Estate planning is an ever-evolving field, and recent legislative changes in California have introduced significant considerations for homeowners and their heirs. Proposition 19 has reshaped the property tax landscape, making it crucial for Californians to reassess their estate plans. In this blog post, we'll explore how Proposition 19 impacts estate planning and what steps you can take to navigate this new terrain.

What Is Proposition 19?

Proposition 19 is a constitutional amendment passed by California voters in November 2020. It primarily does two things:

1. Expands Property Tax Portability: Homeowners who are over 55, severely disabled, or victims of natural disasters can transfer their existing property tax base to a new home anywhere in the state, up to three times.

2. Limits Parent-to-Child Exclusions: The parent-to-child (and grandparent-to-grandchild) property tax exclusions have been significantly narrowed, affecting how property taxes are reassessed upon transfer.

Key Changes to Parent-to-Child Exclusions

Under the previous law (Proposition 58), parents could transfer their primary residence and up to $1 million of assessed value of other property to their children without triggering a property tax reassessment. Proposition 19 changes this in the following ways:

• Primary Residence Only: The exclusion now applies only to the parent's primary residence being transferred to a child who will also use it as their primary residence.
• Cap on Exclusion Amount: There's now a cap on the excluded amount, calculated as the property's taxable value plus $1 million. Any value above this cap is subject to reassessment.
• No Exclusion for Other Properties: Transfers of second homes, rental properties, or commercial properties to children no longer qualify for the exclusion and will be reassessed at current market value.

Implications for Estate Planning

1. Reassessment Risk

Parents planning to leave property to their children must now consider the potential for significant property tax increases. For heirs who cannot or do not wish to use the inherited property as their primary residence, the property will be reassessed at its current market value, leading to higher taxes.

2. Strategic Gifting

Some families are considering transferring properties to their children during their lifetime to lock in the lower assessed values. However, this strategy comes with its own risks and tax consequences, such as capital gains taxes due to the loss of the "step-up" in basis upon death.

3. Trusts and Legal Structures

Estate planning attorneys are exploring the use of trusts and other legal structures to mitigate the impact of Proposition 19. While some techniques may offer benefits, they often involve complex arrangements that require careful consideration and professional guidance.

4. Financial Burden on Heirs

Heirs may face financial challenges due to increased property taxes, potentially forcing the sale of family homes or cherished properties. This outcome runs counter to many parents' wishes to keep properties within the family.

Planning Strategies in the Post-Prop 19 Era

Evaluate Property Usage

Determine whether your children are likely to use inherited properties as their primary residences. If not, the properties will be reassessed, and planning should account for this possibility.

Consider Lifetime Transfers Carefully

While transferring property during your lifetime can avoid reassessment under certain circumstances, it may trigger other tax consequences. Consult with an estate planning attorney and a tax professional to weigh the pros and cons.

Explore Legal Entities

Setting up legal entities like Limited Liability Companies (LLCs) or Family Limited Partnerships (FLPs) may offer some benefits but are not foolproof solutions to avoid reassessment under Proposition 19.

Stay Informed on Legislative Updates

There is ongoing discussion and potential for new legislation or ballot measures that could modify or reverse some of Proposition 19's effects. Staying informed will help you adapt your estate plan accordingly.

The Role of Professional Guidance

Given the complexities introduced by Proposition 19, professional advice is more important than ever. An experienced estate planning attorney can help you:

• Analyze Your Specific Situation: Every family's circumstances are unique, and personalized advice is crucial.
• Navigate Tax Implications: Understanding the interplay between property taxes, income taxes, and estate taxes is essential to making informed decisions.
• Implement Effective Strategies: From drafting wills and trusts to exploring gifting strategies, professional guidance ensures your estate plan aligns with your goals.

Conclusion

Proposition 19 has introduced significant changes that affect the transfer of property in California. By limiting the parent-to-child property tax exclusion, the amendment may lead to unexpected tax burdens on heirs and complicate the preservation of family properties.

If you own property in California, now is the time to review and possibly update your estate plan. Early planning and professional advice can help you navigate these changes, minimize tax liabilities, and ensure that your assets are distributed according to your wishes

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At Victorium Legal, Inc., we specialize in estate planning and are committed to helping you understand and adapt to legislative changes like Proposition 19. Contact us today to schedule a consultation and secure your family's future.