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Changes to Estate Planning Due to Proposition 19

In November’s recent election, California passed Proposition 19 (Prop 19), which has changed two important California property tax assessments that could have a lasting impact on your estate planning.

What is Prop 19?

Prop 19, which goes into effect on February 16, 2021, is a measure that comes as a modification to Propositions 13 and 58. Prop 13 put a limit on property tax increases, reducing them to 2% annually unless reassessed due to sale or another transfer. This had a far-reaching effect on many properties in California, as their property tax assessment would be calculated much lower than the current fair market value.

Prob 58 became effective in 1986, allowing a property owner to pass down their property (and another real estate up to $1 million) to their children at their preferred tax assessment. Eventually, the law was amended to give property owners the ability to pass along their property to qualifying grandchildren. Under Prop 58, homeowners who were over the age of 55, severely disabled, or a victim of a wildfire or other natural disaster were allowed to move to a participating county in the state while maintaining their right to their previously assessed valuation, as long as they were moving to a home of lesser value.

The new Prop 19 is a modification to these existing laws, allowing eligible homeowners (still defined as over age 55, disabled, or victim of a natural disaster) to move anywhere in the state, not just participating counties, to a home of lesser value, while bringing their property tax with them. And unlike before, when this was a one-time opportunity, this can be done up to three times by the property owner.

This comes as good news to older homeowners, but different circumstances are in place for inherited properties.

What Will Change?

Previously, a property owner could leave their home or property and up to $1 million in the assessed value of another real estate to their children or grandchildren. With the implementation of Prop 19, however, this preferential assessed value can only transfer if:

1) it is for the primary residence,

2) only if the child or grandchild is going to use it as the primary residence

3) and only if the fair market value stays under the assessed value by more than $1 million.

This means that the transfer of property, such as commercial or rental properties, is now subject to reassessment at fair market value at the time of the transfer. Let’s look at how that can have a large impact:

For example:

If Sarah’s home has a taxable value of $3 million that she purchased many years ago, the value of the house could now be $5 million. However, if she gifts that property to her child, the new reassessed value will be $4 million. There are also inflation adjustments that could apply to the $1 million increase limitation for the following years.

It is also worth noting that children or grandchildren cannot rent it back to the parent or grandparent. For siblings that are entitled to the residence at the end of a fixed term, they would need to actually live together and share the household to qualify for the exemption. This could be very unrealistic for children who are old enough to own a home, as they may have started families of their own.

Possible Benefits

While Prop 19 might not deliver the best news for those with inherited properties, there are also some unique benefits because the law has expanded the amount of people who qualify for a transfer of their taxable value when transferring from their current home to a new property.

Before Prop 19 comes into effect, only property owners over the age of 55 could make use of the benefit. Also, they could only receive this benefit if the new home was in the same county as their previous home and the value of the new home was less than the old home. The new law extends the benefit to those who have lost their homes in California wildfires or any other natural disaster. The exemption is no longer limited by disability status. Homeowners now have the opportunity to buy a house that is more valuable than their previous home.

What’s Next?

There is limited time to create a plan for your real estate, as Prop 19 will go into effect very soon (February 16, 2021). It is important to speak to a professional who knows the intricacies of this law and how it may affect you or your properties. Accelerating gifting plans might be a good decision for most families, but we’re here to help no matter what your situation may be.

The estate planning attorneys at Lowthorp Richards are here to help you, especially with the new proposition that will go into effect soon. We know what it takes to successfully plan for the future, and we truly care about what is most important to you. Together, we will evaluate your assets, discuss your goals, and work to prepare, provide, and implement estate planning options that best serve you and your family.

Our attorneys live and practice in Ventura, Santa Barbara, and San Luis Obispo counties. We are a client business service and provide prompt and cost-efficient legal services with specific expertise in estate planning. For more information, we invite you to visit our website or call us at 805-981-8555. When the window of opportunity opens, we will make sure you and your family reap the benefits.

NOTE: The information contained herein is not intended to be legal advice and the reader should know that no Attorney-Client relationship or privilege is formed by the posting or reading of this article which is also not intended to solicit business.

Cristian R. Arrieta, Lowthorp Richards McMillan Miller & Templeman, A Professional Corporation, 300 E. Esplanade Drive Suite 850, Oxnard, CA 93036