By Sehr Law Firm // December 19, 2018 // Taylor Hobin, J.D., L.L.M.
Estate planning for Bay Area families often involves planning for the transfer of highly appreciated real estate from parents to children. Due to a provision in the California State Constitution enacted in 1978, Proposition 13, real estate transferred in an estate often has a low base value for property tax reasons. This means that the current owners of the real property pay very low property taxes compared to the property taxes that would be paid if the property was reassessed. These low taxes make the property more valuable, and proper estate planning, given the right circumstances, can empower a savvy individual to pass this benefit on to their heirs.
The rule that we will examine today is the exemption to reassessment of real property passed from parent to children, or from grandparents to grandchildren, under Propositions 58 and 193 of the California State Constitution. These rules mean that there is no reassessment of real property, used as a primary residence or of any other property on the first one million in value, when it is transferred from a parent to a child, or from a grandparent to a grandchild. This applies to property transferred as part of an estate plan. It sounds simple, however there is a common trap that some fall into when doing estate planning that ruins this benefit, and here is an example to illustrate:
Mom and Dad own a home, used as a primary residence, in the Bay Area. The home is currently worth $900,000, was purchased in 1987 for $200,000, and has a base value for property tax purposes of $300,000 due to California Proposition 13. They currently pay $3,000 per year in property tax, but if the property was reassessed would pay $9,000 a year in property tax, a substantial increase. Mom and Dad have four children and in their estate plan they leave the property equally to all children. The property is distributed one-fourth to each child, however only one child plans to own the home. This is where there is a problem. Consider that there is no exclusion from reassessment for a transfer of real property from sibling to sibling. Thus, when the siblings transfer their interests to the sibling who will own the home, three-fourths of the home will be reassessed, diminishing the value of the property for the beneficiary substantially.
At Sehr Law Firm, we take a proactive approach to help our clients avoid this issue and similar issues in their estate plans. We draft estate plans to give trustees and executors the power to distribute assets in a way that avoids this reassessment issue. Utilizing this approach, and other similar strategies, we help families take advantage of California law to maximize the value of their estates.