Prop 19 Is Here; Now What?

Posted by & filed under Proposition 19.

Proposition 19, formally known as The Home Protection for Seniors, Severely Disabled, Families, and Victims of Wildfire or Natural Disasters Act, and more informally referred to as Prop 19, is here. It was approved by California voters in the November 2020 election. The proposition went into effect December 16, but the changes to the parent-child and grandparent-grandchild exclusion didn’t begin until February 16, 2021. And the base year value transfer provisions just went into effect on April 1.


The Basics of Prop 19

As defined by the Los Angeles County Office of the Assessor Jeffrey Prang, Prop 19 “imposes new limits on property tax benefits for inherited family property. …Children may keep the lower property tax base of the parents only if the property is the principal residence of the parents and the children make it their principal residence within one year.
“The other component of Proposition 19 allows homeowners who are over 55 years of age, disabled, or victims of a wildfire or natural disaster to transfer their lower assessed property value of their primary home to a newly purchased or newly constructed replacement principal residence up to three times (or once per disaster). The tax base may be transferred to a property located anywhere in the state.”


Benefits of the New Proposition

There is one great thing about Prop 19: Residents aged 55 or higher, those who are disabled, or victims of wildfires or disasters can move three times statewide. This is an increase from the previous one time allowed. During the move, these individuals can transfer their lower property value to the newly purchased property.


The Negative Side of Prop 19

There are many implications of this new regulation that will have a negative impact on California residents:
  • Only the principal residence may be covered, and $1 million of the other property is eliminated.
  • For the principal residence, the assessed value plus $1 million will not be reassessed (adjusted for inflation starting February 16, 2023).
  • Children must file homeowners’ or disabled veterans’ exemption within one year instead of the three years previously, and they must use the home as their primary residence.
  • If the current property value exceeds the assessed value plus $1 million, the property will be reassessed at fair market value minus $1 million.
One of the big issues that has come to light since Prop 19 passed is that a number of people don’t have a solid, basic estate plan in place. And that’s something everyone most definitely needs. Unfortunately, deed errors didn’t allow for Prop 19 planning.


What You Need to Know

There are some stipulations that allow your estate to follow the previous stipulations outlined in Prop 13:
  • Only one child has to move into the home.
  • The child must move into the home within one year of the parent’s death.
  • The child must file a claim for homeowner exception within one year of the parent’s death.
  • Even if the parent does not own 100%, the $1 million exemption will apply to their share.
  • The child must use the home as a primary residence; however, a period of temporary absence is allowed.
  • A family farm does not need to be a primary residence.
  • If the date of death or transfer is before February 16, 2021, it preserves Prop 13. Of course, proper documents must be filed.
  • Gift deeds signed by February 15, 2021 don’t need to be recorded by that date pursuant to a California State Board of Equalization (BOE) memo dated February 16, 2021.
  • The $1 million assessed value exemption applies to inheritances and gifts.


How Can You Move and Keep Prop 13?

Prop 13 instituted a base-year value for property tax assessments and limitations on the tax rate and assessment increase for real property. While Prop 19 changed this 1978 proposition, there are some things you can do to retain its original intentions when moving:
  • Your home purchase or new construction must occur within two years of selling the prior property.
  • The older property must be reassessed at the time of sale.
  • If the new property costs more than the old property, the difference will be reassessed.
  • The two-step transaction, or sale and purchase, only requires that one step is completed after April 1, 2021, according to the State Bar. As stated by the BOE, “The transfer of the base year value must be on or after April 1, 2021, and not the purchase or sale of either the original or replacement property. If the replacement primary residence is purchased or newly constructed on or after April 1, 2021, the primary residence may be sold either two years prior to or after the purchase or new construction of the replacement primary residence and qualify.”
Each spouse can make this move, sale, and purchase three times.
Forms for the process are available on the BOE website.


Hope for the Future of Estate Planning

Senate Bill (SB) 668 is coming down the pike, and it may delay the effective date of Prop 19 for two years. That means you’ll have until February 16, 2023 to make any changes to your estate plan.


Still Have Questions? Contact Estate Planning Expert Joel A. Harris

For over 30 years Joel A Harris has been protecting the estates of families throughout California. If you need help navigating the ins and outs of protecting your estate, feel free to visit us online, in person or call us by phone at (925) 757-4605.

The Future of the Estate Tax Exclusion Under President Biden

Posted by & filed under 2021 Changes, Estate planning.

What will this new administration bring? While we know some of President Biden’s plans, some will inevitably be unrolled across the next few months and years. One thing that might change, though, is the estate tax exclusion.

 

Defining the Estate Tax Exclusion

The estate tax exclusion outlines the amount of money you can leave to beneficiaries without having to pay estate tax. Currently, you can bequeath this amount either at death or while you are still living. After the amount is used, you can look forward to 40% federal tax on assets that exceed that amount.

 

What is that amount?

 

It has fluctuated significantly across the years. For instance, in 2001, it was $675,000. For 2021, the exclusion has grown to $11.7 million per person. That’s a huge difference in two decades.

 

The estate tax exclusion amount includes a permanent exclusion of $5 million, which has been adjusted for inflation, using 2011 as a base year. The exclusion doubles through 2025 as a result of a 2017 law. However, unless Congress votes to extend the doubled exclusion, it will revert back to $5 million, adjusted for inflation, in 2026.

 

Yes, it’s a bit confusing to ponder. Is your head spinning yet?

 

Congress’s Plans for the Exclusion

While the incoming Congress has a few years before they have to act on this matter, they could choose to do so sooner. There is certainly a precedence seeing as Congress has changed the estate tax numerous times across the past decades.

 

According to Biden’s campaign, they seem to have a desire to drop the estate tax exclusion to $3.5 million. To push this through, it will need to be approved first in the House, which has a narrow Democratic lead, edging out Republicans at 222 seats to 211. And if the estate tax exclusion reduction were to pass in the House, it would then move to the Senate for a vote. There, the party line cuts right through the middle at 50 each. That means, in a tied vote, Vice President-elect Harris would have the tie-breaking vote, and she’ll no doubt side with the Democrats.

 

Plan Now for the Future

Due to the state of the current economy, Congress may seek to generate revenue from a number of sources to reduce the deficit. And that could include reducing the estate tax exclusion.

 

Instead of taking a “wait and see” approach, your best option is to act now and take advantage of the current, unprecedented high exclusion.

 

Some ways that might play out include:

 

  • A married person giving assets equivalent to the remaining exclusion to a trust for their spouse or children. Then, they could make their spouse the trustee of that trust to gain access to those assets.
  • An unmarried person could give assets to a trust for their descendants.

 

Don’t wait to make changes to your estate. Make an appointment now to speak with an experienced estate planning attorney to see if you should take advantage of the estate tax exclusion—before it potentially disappears.

 

And remember, if the exemption drops you will need to do planning before the drop goes into effect.

 

Still Have Questions? Contact Estate Planning Expert Joel A. Harris

 

Located in Concord, Walnut Creek, and Antioch, the Law Offices of Joel A. Harris is more than prepared to provide you with legal counsel pertaining to the planning and execution of your estate, including any other legal concerns or questions you may have. For over 30 years Joel A Harris has been protecting the estates of families throughout California. If you would like some help navigating the ins and outs of protecting your estate, feel free to visit us online or call us by phone at (925) 757-4605.

Posted by & filed under 2021 Changes, Proposition 19.

California’s Proposition 19 - What You Need to Know Now If You Have Property


On November 3, 2020 everyone’s eyes were at the top of the ticket. However, other ballot measures will also have a huge effect on the lives of people in California. Californians this year had a wide array of propositions to vote on, including Proposition 19. Proposition 19 passed 51% to 49% as of November 17, 2020.


What is Proposition 19?

Proposition 19 is a measure to change Props 13 and 58 in California. As you probably know, Proposition 13 passed in 1978 and limited property tax increases to 2% annually unless reassessed due to sale or other transfer. Because of Proposition 13, property tax valuation of properties in California is much less than the actual current market value. Proposition 58, passed in 1986, authorized the owners of property to transfer property to their children and grandchildren with the the same low property tax basis. This affects the personal residence (regardless of value or who will live there) plus $1Million in additional property.


Current California law also allows a qualified homeowner (aged 55 or over, disabled, or a natural disaster victim) to move to a participating in-state county once, and carry the assessed value of their property with them when moving to a home with a lower assessed value.


How Does Proposition 19 Change Property Taxes?

Proposition 19 amends the current legislation adopted in Propositions 13 and 58. It allows qualifying owners (over 55 years of age, physically disabled or natural disaster victims) to move into a house of lesser value up to three times in the State and to carry their lower property tax assessments. This is great news for homeowners, but you should be aware; Proposition 19 also amends the law on inheriting property. Under proposition 19, all real estate will be reassessed at death, with the exception of a primary residence worth less than $1 million that a child actually moves into (if worth over $1M the balance is reassessed).

Again, before Proposition 19 goes into effect on February 16, 2021, property owners can leave or gift their primary residence and up to $1 million in assessed value of other real estate to their children (and qualifying grandchildren) and the assessed value would transfer with the property. Under Proposition 19 the preferential valuation can only be transferred under the following conditions:

How Will This Look for Me?

Let’s look at a case in point:

Amy owns her first home, now worth $2 Million, with an assessed value of $300,000. She pays $3,600 a year in property taxes. The property tax would be approximately $24,000 a year if it were to be reassessed at current fair market value. Amy also has rental home with a cost basis of $250,000 and $1.2 million current valuation. The property taxes Amy pays are $3,000 a year for the rental, but the property tax would be about $14,400 if it was assessed at current fair market value. Amy is planning on leaving her property to her son David.

Before Proposition 19, if Amy dies, David would pay the same property taxes that Amy had been paying, totaling about $6,600 per year. Just as with Amy, property taxes will increase only 2% per year.  After Proposition 19, once the properties pass to David, they will be reassessed to about $26,400 if David moves into the house, or $38,400 if David does not move into Amy’s house.  

What Can You Do Now?

So what do we recommend someone like Amy do? Proposition 19 will go into effect on February 16, 2021, so before that date, Amy should consider transferring one or both properties to David. If Amy does this, David will not face the reassessment to fair market value of the property and would not have to move into Amy’s home.

These assets could be completely transferred to David outright. However, in the event of divorce or if David had other issues, an outright transfer could make the properties vulnerable. Many of these problems could be avoided by transferring the property to a trust for David. Such transfers must be made by February 15, 2021. Any transfers after February 15, 2021 will be subject to the rules of Proposition 19.  There are very serious downsides to making real property gifts. First, you would have to file a gift tax return using part of your $11,580,000 lifetime gift and estate tax credit to avoid paying taxes on this gift. This may be a very good use of the $11,580,000 credit, which is set to drop by 50% in 2025, if not lowered sooner by the new administration.     
 

The second major consideration is cost basis. When you gift property, the recipient keeps your lower cost basis. When you die, your heirs get a stepped-up basis, which would allow them to sell real property with no capital gains tax, or depreciate income property as it if just purchased. This is a huge tax benefit that must be considered when making gifts. A gifting strategy would clearly work best for a valuable primary residence (worth over $1 Million) that your child plans to live in, then pass along to his or her heirs. You can avoid gift taxes using your lifetime credit, there would be no capital gains tax as the property will not be sold during your child’s lifetime, and your low property taxes have been preserved. 

One possible strategy is available for other property, such as rentals, commercial property and land. Consider transferring the property into a corporation or LLC, then your children or grandchildren can inherit shares of the business and there will be no change of ownership on the actual deed to trigger reassessment. This is a current loophole that the counties will try to close, and may or may not be an effective tool for avoiding reassessment.

Other benefits of this strategy are (1) asset protection (2) advanced gifting opportunities by giving stock/shares (3) possible estate tax reduction in the value of the property owned by the business entity if you do not own 100% of the shares/stock by gifting shares/stock to your heirs, and (4) no February 2021 deadline. This is a complicated and important issue. Proceed carefully and make informed decisions together with your attorney and CPA. Personal residence gifts must be made before February 16, 2021, to take advantage of Prop 13.


Will Proposition 19 affect your family? Consider if it makes sense for you to gift your home or move the property into a trust or business entity.


Still Have Questions? Contact Estate Planning Expert Joel A. Harris

For over 30 years Joel A Harris has been protecting the estates of families throughout California. If you want some help navigating the ins and outs of protecting your estate, feel free to visit us online, in person or call us by phone at (925) 757-4605.