November Is Approaching Fast! What You Need to Know About Estate Planning and Property Taxes

The upcoming November election could bring significant changes in tax laws impacting estate and wealth-transfer planning for our clients. Don’t wait until after the election to consider making important decisions—by that time, it might be too late to accomplish your desired actions. 

Estate Planning

While no one can predict the outcome of the election or changes in tax law that might occur, there are two certainties: (1) The gift tax exemption this year is $11,580,000, and (2) if there is a change in the law next year, it could be made retroactive to Jan. 1, 2021. We addressed in a recent newsletter the benefit of making gifts to use the current high gift exemption before any possible change in the law. (Read our newsletter here.) If you are interested in using your gift tax exemption this year, we encourage you to contact us now or early in the fall. We expect that many clients will want to make estate planning transfers before year-end if there is a change in administration, and given the anticipated volume of work, we may not be able to timely complete transfers for clients who wait to see the election results.  

Property Taxes

Property owners who want to transfer real property in California to their children may soon lose a valuable tax benefit under state law. California voters will decide on Nov. 3 whether to implement Proposition 19, the “Property Tax Transfers, Exemptions, and Revenue for Wildlife Agencies and Counties Amendment.” The ballot measure proposes amendments to the California Constitution regarding the state’s property tax law that would significantly narrow the parent-child property tax exclusion that allows transfers of real property between parents and children to avoid the property’s taxable value being reassessed to its current fair market value.

Under current California law, all real property has an established taxable value that may be increased by no more than 2% each year except when there is new construction or a change in ownership of the property. When a change in ownership occurs, unless an exemption applies, the transferred real property is reassessed to its current market value as of the date of transfer, which becomes the property’s new taxable value. This reassessment can often result in a dramatic increase in the property’s taxable value.  

However, under current law, the transfer of a principal residence between parent and child may be fully excluded from property tax reassessment, regardless of the market value of the property and regardless of whether the property is subsequently used as the child’s principal residence or for some other purpose, such as a vacation or rental property. The children get the benefit of the existing taxable value and can pass some or all of that benefit along to their own children. For any other property, including vacation, rental and business property, the first $1 million of the taxable value transferred between a parent and child (that is, the current assessed value, not fair market value) may also be excluded from reassessment. A similar exemption applies for transfers from grandparents to grandchildren if all the parents of those grandchildren are deceased.

The Prop. 19 ballot measure would eliminate the unlimited exemption for transfers of a principal residence unless the transferee continues to use the property as a principal residence. In addition, the transfer of a principal residence with a fair market value in excess of the residence’s current taxable value as of the date of transfer plus $1 million would also trigger a partial property tax reassessment, even if the property will continue to be used as a principal residence by the transferee. If approved by voters, Prop. 19 would go into effect Feb. 16, 2021. Starting Feb. 16, 2023, the $1 million threshold would be adjusted annually at a rate equal to the change in the California House Price Index.

Prop. 19 would also allow homeowners who are over age 55, have severe disabilities, or are victims of natural disasters or hazardous waste contamination to transfer their assessed value for property tax purposes to a different primary residence anywhere in the state—a change from existing law that generally requires the new property to be in the same county or in a county that has authorized intercounty transfers by ordinance. Under existing law, the taxable value of the old home may generally be transferred to the new home only if the fair market value of the new home is equal to or less than the fair market value of the old home. If the new home is of the same or lesser market value, the assessed taxable value of the new home remains the same as the old property. Under Prop. 19, the homeowner still gets the benefit of the lower assessed property tax value even if the new home has a greater market value than the old home, with an upward adjustment equal to the difference between the fair market value of the two homes. Homeowners who are over age 55 or who have severe disabilities may claim the tax assessment transfer benefit up to three times (an increase from the current single-time benefit), while disaster and contamination victims would continue to be allowed one transfer.