Dear Len & Rosie,
My parents have multiple properties that I’m supposed to inherit after they pass. I’ve read that because of the passage of Proposition 19, the property tax bills on each of their properties will skyrocket. I may have to sell properties to come up with the money to pay property tax. Is there any way to avoid this?
Proposition 19 limits the parent-to-child transfer reassessment exclusion to just your parents’ residence, and only if you establish your own residence there within one year of its transfer to you. Also, if the market value of your parent’s home is greater than $1,000,000 above the property’s “base value” (that’s the assessed value reported on your parents’ property tax bill) then the amount in excess that will be added to your new assessed value.
For you, the most important date of the new year may be February 15, 2021. Your parents can still transfer property to you under the old Prop 58 rules, as long as the deeds are recorded on or before that date. If your parents own income property whose income they don’t really need, they can give it to you now, saving you thousands of dollars a year in property tax for the rest of your life.
There is a downside. Basis follows Gift. The cost basis of your parent’s properties (that is, the amount they’ll get tax free if they sell them) be stepped up when they die if they give these properties to you now. You’ll have their old cost basis, and thus more capital gains tax to pay if and when you ever sell these properties.
There’s a way to avoid that too. Your parents can create an irrevocable trust specifically designed to accomplish the following: First, your parents will retain no beneficial interest in the trust. Instead, you will be the beneficiary. That means funding the trust, on or before February 15, 2021, will qualify the transfer under the Prop 58 parent-to-child transfer reassessment exclusion.
Second, if the trust includes a provision allowing your parents to change the trust beneficiary to someone other than you, but not themselves, then the trust properties will receive a step-up in cost basis upon your parents’ deaths under Internal Revenue Code section 2036(a)(2). This will give you the best of both worlds—avoiding reassessment while giving you a higher cost basis upon your parents’ deaths.
Don’t forget the February 15, 2021 deadline. To be safe, you’ll want everything to be complete, including the recording of the deeds, by that date.
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Len Tillem and Rosie McNichol are elder law attorneys. Contact them at 846 Broadway, Sonoma, CA 95476, by phone at 707-996-4505.