An important and often overlooked estate planning goal is to structure our estate plan in a way that allows our loved ones to inherit our current (and often relatively low) property tax base. Let’s face it, a major factor these days in housing related expenses is the cost of our property taxes. Our property taxes are based on our home’s assessed value from the county accessor’s office. The property tax rate is applied to its assessed value and viola, the annual tax is due. Therefore, we want to be sure and do whatever we can to keep the assessed value of our real estate as low as possible. (Note, this has nothing to do with “market value,” which is what a willing buyer would pay for a given piece of real estate.)
California Proposition 13 helped taxpayers a great deal by rolling back property values to their 1976 levels. Going forward, that base is preserved (subject to a maximum 2% annual increase) so long as the property is not sold or transferred in a way that triggers a reassessment. If it is sold, the property will be reassessed to its current value based on today, and property taxes typically go up, sometimes considerably. My home, for instance, was subject to an annual property tax increase of over $5,000 when we bought it from the builder.
When it comes to estate planning, we want to be sure and avoid having our loved ones inherit property in a way that causes the property to be reassessed. Fortunately, under California Revenue and Taxation Code Section 62(d) California property owners can transfer their real estate to a revocable trust without triggering a reassessment. In addition, pursuant to Revenue and Taxation Code Section 63, married spouses can transfer real estate to each other during lifetime, and at death through a will or trust, without triggering a reassessment. In addition, California Proposition 58 provides that, when a parent transfers property to a child, whether as a gift during lifetime, or through a will or trust at death, the transfer is exempt from reassessment. The exemption may be applied to a principal residence, and up to $1,000,000 in additional property. A claim must be filed for the parent child exemption to apply. In addition, California Proposition 193 provides for an exemption from reassessment if a grandparent transfers property to a grandchild (either during lifetime or at death through a will or trust) if the grandchild’s parent was deceased.
Having a low tax base on inherited property can be a tremendous benefit, as reported by the Los Angeles Times recently, who noted that many heirs are using their inherited properties as second homes or renting them out for many times more than what they’re paying in Prop. 13-controlled property taxes
Unfortunately, when drafting estate planning documents, attorneys often include provisions that cause property to be reassessed when it could have otherwise been exempt from reassessment. Such provisions include common provisions where a trustee has the express authorization (discretion) to sprinkle or spray income from a family trust to members of the family who aren’t exempt from reassessment (such as grandchildren when the grandchild’s parent is still living, nephews and nieces, etc.) or when a life estate is created in favor of someone who is not exempt from reassessment.
Based on the opportunities and pitfalls that exist, it is important that all estate planning documents be analyzed and prepared carefully by an attorney with knowledge in the area of California real property taxation.