Your Estate … with James Ward: Now is time to take action to solve propositions 13 and 19 tax issues
Transferring a highly appreciated property to a child now could create a serious tax problem for that child
By James Ward
James Ward
Most people are scratching their heads and realizing that, without fully understanding it, they voted for Prop. 19 and didn’t realize that it might cause harm to their children.
This column does not cover what an owner can do as far as transferring Prop. 13 on their own residence to a new residence. Here, we’re concerned with problems with transferring Prop. 13 to children and grandchildren, but since very few grandchildren qualify for a Prop. 13 transfer, my comments only pertain to transfers to children.
Prop 19 has the effective date of Feb. 16, 2021 on changes in the law regarding transfers, BUT … That date follows a holiday weekend, and we don’t want to miss any cutoff date. Therefore, we’re trying to get all transfers completed by Feb. 1, 2021, so we’re trying to move fast on this.
If your children will not keep your property after your death, the new law change probably means nothing to you.
If your children might keep the property, or they definitely will keep the property, then you need to figure out a plan. And, fortunately, we now have a solution for this.
Here are four scenarios I’ve had:
- Children will sell all properties once parents die. No need to do anything.
- Parents want to pass residence to one child, that child will make it his or her principal residence, and Prop. 19 will cause the child to pay much higher property taxes. Parents need to consider a special Prop. 19 trust.
- Parents want to pass their residence to one or two children who might or might not ever live in the residence, but they will likely keep the parents’ residence as a rental if they can continue with the parents’ low Prop. 13 tax rate. Parents need to consider a special Prop. 19 trust.
- Parents want to pass investment property to children, and they want the children to continue to own the property or properties, and keeping the Prop. 13 tax rate is very important to parents and children. Parents need to consider a special Prop. 19 trust.
If the market value of your residence is not more than $1 million above your current tax assessed value, passing the Prop. 13 on your residence may not be a serious problem if the residence will pass to only one child and that child makes it their principal residence. If your child wants to use it as a rental, they will not be able to keep your Prop. 13 tax rate unless action is taken now.
Transfers of vacation homes, rental properties, or commercial properties will not carry the existing Prop. 13 tax rate of the parents to the children unless action is taken now.
Some people have considered transferring the property to their children now, but transferring a highly appreciated property to a child now could create a serious tax problem for that child. We believe our solution, using an irrevocable trust with special terms in it, will allow for a full step up in basis at the owner’s death, and also allow the child, or children, to retain the parent’s tax rate.
In one scenario we discussed this week, the specialized trust could potentially save the children $300,000 in capital gains tax, and $24,000 per month in property tax. Those numbers are significant.