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. 

Problems with Proposition 19

Posted by & filed under Proposition 19.

With election day looming, there are many considerations on our ballot in California. One important box to tick is whether you’ll vote yes or no on Proposition 19.  Proponents say it will encourage residents 55 or older to downsize and eliminate the inheritance tax break, providing billions of dollars to firefighters and municipalities. Those opposed to Prop. 19, however, argue that Realtors are pushing it to increase their commission and heirs should be able to do whatever they want with inherited property without having to face a huge inheritance tax.
  

The Case Against Proposition 19

If this measure passes, Prop. 19 will remove tax protections Californians have enjoyed since 1986. Previously, when a parent left property to a child upon death, property and inheritance taxes were assessed at the original purchase price. However, should a yes vote come in on this proposition, transferred property would be assessed at current market value, resulting in a huge tax burden in many cases. The only exception would be if the child moves into the home as a principal residence within one year of transfer, which would allow them to continue to enjoy the tax break. 


Prop. 19 and Prop. 13

Many aspects of Proposition 13, passed in 1978, will be eliminated should Proposition 19 pass in 2020. For instance, it eliminates:

  • the protection for most inherited real estate between parents and children
  • the protection for grandchildren if their parents are deceased
  • the protection for primary residences valued at higher than $1 million

 Currently, thanks to Prop. 13, there is a $1 million non-principal lifetime exclusion ($2 million for a married couple), which allows parents to transfer up to $2 million of assessed value of all other property, including second homes, rental homes, and commercial property. Prop. 19 would eliminate this exclusion entirely. The child who inherits must use the property as a principal residence, and the exclusion amount would be capped at $1 million. 


Who Benefits from a Yes Vote

While the detriments of Prop. 19 are many, as with any new suggested legislation, there are always a few benefits. In this case, those aged 55 or older will enjoy a continued reduction in property taxes when moving to a new residence. Currently, homeowners pay property tax on the original value of the home—not its current value—giving them a significant tax break. A yes vote on Prop. 19 will allow seniors and disabled buyers to move their property tax break anywhere in the state. However, this benefit is already available in county and between many counties already, so that wouldn’t represent a change.  


The Impact on Estate Planning

The cost to your heirs may be significant should Proposition 19 pass and you plan to leave them property. Whereas many inheritors now enjoy the benefits of that passed-down property as vacation homes or rental income, they would have to move into the property and make it their primary residence to continue to enjoy the tax break, and only if the residence appraised for less than $1M. Plus, even outside of looking at this proposition from an estate-planning perspective, it will affect all residents. Some families will no longer be able to keep their primary residences since they will not be able to afford the property tax. This is an important time in the history of our country and the history of our state. You, your family, and your heirs stand to lose millions to property taxes should Prop. 19 pass. Are you willing to take that risk?