Will I have to sell inherited property to pay property taxes | California Proposition 19

Dear Len & Rosie,

My parents have multiple properties that I’m supposed to inherit after they pass. I’ve read that because of the passage of Proposition 19, the property tax bills on each of their properties will skyrocket. I may have to sell properties to come up with the money to pay property tax. Is there any way to avoid this?

Sarah

Dear Sarah,

Proposition 19 limits the parent-to-child transfer reassessment exclusion to just your parents’ residence, and only if you establish your own residence there within one year of its transfer to you. Also, if the market value of your parent’s home is greater than $1,000,000 above the property’s “base value” (that’s the assessed value reported on your parents’ property tax bill) then the amount in excess that will be added to your new assessed value.

For you, the most important date of the new year may be February 15, 2021. Your parents can still transfer property to you under the old Prop 58 rules, as long as the deeds are recorded on or before that date. If your parents own income property whose income they don’t really need, they can give it to you now, saving you thousands of dollars a year in property tax for the rest of your life.

There is a downside. Basis follows Gift. The cost basis of your parents properties (that is, the amount they’ll get tax free if they sell them) be stepped up when they die if they give these properties to you now. You’ll have their old cost basis, and thus more capital gains tax to pay if and when you ever sell these properties.

There’s a way to avoid that too. Your parents can create an irrevocable trust specifically designed to accomplish the following: First, your parents will retain no beneficial interest in the trust. Instead you will be the beneficiary. That means funding the trust, on or before February 15, 2021, will qualify the transfer under the Prop 58 parent-to-child transfer reassessment exclusion.

Second, if the trust includes a provision allowing your parents to change the trust beneficiary to someone other than you, but not themselves, then the trust properties will receive a step-up in cost basis upon your parents’ deaths under Internal Revenue Code section 2036(a)(2). This will give you the best of both worlds - avoiding reassessment while giving you a higher cost basis upon your parents’ deaths.

Don’t forget the February 15, 2021 deadline. To be safe, you’ll want everything to be complete, including the recording of the deeds, by that date.

Len & Rosie

Putting Affairs in Order Before Death

Dear Readers,

We would like to share with you something that we share with each of our clients. It’s really important, our clients like it, and we think that your family can benefit from it as well. You may have seen this in the column before. We print it year after year. Consider it as a gentle reminder to get yourself organized. One of the most tedious tasks in administering a trust or an estate is finding the decedent’s estate planning documents and asset information. Frequently, children or even spouses have no idea where important documents are to be found.

After you pass away, the last thing you should want is for your loved ones to have to search through your belongings to find your will, stock certificates, or other important papers. They shouldn’t have to wait a month for new account statements to come in the mail so they can figure out where you invested your savings.

To avoid these difficulties, you should organize your personal and financial data. This is where the list comes in. Collect the information described in this list and give a copy to your children or close relatives, or keep it somewhere safe and let your family know where to find it. In case something happens to you, the List of Eleven is one of the best ways to ensure that your relatives can find all your vital records.

The List of Eleven

1. The location of your safe deposit box, if you have one, and the location of the key.

2. Account numbers for all of your insurance policies, health, life, auto, home, burial, etc., and the names and addresses of your insurance agents.

3. Your investment accounts and directly held investments and the contact information for your financial advisors.

4. The names of the banks, savings and loans, and credit unions for each of your accounts, and the account numbers, or better yet, copies of your account statements.

5. The location of your cemetery plot or mausoleum niche.

6. The location of your will or trust and the name of your attorney.

7. Your credit cards.

8. Your Social Security Number.

9. The name and address of your mortgage lender, the account number, and the approximate amount of the outstanding debt.

10. The name and address of your accountant, and where your past income tax returns are located.

11. The type of memorial or funeral service you want.

11+1. These days, many people receive account statements and pay their bills online, leaving no paper trail at home. It’s important for your loved ones to be able to access your email and online accounts so they can wrap things up when you are gone. You may want to provide them with a list of your account numbers and passwords.

If you think this is too hard to do yourself, consider how hard it will be for your children to deal with after you pass away. Take a few minutes to get organized.

Len & Rosie