Taxpayers who want to take advantage of current law, which allows parents to pass property to children without reassessment as to primary residences and up to $1 million of assessed value ($2 million for a married couple) in other properties, should consider taking one or more of the following actions. Please note the actions described below must be taken by February 15, 2021 in order to be effective.
- For Taxpayers who anticipate having taxable estates:
Gifting property to children, or a trust for children, by February 15, 2021 will not only allow the property to pass to children without property tax reassessment but will also remove the property from the Taxpayer’s taxable estate for estate tax purposes.
- For Taxpayers who do not anticipate having taxable estates:
For Taxpayers who do not expect to have a taxable estate, the typical estate planning focuses on preserving the “step-up” in basis for assets passing to children rather than minimizing future estate tax. For those Taxpayers, consideration should be given to gifting property, by February 15, 2021, to an “incomplete gift trust” created for the benefit of their children. Such a gift would allow the property to pass free of property tax reassessment (to the extent of the parents’ property tax exemption), while preserving the step-up in basis on the property upon the death of the parent.
- For Taxpayers who prefer to retain significant income from property gifted:
Through a combination of gifting real property, by February 15, 2021, and subsequent formation of an LLC, it is possible for parents to retain 49% of income from the property while allowing the 51% of the property to immediately pass to children free of reassessment as well as having the remaining 49% passing to children free of property tax reassessment upon the death of the parents.
- For Taxpayers who currently hold property in a Partnership or LLC:
For Taxpayers who are willing to retain only 49% of the entity, there is a strategy, if implemented by February 15, 2021, that allows the property to pass to children and future generations without being reassessed.
Note: This strategy has several steps and implementation must begin as soon as possible in order to be completed by February 15, 2021.
- For Taxpayers who hold property that has not appreciated significantly:
For Taxpayers who are willing to have property reassessed (because the increase in property tax would be tolerable), there is a technique, with the use of an LLC, that would allow the children, and future generations, to inherit the property free of property tax reassessment.
- For Surviving Spouses with a Decedent’s Trust (also known as Bypass Trust or Credit Trust)
For surviving spouses who have a power of appointment under a Decedent’s Trust which allows them to transfer trust property to children during the surviving spouse’s lifetime, gifting property to children through the exercise of the power of appointment by February 15, 2021 will allow the property to pass free of property tax reassessment (to the extent of your deceased spouse’s unused property tax exemption).
Note for Taxpayers with Qualified Personal Residence Trusts (QPRTs) – If the initial term of your Qualified Personal Residence Trust (QPRT) has ended (i.e. beneficial ownership of the residence has already passed to your children) or will end by February 15, 2021, Proposition 19 does not affect your QPRT. However, if the initial term of your QPRT ends on February 16, 2021, or later, then under the new property tax rules your residence will be reassessed at the end of the trust’s initial term (i.e. during your lifetime) if you do not take action by February 15, 2021. There are actions you can take to avoid this result. Please contact us if you want to discuss your options.