California's property tax system has undergone significant changes due to various propositions aimed at regulating property tax assessments and transfers. To understand how to maintain your parents' property tax basis, particularly when dealing with multiple child beneficiaries, it is essential to grasp the nuances of Proposition 13, Proposition 58, and Proposition 19.
Proposition 13: Property Tax LimitationsProposition 13, passed in 1978, is a cornerstone of California's property tax system. It caps the annual increase of the assessed value of real property at 2% unless there is a change in ownership. This means that property taxes are based on the purchase price of the property rather than its current market value, leading to significantly lower taxes for long-term property owners.
Proposition 58: Parent-Child Transfer ExclusionProposition 58, approved in 1986, allowed for the transfer of a principal residence and up to $1 million of other California property between parents and children without reassessment. This proposition enabled children to inherit their parents' properties and maintain the existing property tax base, thus avoiding a significant increase in property taxes.
Proposition 19: Changes to Parent-Child TransfersProposition 19, which took effect in February 2021, introduced new rules that significantly altered the benefits under Proposition 58. Under Prop 19, the parent-child exclusion now only applies if the child continues to use an inherited primary personal residence as their principal residence. Additionally, there is a cap on the exclusion: the property's assessed value exclusion only overs up to $1 million without reassessment. Any value above this cap is reassessed at current market rates.
Maintaining Parents' Property Tax with Multiple BeneficiariesWhen multiple children inherit a property and one wishes to retain it while the others do not, careful planning is required to avoid reassessment and maintain the parents' property tax base. Here’s a step-by-step guide using an example scenario:
Example Scenario
· Property Value: $1 million
· Other Assets: $2 million in bank accounts or investments
· Beneficiaries: Three children (Child A, Child B, and Child C)
Child A wants to keep the $1 million home, while Child B and Child C prefer the other assets.
Step-by-Step Process
1. Review the Trust Terms:
- Non-Pro Rata Distribution Authorization: Check if the trust explicitly allows non-pro rata distributions, meaning assets can be divided unequally but proportionally among beneficiaries.
- Pro Rata Distribution Requirement: If the trust requires pro rata distribution, all assets must be split equally, complicating the process.
2. Non-Pro Rata Distribution Scenario:
-Divide Assets Proportionally: If the trust permits non-pro rata distributions, divide the estate in a way that each child receives an equal share of the total value of the trust estate.
-Child A takes the $1 million home.
-Child B and Child C each receive $1 million from the remaining assets.
3. Pro Rata Distribution Scenario (possible solution but legal research with Assessor may be required in advance):
-Single Asset (Home) Situation: If the only asset is the home, a different approach is needed.
-Trust Takes Out a Loan: The trust, not the child, takes out a loan equivalent to the shares of Child B and Child C $1,000,000 each).
-Child A Receives Home: Child A receives the home as their proportional distribution of the estate.
-Child B and Child C Receive Cash: The loan provides the cash needed to compensate Child B and Child C for their shares.
-File Applicable Exclusions: Child A must file the necessary Parent/Child exclusion (Prop 19) to maintain the existing property tax assessment, move into the parent’s home and file a Homeowner’s Exemption.
Avoiding Reassessment
Properly executing these steps is crucial to avoid reassessment (legal counsel is strongly recommended before taking any action):
-Ensure Loan is from Trust: The loan must be taken by the trust and not directly by the child to ensure compliance with the law.
-Timely Filing of Exclusions: File the parent-child exclusion forms promptly to benefit from Prop 19's provisions and maintain the lower property tax base.
Navigating the complexities of California's property tax system requires a thorough understanding of Prop 13, Prop 58, and Prop 19. By carefully reviewing the trust terms and planning the distribution of assets, beneficiaries can ensure that they maintain their parents' property tax base on their parent’s primary residence, thereby avoiding potentially substantial increases in property taxes. Proper legal and financial advice is essential to execute these steps correctly and in compliance with current laws.
If you, a friend, or family member need help establishing or updating an estate plan please reach out to our Intake Department at 760-448-2220 or at https://www.geigerlawoffice.com/contact.cfm. We have offices in San Diego County(Carlsbad) and Orange County (Laguna Niguel), but we assist can families throughout California as well.
