be limited to only the parents’ residence and (ii) only if the inheriting child or children actually reside on the property. Additionally, (iii) the transfer exclusion is limited to the old assessed value plus $1 million. This means that children inheriting a multi-million dollar home with a low assessed value will see a property tax increase - something that may easily happen in densely populated areas where property values have risen dramatically such as the greater areas of Los Angeles or San Francisco. This may also impact small mom-and-pop landlords when passing down the small rental unit to the children.
What This Means for You and Your Family
The passage of Prop 19 now necessitates considering the property taxes on your property and whether your child or children will be able to afford to pay the taxes if they are reassessed. Are you children going to be able to afford to keep the family home after you pass away? If there is already a mortgage on the property, are you also bootstrapping your children with a higher cost just to keep the home?
One possible solution is to simply transfer the property to a child or your children now, that is, before February 16, 2021. However, this would then required further considerations when it comes to any possible gift or estate taxes (somethings that can fluctuate with the general political climate of the country at the time) as well as eliminating the possible capital gain tax exemption your child may be eligible for if you were to keep the property and your children sell it after your death. Additionally, once you put a child on title for your home, they are now in charge of that property, thus severely limiting your ability to actually plan your estate.
Finally, it is still unclear as to how the county assessors will apply these new rules in extremely common situations where, for example, mom and dad had more than one child. For instance, the parents have passed away and the family home is left to their three children. If only one child decides to move into the family home, is the county going to allow the property tax reassessment exemption as they would in the past, or is the county going to only exempt that ⅓ from reassessment and reassess the remaining ⅔ of the property (each child having a ⅓ interest in the home) since the remaining two siblings don’t move into the home?
While these matters will eventually be hammered out, it may take some time for the county assessors to either release guidance on how the rules shall apply or for a consensus to be determined due to the passage of time. Unfortunately, in the meantime, this will likely lead to inconsistent treatment across various counties and even various officials within the same county - much the same way we saw inconsistent application of the SB-2 Affordable House and Jobs Act Fee when that was enacted beginning January 1, 2018.
What You Should Do Before February 16, 2021
When it comes to matters such as this, a one-size-fits-all solution is rarely applicable as you need to take into account your total estate, your children’s’ positions, and the family dynamics among other considerations. You should speak to an estate planning attorney to discuss these options and determine what is the best course of action for you. However, you should not wait too long as Prop 19 goes into effect February 16th, 2021. While we don’t know the details as to how the county assessors will be implementing Prop 19 - as anytime new rules like this are enacted, their initial implementation has been messy and inconsistent - it is likely that these rules will be applied to all property transfers recorded after February 16, 2021 (as opposed to the date of signing). That means it is in one’s best interest to determine their plan of action as soon as possible so as to avoid the inevitable rush of deeds that are likely to pour into county recorder offices the first two weeks of February.
If you would like to discuss how Prop 19 will impact your home and estate plan, of if you have other questions in regards to wills, trusts, Medi-Cal, probate, or estate planning in general, please feel free to contact us here or call us at 909-307-6282.