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Tax & Estate Planning After Proposition 19 in California

Tax & Estate Planning After Proposition 19 in California 1074 967 Bernstein Financial Services

On November 3, 2020, California voters approved Proposition 19, The Home Protection for Seniors, Severely Disabled, Families, and Victims of Wildfire or Natural Disasters Act. This analysis is not meant to be exhaustive, rather to give some of the basic information about this proposition that goes into effect February 6, 2021.

Proposition 19 Highlights

  • Homeowners may now transfer their tax basis anywhere within the State and to a property of greater value.
  • No property tax basis transfers for non-residence properties.
  • If a person is 55 years or older, has severe disabilities, or lost a home in a natural disaster, the transfer of property tax basis is allowed anywhere in California for any value, but amount over 100% of value is added to prior basis.
  • If a person is 55 years or older, has severe disabilities, or lost a home in a natural disaster, they can transfer property tax basis 3 times.

Gifting Property & Prop 19

The big question is whether parents should transfer (gift) their property to their children to preserve the lower property Tax Base for their children. Although I have addressed some pros and cons below, this subject is complex and can affect Income tax, Estate tax, Property tax, and Legal estate issues (such as inheritance). The below list of positives and negatives is meant to help you consider as many factors as possible when deciding to gift property.

Positives of Prop 19

  • Transferring property from parent to child prior to 2/15/2021 preserves the low property tax base for the children.
  • The asset is now out of the state of the parent, and therefore will not appreciate in the estate (called an estate freeze). This may save Estate tax at the dates of death of the parents.
  • Biden may propose an elimination of the step up in income tax basis upon the death of the parents making gifting more attractive.

Negatives of Prop 19

  • The parents no longer have control of the property. The children can sell the property.
  • If there are multiple children, there may be disagreement as to the operation or sale of the property.
  • The parents may need funds back ad must ask then children for the funds.
  • For gifts, property tax basis transfers from parent to child, but this will likely not allow for a step up in cost basis if inherited. So, gifting could create a larger capital gain upon sale of the asset, whereas inherited with a set up in cost basis would eliminate part or all of the gain.
  • The assets are subject to any liabilities of the child receiving the property
  • There will likely be a need to file form 709 gift tax returns to report gifts in excess of the $15,000 annual exclusion, although not tax will be due unless over the estate exclusion amount.
  • Assets may be at risk in the case of a child’s future divorce.
  • Difficult to reverse this action.

Note: Some attorneys who specialize in estate and property tax issues believe that there are special ways for the parents to contribute property to a type of trust that will both allow the gift of property tax purposes, and claw it back into the parent’s estate for the purposes of Set-Up in Basis. This is complicated, and the attorneys I have spoken to are not 100% sure it would be accepted by the IRS and/or Assessors office.