children – Experience a Richer Way to Wealth

Introduction

California’s Proposition 19, passed by voters in November 2020 and implemented on February 16, 2021, has redrawn the landscape of real estate taxation and inheritance. With these significant changes, estate planning strategies must evolve to encompass the new tax implications for inherited properties.

Before Prop 19: Property owners could pass their primary residences, and up to $1 million of other property, to their children (or grandchildren if both parents are deceased) without triggering a reassessment of the property’s value for tax purposes Cal. Const. art. XIII A, § 2.

The Mechanics of Proposition 19

Tax Base Transfer

Under Proposition 19, homeowners aged 55 or older, severely disabled, or victims of natural disasters are allowed to transfer their property tax base to a replacement residence up to three times California Board of Equalization.

Example:

Jane, a 57-year-old homeowner, decides to downsize. Thanks to Proposition 19, she can move from her family home in Silicon Valley to a smaller property in San Diego without experiencing a hike in her property tax, even though the market value of the new home is higher.

Before Prop 19:

Parents could transfer primary residences to their children without a change in the property tax base. They could also transfer up to $1 million of assessed value in other properties, like vacation homes or rental properties.

After Prop 19:

The property tax base can only be transferred if the child uses the inherited property as their primary residence, and there’s now a cap on the assessed value exclusion. Vacation homes or rental properties do not receive the basis transfer.

Inheritance Rules

The proposition modifies the rules around the inheritance of property tax bases California Legislature.

Implications for Estate Planning

1. Impact on Heirs

a) Increased Taxes:

Heirs inheriting properties that are not used as their primary residence or exceed the value exclusion cap will face higher property taxes, which could make inheriting and maintaining such properties financially unsustainable.

Example 1:

Before Prop 19: Alex’s parents leave him a family home with an assessed value of $500,000. Regardless of whether Alex decides to live there, rents it out, or leaves it vacant, the property’s assessed value for tax purposes remains $500,000.
After Prop 19: If Alex decides not to live in the inherited home, the property will be reassessed at its current market value, which could be significantly higher, leading to an increase in property taxes.

Example 2:

Before Prop 19: Sarah inherits her parents’ primary residence and a vacation home with a combined assessed value of $1.5 million. Neither property’s assessed value is reassessed for property tax purposes.
After Prop 19: Only the primary residence may be excluded from reassessment, and only if Sarah uses it as her own primary residence. The vacation home would be reassessed at current market value.

b) Selling Inherited Properties:

Given the new tax burdens, heirs may be compelled to sell inherited properties, a shift that could impact family legacies and long-term estate planning strategies.

Example:

Maria, who inherits her parents’ $2 million family home where the property tax is based on a $500,000 assessed value, will face a reassessment if she doesn’t move into the home. The increased property tax could make it financially challenging for Maria to keep the home, prompting a sale.

Implications for Estate Planning Strategies

a. Review and Update:

Individuals and families need to revisit their estate plans to accommodate these changes, especially those plans that include leaving homes to children.

b. Gifting Properties:

Some might consider gifting properties to their heirs before death to circumvent the new rules, though this comes with its own tax implications.

c. Trust Adjustments:

Estate planners will need to consider adjustments to trusts to optimize for the new tax landscape and minimize the financial impact on heirs.

Financial Planning Intersection

Wealth Management:

For wealthier individuals, the intersection of estate planning and financial planning becomes critical. The impact of Prop 19 may require diversifying assets or finding alternative methods to transfer wealth while minimizing tax impacts.

Real Estate Decisions

Downsizing:

Older adults might consider the implications of Prop 19 in their decisions to downsize or relocate, balancing the benefits of transferring their tax base with the limitations imposed on their heirs.

Adjusting Inheritance Strategies

Prop 19 limits the transfer of low property tax bases for inherited properties unless used as a primary residence by the heir, and even then, it is subject to a new value cap.

Example:

Mark inherited a property valued at $2 million from his parents. The original tax base was $500,000. Under Prop 19, if Mark does not use the property as his primary residence, the property will be reassessed at its current market value, leading to a significant increase in annual property taxes.

Navigating the Legal Terrain

Legal Citations

Prop 19 alters the application of sections 2.1 and 2.2 of Article XIII A of the California Constitution, impacting the reassessment rules of transferred property between parents and children or grandparents and grandchildren if the parents are deceased California Legislature.

Expert Consultation

The complexity of the proposition underscores the necessity of consulting with estate planning attorneys to revise and adapt existing plans, ensuring that they align with the new tax landscape while optimizing asset preservation and minimizing tax liabilities.

Conclusion

The implementation of Proposition 19 is a pivotal development with profound implications for real estate owners and heirs in California. It necessitates an in-depth review and, potentially, a comprehensive revision of estate plans to navigate the new tax implications effectively. Armed with informed insights and strategic adjustments, property owners can transition from reactive postures to proactive planning, turning the challenges of Proposition 19 into opportunities for optimized estate management and asset transitions.

If you have a current estate plan, I’ll bet you plan to leave your assets to your children outright and unprotected by age 35, or maybe a little later. Go take a look at your estate plan, and see what it does right now. And, if you don’t have an estate plan, and you have kids or other people you care about, contact us today and let’s get that handled for you.

If you do have a plan and it distributes your assets outright to your kids — even in stages, over time, some at 25, then half of what’s left at 30, and balance at 35 (or something along those lines), you’ve overlooked an incredibly valuable gift you can give your children (and the rest of your descendants for generations); a gift that only you can give them. And a gift that, once you’ve died and left them their inheritance outright, is lost and cannot be reclaimed.

Leave your kids a nest egg protected from lawsuits, divorce, and estate taxes.

While you may think to yourself, “my kids’ inheritance doesn’t need to be protected. They aren’t going to get sued.” You may be right, but you may also be overlooking one of the most common “lawsuits” that causes inheritances to be lost everyday, and that’s divorce. If you want to protect the money you’re leaving to your children from their future divorces, even if you love their spouses or expect you will, in the future, you can easily do so using a protected trust.

And, if your child is ever involved in a lawsuit, for example, a simple car accident, or if a business transaction goes bad, what you leave to your child can be protected from all future lawsuits or claims against them.

The best part is that if your child has their own taxable estate when they die, your planning now could save your family 40 cents on every dollar (or more) handed down from one generation to the next.

Save your family up to 40 cents on every dollar — currently — at each generation.

As of 2023, the current federal estate tax rate is 40% — meaning that every dollar passed on over the estate tax exemption rate is taxed at 40%. And it has been as high as 55%. On top of that, many states have estate taxes as well.

This all adds up fast, and can decimate your family’s financial legacy over time. For every million dollars you leave outright to your children, if your children have a taxable estate when they die, could result in your grandchildren receiving only $550,000, with $450,000 going to the government … unnecessarily.

So, if you want to know that everything you’ve worked so hard to create will stay in your family for generations to come and not be lost to outsiders, leaving your assets to your children protected in a trust we call a Lifetime Asset Protection Trust, instead of outright, is the way to go. And, it can be easily built into your existing estate plan or trust. You just need to ask us to help you get a Lifetime Asset Protection Trust added to your plan.

But how will my kids get to use what I leave to them?

Here’s the best part about leaving your assets to your children in a Lifetime Asset Protection Trust. Not only is what you leave protected, but your children control what you leave them when you decide they’re ready.

After your death, the assets you leave behind will pass to your children (and your grandchildren, great-grandchildren, and so on for successive generations) in a Trust that your child can control, as the Trustee of the Trust. You can decide when your child is mature enough to act as a Trustee.

As the Trustee of the Trust, your child decides how what you’ve left is invested and what to do with the Trust assets. And your child will even be able to determine the amount of control vs. the amount of asset protection he or she wants based on his or her specific circumstances.

Is this still important if I don’t have much money?

If you only leave your children a small amount of money, this is still incredibly valuable for protection, if you’re leaving assets that will be invested and grown, and not just spent right away on consumables. Some might say it’s even more important because your family has less to lose to taxes, lawsuits, and divorce each generation. And the impact of such losses is much greater.

A mere $10,000 protected now can become millions for the people you love for generations to come.

Imagine that you leave just $10,000 to your child in a Lifetime Asset Protection Trust, and instead of spending that $10,000 or losing it in a divorce, they invest that $10,000 in creating their own business inside their trust, and then grow that business into a million dollar or multi-million dollar venture because of how you chose to leave your child that $10,000 gift … and it’s fully protected for generations.

Secure the future of your family today by speaking to us. We review estate plans and inherited funds with you, ensuring that all legalities are in place so generations can enjoy the benefits according to your wishes. Get peace of mind now – contact us today to get started

This article is a service of Brittany Cohen, Personal Family Lawyer. We don’t just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That’s why we offer a Family Wealth Planning Session, during which you’ll get more financially organized than you’ve ever been before and make all the best choices for the people you love. You can begin by calling our office today to schedule a Family Wealth Planning Session and mention this article to find out how to get this $750 session at no charge.

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