You own a home in Rocklin, Roseville, or Orangevale, have an estate plan, and all of your properties are in your Estate Plan. And things were just fine. Then, Proposition 19 passed, even though it was opposed by all but 1 major California newspaper (16 Major Newspapers Oppose Prop 19). What does that mean for you? If you own residential property then Prop 19 could seriously impact your plans. Call our probate law firm today to review your plan and speak to an estate planning attorney for free. Call: 916-282-9799 Book online: Book now
Estate Planning Impacts from Prop 19
Proposition 19 was approved by California Voters, according to the Associated Press (“California voters give property tax breaks a makeover“). The law limits a crucial exception that would otherwise limit tax increases when a home transfers from a parent to child (or grandparent grandchild under certain circumstances). If you own residential property and plan to leave your children your property, your entire estate plan likely needs a review.
What Changed with Prop 19? The Perk.
Prop 19 amends California’s Constitution in several ways, but for trusts and estate plans the key change has to do with the limitation on taxes for inherited property. First, property taxes are based on the value of the property when it changes owners. The county Assessor gives property an “assessed value” and the tax each year is based on that value (with modest increases that aren’t discussed here).
Second, the land value is “reassessed” when property changes owners. This reassessment always means “higher taxes.” For example, if mom and dad bought a home in Roseville, California 30 years ago, their property tax bill might be only $400/year. If the same home sold in Placer County at today’s value of $427,600 the new owners would have a tax bill of $3,441, an increase of over $3,000.
Before the amendment, California homeowners could pass real property to a child and that child would avoid the higher property tax. This perk meant that children (or grandchildren in some cases) would enjoy the same property tax bill that their parent had. So in our Roseville example, the child would only pay $400/year in property taxes, even if the property today is $600,000!!
Example of Estate Planning Perk Before Prop 19
You enjoyed the American Dream and bought a couple of residential homes in the 1980’s. But it is harder today to purchase a new home, and rent is expensive. So, you rent your second or third home to your children, and you want to give each of your two children the home they now rent from you when you die. Under the old rules your children would pay the same property tax bill you paid ($400/year under our example). As of right now, if you died with a trust plan that gifted the home to your children, they wouldn’t have to pay higher property taxes.
How Prop 19 Affects Your Estate Planning Now
The new law changes the reassessment exemption so that only the “family home” is exempted from higher taxes and only “… if the property continues as the family home of the [child],” (see link for text of changes here). A “family home” means the “principal residence,” which is defined throughout California law as “… the home… in which the individual resides” (defined here), or “a dwelling eligible for either the homeowners’ exemption or the disabled veterans’ exemption” (as defined here). This means that ONLY the ONE home that was the parent’s principal residence can pass without reassessment and ONLY if the child will use the home as their own family home.
If you have two children and you own two residential properties and wanted to gift a home to each child to live in at your death only ONE child will get the benefit of the lower tax bill. The other child will be reassessed taxes based on the FULL FAIR MARKET VALUE of the home.
Review Your Estate Planning With Our Firm
While this law may be repealed later, it will be the law of the land beginning in 2021. Don’t let this change affect you. Call our estate planning law firm for your free consultation today.