prop 19 pros and cons 2020

Dear Readers:

Election results are in and Proposition 19 passed. For those of you with children, Prop 19 may have a significant effect on your estate planning.

The first provision of Prop 19 allows property owners who are age 55 or older to relocate anywhere within California to a home of equal or lesser value and carry their old home’s Prop 13 assessed value with them. This is good news for property owners looking to downsize their homes after their children grow up and move out or after a spouse dies and the large family home becomes a bit too much to handle. You could still do this prior to Prop 19, but only within the same county, with some exceptions.

The other change brought by Prop 19 limits how much property parents may pass to their children or grandchildren without reassessment. Until Prop 19, the parent to child transfer reassessment exclusion allowed parents to transfer their residence and up to an additional $1,000,000 of real property to their children without a property tax increase. On top of that, the $1,000,000 exclusion was not measured by the fair market value of each property. Instead, it was based on each property’s assessed value as reported on its property tax bill. In some cases, that resulted in millions in property value passing to children with no reassessment.

Many felt this allowed the creation of property tax dynasties in which the children of wealthy families with multiple properties were allowed to pay far less in property tax on inherited property than first time home buyers have to pay on a property of equal value. This was perceived by many to be unfair.

Commencing on Prop 19's February 16, 2021, effective date, the parent to child transfer exclusion will be limited to just the parents’ residence, and only if the child or children inheriting it will also reside there. Furthermore, the transfer exclusion is limited to the old assessed value plus $1,000,000. Thus children inheriting multi-million dollar homes with low assessed values will still see a property tax increase.

What does this mean for you? You now have only until February 16, 2021, to take advantage of the full benefit of the parent to child transfer exclusion. If you own multiple properties today, you may want to consider transferring some of them to your children prior to February 16, 2021. There are other gift and estate tax and capital gains tax issues that arise with such gifting, so you’ll want to consult with your attorney before doing so.

Len & Rosie

Should you update your Estate Plan - Questions to ask yourself

Dear Readers:

Election 2020 is just around the corner, and that means everyone is thinking about the future. While doing so, it’s a good idea to review your estate plan. The trust you created years ago may not be appropriate for you now. Things change. What was a good idea fifteen years ago may not be such a good idea today.

Start with the Table of Contents, if there is one. There should be a paragraph labeled something like, “Successor Trustees.” Turn to that page. Are the trustees you named still alive? Are they honest? Are they good with money? Do they get along with the rest of your family, or are they a source of conflict? If the eldest male child you named as trustee thinks that since he’s trustee he can lord it over his brothers and sisters, then he’s not the right person for the job.

Next, find the paragraph that says something like “Disposition on Death” or “Disposition on Death of Surviving Spouse.” That’s the paragraph that says who gets what when you die. Read it. Does it still make sense? Have any of your children died? Are any of your children now disabled? Do you have a spendthrift child who can’t be trusted with money? Does your trust leave your son’s ex-wife an inheritance you no longer want her to get? Does your grandson have a drug problem? Maybe you need to make some changes.

Now look at the last pages of your trust. There should be a Schedule of Trust Assets. Read it. Have you moved? If so, is your new home in the trust? Are your retirement accounts listed in your trust document (they shouldn’t be). Who are the beneficiaries of your retirement accounts and life insurance policies? Did you leave your IRA to the trust? (Don’t unless your lawyer says so.)

If you’re married, find the part of the trust that talks about what happens between the first death and the second. Do you have an A/B trust that divides everything between a “Survivor’s Trust” and a “Bypass Trust” or “Exemption Trust?” If so, then maybe you don’t need or want an A/B trust any longer. An A/B trust is a great way to avoid death tax, but it’s more expensive to administer.

As of January 2020, up to $11,580,000 of your assets may pass free of Federal Estate Tax upon your death, and that amount goes up annually with inflation. This means that many of you with A/B trusts should update your trusts to the ordinary type of trust that leaves everything to the surviving spouse, who won’t be answerable to anyone.

Is either you or your spouse in a nursing home? Do you suffer from an ailment that will likely put you in a nursing home before you die? Are you already on Medi-Cal running up an estate claim that will be due and payable upon your death? If so, it’s not too late to protect your assets from the cost of your medical care.

If you are not completely comfortable with the answers to all of these questions, then you need to see a trusts and estates attorney to review and update your estate plan.

Len & Rosie