If you are a resident of California, the recently passed Proposition 19 could impact your estate planning. Proposition 19 includes two changes to California property tax assessments that all California residents should be aware of.
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Proposition 19 and the Parent-Child Exclusion Changes
In accordance with Proposition 19, the availability of the parent-child exclusion for real estate tax assessments will be limited. This change will go into effect on February 16, 2021.
Under current law, a parent can transfer ownership of their principal residence to a child without having the property value for tax assessment purposes reassessed. This is true, regardless of how the child intends to use that residence. The child or children who are gifted a home from their parents may use it as a rental property, vacation home, or primary home.
Under the new law, the child or children must use the residence as their principal residence, or the residence will be reassessed for tax purposes. Additionally, there is a cap of $1,000,000 on the exclusion, even if that residence is used as the principal residence of the child or children.
How Might Proposition 19 Affect My Current Estate Plans?
Even after you have finalized your estate plans, it is crucial to review them from time to time to ensure that these plans are not impacted by any change in the law. The change to the parent-child exclusion brought about by Proposition 19 does have the potential to affect many estate plans that have already been completed.
For example, a qualified personal residence trust allows for the transfer of a residence to a trust while still allowing that residence to remain occupied for a fixed number of years. In this scenario, a set of parents could continue to live in the residence as their primary residence for a fixed number of years. At the end of this time period, the residence will transfer to someone else, such as their child.
Under the new law, the parents could not continue to live in the residence after the time of transfer since the child will need to make it their primary residence—or it will be reassessed for tax purposes, which could lead to a big increase in property taxes. If your estate plans include something similar to the above scenario, it is important to meet with an estate planning attorney to discuss how the changes that come with Proposition 19 may impact these plans.
Anyone that currently has an established trust that includes a residence and names a child or children as remainder beneficiaries should contact an estate planning attorney right away to go over any changes that may need to be made. Additionally, anyone who is planning to transfer a home to their child or children either through a trust or outright should also contact their estate planning attorney before this portion of Proposition 19 goes into effect on February 16, 2021.
Proposition 19 and Transfer of Taxable Value for Some Property Owners
In addition to the parent-child exclusion changes, there is also another aspect of Proposition 19 that may impact current and future estate plans for California residents. This change tends to be beneficial to homeowners. As of April 1, 2021, the class of people who qualify for a transfer of their taxable value from their current home to any new property will be expanded.
Under the current law, only homeowners over the age of 55 or some disabled individuals meeting certain criteria are able to use this benefit. Additionally, it is only available to homeowners as long as their new home is within the same county as the old home, and the value of the new home is also less than or equal to the value of the old home.
When this section of Proposition 19 takes effect on April 1, 2021, homeowners can qualify for a transfer of their taxable value from their current home to a new home in the event of a natural disaster or wildfire, regardless of their age or disability status. Proposition 19 also takes away the restriction that the replacement home must be in the same country as the previous home—now, the new home is only required to be in the state of California.
With these changes coming in 2021, it is essential to review any estate plans you already have in place with an estate planning attorney to see if you need to make any changes or updates.