The result of Proposition 19 is that Proposition 58 is cancelled which provided inter-generational transfer protection (e.g., Parent-child) without property tax reassessment.
Prop 19 Effects 02/16/2021
In order to receive an exemption on reassessment the following must occur:
- The parent must have had a homeowner's exemption claimed on the property.
- Child must make the parent's home their personal residence within one year of death. And must physically move into the home.
- Tax base + $1million anything over that gets reassessed.
$2 million house today.
$120,000 base + $1,000,000 exclusion = $1,120,000
$880,000 above exemption will be reassessed.
- Keeping a home in Living Trust.
Generally, through obituary databases and requests for death certificates, paperwork will be triggered and sent out to the home of the deceased called "Claim for Reassessment Exclusion," from the County Assessor's Office. Some counties require a copy of the trust be submitted in order to approve the exclusion but again it is going away by February 11th. The Orange County Assessor's Office provides the following instructions – “The administrator of the estate should file a PCOR (Preliminary Change of Ownership) and copy of the death certificate within 150 days of the date of death. If the estate is probated, the PCOR should be completed and returned to the Assessor Department when the inventory and appraisal is filed with the court.” This would mean in an ordinary trust (revocable) and no instruction to hold the real estate; it would be concluded that after the second trustor passed, the property is being transferred requiring a change of ownership declaration. All Counties view the death of the second trustor or primary trustor for a single person, triggers a change in ownership.
- Transfer into an irrevocable trust for children today (works better for commercial/multi-family or non-personal residence. Must be done by February 11th and recorders/assessors could be backed up.
Some law firms are moving real estate into irrevocable trusts and doing the transfers now as completed gifts and filing the Prop 58 exclusions. Transferring right now whilst parents might still live in the property would eviscerate the step up in basis that over a decade or more could spell disaster with capital gains unless proceeds were available to cover it. In my view, this trust approach would need to include a WPT (wealth preservation trust) which is funded with life insurance just like the SPT19 (special purpose trust prop 19) so that proceeds would be available and growing to cover cap gains. Also, the type of life insurance used can have living benefits added to cover any nursing care required that catches the insured off guard and provides a gap filler for look-back in qualifying for MediCal/Medicaid.
2. Just Add Children on title of Residence or other property.
At best, it is a partial change in ownership if a parent "adds" a child as a tenant in common but does not solve the problem entirely and may create new problems. A transfer from parent to parent and child as joint tenants is not a change in ownership at all. If the parents give the property entirely to a child then that does work for change in ownership purposes but the parent loses control, there are capital gains tax issues and what happens if the child dies first...? The property may very well be reassessed while the parent is living. This planning is not easy and there is no one size fits all.
In addition, there is a loss of control, basis carry over to child, subject's property to child's creditors or divorce, loss of rental income and child may predecease.
Rentals – transfer now and no future adjusted basis and cannot depreciate it.
3. Special Purpose Trust (SPT19™)
A trust designed to cover future expenses so as to not saddle it from the estate or on the heirs. We have a Newport Beach wealth management firm on our board of consultants to provide quotes for clients should they be interested in exploring the numbers on this solution. This firm even does celebrities and they negotiate terms and pricing with insurance carriers and know all the underwriters making the decisions. We have determined that you use the age of the owner, examine IRS mortality tables for lifespan, apply 3.75% out from today to the end of that life span in terms of annual appreciation (3-5% annually except for recession years so average with 3.75%). Then we add the 1.25% reassessment rate on that future home value and use that as a minimum death benefit to cover property taxes for up to 10 years assuaging the effects of it. As discussed above, while proceeds must be used for the special purpose of paying property taxes or a buyout should the insured need critical living care for nursing that would be added and made accessible.
4. Dedicate home to one child who will make their personal residence.
This gets complicated and should require an amendment to the trust making the personal residence to this particular child. However, there will be problems where there is more than one child in terms of fairness. In effect, a buyout strategy may also be required to ensure equipoise among the beneficiaries. This can also be done with a reallocation of the assets. For example, one could receive pension plan assets vs. value of the home ( hard to predict what 50% more or less of a home value will be in the future). Probably needs SPT19 also for buyout.
5. Sell – sell – sell
This means either use Prop 19 to upgrade to something worth more and capture the new value and shorten the reassessment period. Alternatively, sell and move to another state (we have realtors in most of the popular non-tax states). We have been working on the California Expat program which helps folks extricate themselves from the clutches of California taxes and move to another more moderate or non-tax state. We like to see what the retirement horizon is and maybe help the client acquire a rental property in the future state of residency so that the landing pad is identified for the launch and can get pre-paid by a tenant and provide tax deductions until a client is ready to move.
I would say these are really the only solutions to Prop19 and dampening the effects unless it is recalled or amended. The other final thought might be just live life and do not worry about it as it does not affect you and someone is receiving your property for free so they will have to make the proper calls when it lands in their lap and pre-planning anything right now might be hastily with counterproductive consequences like everyone rushing to transfer property into irrevocable trusts (might be good for commercial/multi-family holdings).