Amy F. Peters
HOW PROP 19 WILL IMPACT YOUR ESTATE PLANNING
The recent passing in California of Proposition 19 (Prop 19 contains two changes in California property tax assessments which can adversely impact your estate plan.
Limitations to the Parent-Child tax reassessment Exclusion effective 2/16/2021
The current law provides an exclusion from a property when a parent transfers ownership of a principal residence to a child, without regard for the child’s anticipated use of that property. The passage of Prop 19 will require that a child or children use the residence as their own principal residence in order to retain the exclusion allowed by the previous law under Prop 13. In fact, even if the child uses the property as that child’s primary residence, there is a $1,000,000 cap that applies to the exclusion. This applies even when a child transfers the residence to a parent (although this is a less common scenario).
Common estate planning trusts established several years (or even decades) ago may be impacted. For example, a qualified personal residence trust (QPRT) allows the transfer of a residence to a trust while that residence can still be occupied for a fixed number of years in which the parent(s) continue to live in the residence it is transferred after a fixed number of years to someone else (typically their children or a trust for their benefit). Most parents who established a QPRTs intended to continue living in their home until after the fixed term ends. They may do so, but now, they need to pay rent to the trust or to their children, depending on who owns the residence at the end of the fixed term.
Under today’s existing law, the child qualifies for the parent=child exclusion when that child becomes the property owner, but, Prop 19 will require the child take up residence in the home to qualify for this exemption or trigger a reassessment. They can no longer rent it back to the parent, and if a sibling is entitled to the residence at the end of the fixed term, that sibling would need to move in with the other child and share the household in order to qualify….probably not ideal for most adult children.
A parent with a QPRTs, whose fixed term ends on or after February 16, 2021, will have their home reassessed to its current value, potentially leading to high property tax increases. The new rules apply to outright transfers and to transfers in trusts, such as the QPRT transfer illustrated above. If the increase in value is less than or equal to $1,000,000, no adjustment is made. If the increase in value is more than $1,000,000, the increase in value after the first $1,000,000 is added to the tax assessed value. For example, assume a parent's home has a taxable value of $3,000,000. Because the parent purchased the home many years ago, its value is now $5,000,000. In other words, it has increased by $2,000,000. The new reassessed value if the parent gifts the home to her child will be $4,000,000. There are inflation adjustments that apply to the $1,000,000 increase limitation for subsequent years.
Changes to the Transfer of Taxable Value for Certain Property Owners
The other relevant change in Prop 19 is generally beneficial to homeowners. Prop 19 expands the class of people who qualify for a transfer of their taxable value from their current home to a new property.Under existing law, only homeowners over 55 years of age or certain disabled persons could make use of this benefit. And they could do so only if (1) their new home is in the same county as their old home; and (2) the value of their new home is less than or equal to the value of their old home.
The new law, effective April 1, 2021, expands the class of homeowners qualified to to transfer their taxable value to include victims of wildfire or other natural disasters, regardless of age or disability status. The new law removes the restriction that the replacement home must be in the same county as the old home. Replacements can now be anywhere within the state of California. In addition, homeowners are now allowed to buy a replacement home worth more than their old home, provided the increase in value is added to the transferred taxable value of the old home. As an example, if a homeowner over 55 owns a home with taxable value of $5,000,000 and sells it for $15,000,000. that homeowner can buy a new home anywhere in California for $15,000,000 or less, and transfer the $5,000,000 taxable value to the new home. This is its new taxable value. If the homeowner chooses to to upgrade to a $20,000,000 home, the new home's taxable value is $10,000,000 – the taxable value of her old home transferred ($5,000,000) plus the upgrade value ($20,000,000 - $15,000,000. NOTE: The transfer of taxable value is not automatic, and homeowners must apply for the benefit by filing a claim with the assessor’s office in the county in order to provide the information required by the statute.
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