What does the passage of Prop 19 mean for your estate plan?

Dec 4, 2020
Estate Planning

If you have been keeping up with the news, you may have noticed that California voters have passed Prop 19 with 51% of the votes being in favor of the proposition. As a result, there will be big changes in inheritance laws in the Golden State. We have the vital details you need to understand how Prop 19 will affect you and your estate plan.

How does Prop 19 affect Prop 58?

Voters approved Prop 58 back in 1986. What this did was exclude tax reassessment on properties that parents passed down to children. Considering how expensive real estate in certain areas of California can be, this represented major tax savings. This is because prior to the passage of Prop 19, the government would reassess properties at current market value if sold or transferred at that value.

Essentially, prior to Prop 19, annual property tax increases were capped at not more than 2% per year.  Considering that existing home prices have appreciated at an average of 5.4% per year since 1968, long-term owners of real property in California typically have a dramatically lower assessed value than short term owners owning similar property in the same locale.   For example, assume a couple bought a row house in the Mission District of San Francisco in 1950 for a comparatively modest amount. In turn, they then passed it down to their children in 2020. Prior to Prop 19, children would continue to pay property taxes at a dramatically reduced rate as there would be no tax readjustment.

What do the changes mean for my estate plan?

Prop 19 does still have tax exclusion for properties passed down within the family, but it adds a residency requirement. Prior to Prop 19, it would have been possible for the parents to pass down the aforementioned row house in the Mission District and the children could rent out the property at 2020-level rental prices while paying 1950s based property tax rates.

After Prop 19, in order for the children to hold on to the tax reassessment, all property owners must move in and use the home as a primary residence. One could imagine this being very problematic for multiple adult children with their own homes, families and lives.

What are the best actions for us to take at this time if I want my children to inherit my property after I die?

If you have a property that you would like your children to inherit, there are options available. You may be thinking that passing your property to your children before Prop 19 goes into effect would be smart. However, there are many cons to giving away your house before you die. Fortunately, there are superior options available for the savvy estate planner.

The best path forward is to put your home in a trust. Since California allows in-kind distributions, this allows the Trustee and your children to figure out what sort of inheritance situation is best for everybody when you die. For instance, your children might agree to pass your property down to one adult child who can move into the home and take advantage of the tax exemption. Then, the other children inherit remaining assets of equal value.

In order to reassess your current estate plan in the light of Prop 19 passing, make sure to contact us here at AmeriEstate. Our expert advice can ensure that the system delivers your assets to the right people at the right time.