Online resource center to help you explore these key issues, and others, regarding your estate.

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Mr. Miller has many years of experience in designing and implementing a comprehensive variety of Trusts, Wills, and other estate planning documents, as well as settling estates in the most expedient and appropriate method. Further, he counsels and assists clients on becoming eligible for VA benefits and Medi-Cal.

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Mr. Miller has been active in the area of VA Pension and Medi-Cal for well over a decade. He uses various specialized types of Trusts as well as non-trust strategies to gain eligibility for his clients and save the family money.

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Mr. Miller has been settling estates (both simple and complex) for well over 40 years. The starting point is always to create a strategy to settle the estate in the most efficient manner possible with a minimum of taxes. Often times the strategy created allows the family to bypass Probate Court proceedings.

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Don’t Let Property Taxes Increase–Deadline Looming & Action Needed!

By merv,

  Filed under: Elder Law, Estate Planning, Probate & Estate Administration, Tax

Dear Mr. Miller:

I just heard that if I leave my three daughters my house  and rental, the property taxes are going to shoot up.  What gives?  I thought Prop 13 guaranteed that they would get the same property tax bill that I did.  Is there a solution?

Doting Father

Proposition 13 and Parent/Child Exception
Property tax vs Income tax Basis
Proposition 19 & Investment Properties
Proposition 19 & the Residence
Solving the Dilemma

Dear Doting:

Proposition 13 and Parent/Child Exception:  Proposition 13 has been with us since 1978.  It guaranteed pretty much what you said.  Proposition 19, just recently passed by California voters made some significant changes to the Prop 13 rules.   Under the old approach, for your residence or your investment properties the property tax basis (upon which the county then taxes at 1%) would stay the same until the ownership changed.  Although inheritance or gift would be a change of ownership, an exception passed in the mid-80’s provided that, for the benefit of children and in some cases grandchildren, the basis stayed the same for (1) your residence and (2) investment properties up to the first $1 million.  Prop 19 changed the rules for children receiving gifts or inheritances.

Property tax vs Income tax Basis:  Although it sounds like similar terminology, keep in mind that the property tax basis is a completely different tax and has completely different rules than the income tax basis.

Proposition 19 & Investment Properties:  Under the new approach, investment properties do not receive any property tax protection and the tax will shoot up based on the fair market value (FMV) at the date of the transfer (i.e. date of the gift or your passing).  This provision arguably will cause the most pain.  The provision was justified based on the vision of wealthy Hollywood actors leaving Malibu beach front property to the children and the children paying almost no property tax since the house had been in the family for many decades. This new approach will force children to sell properties that they may not have before and is, at least, one reason that the California Association of Realtors backed this proposition.

Proposition 19 & the Residence:  As to your residence, there are now several requirements including the necessity of the parent having claimed the homeowners or disabled veteran’s exemption at the time of the transfer.  The main requirement is based on the FMV of the property.  Basically, if its fair market value less the basis that you enjoyed (the old basis) does not exceed $1 million, then the basis stays the same for your children.  However, if it exceeds that sum, then the basis increases according to a formula.  Let’s assume your house is worth $1.5 million (but the basis that you enjoyed was $400,000), obviously over the $1 million limit.  So the new basis will be determined as follows:

  1.  the assessed value (not the FMV) of the home just before you died or made the gift, i.e. the old basis, plus
  2.  the FMV less the old basis and less $1 million

In other words, $400,000 + ($1,500,000 -400,000- 1,000,000) =$500,000

The tax to your children would then be 1% of the $500,000 (plus various taxes for school districts, etc.).  Higher than your tax but not too bad; but if your property was worth $2 million then the new tax basis would be $1 million and the tax to the children would basically more than double.

Solving the Dilemma:  What can you do?  The new law as described above does not go into effect until February 16, 2021.  So you may have to act quickly to beat the deadline.  Here are some options; each has pros and cons.  Make sure you discuss them with your attorney before taking any action.

  1.  give the property to your children now so the children keep your low property tax basis.  Unfortunately, this will lose the income tax capital gain step up in basis when you pass.  And you may have to pay rent if you continue living there.
  2. Do nothing and the children get the property when you die.  They will get the income tax capital gain step up in basis when you die but, assuming you die after the new law takes effect and the property is over the $1 million limit, the property tax gets kicked up.
  3.  Irrevocable Trust.  If configured correctly (that’s one of the reasons why you need a skilled and knowlegeable attorney), then the children should get the income tax capital gain step up in basis when you die and should keep your low property tax basis.  You may need to pay rent if you live in the property or give up the rental income if it is investment property.

Call Us:  Remember, you need to act fast.    We have done many irrevocable trusts and are well versed in this technique.  Give us a call at 760-436-8832 to see if you and your property qualify.

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About Living Trusts

About Living Trusts is hosted by the Law Offices of Merwyn J. Miller, as your online resource center to help you explore these key issues, and others, regarding your estate.

Merwyn J. Miller, J.D.

  • Board Certified Specialist in Estate Planning, Trust & Probate Law
  • Co-Author of legal text book and of “Don’t Go Broke in a Nursing Home
  • Teacher of law courses at public and private colleges
  • Continuing Education Instructor for attorneys
  • Columnist for largest regional newspaper in San Diego County and professional journals for 15 years, Contributing author to the book “In Your Service: The Veteran’s Friend”
  • Masters Degree in Financial Services - Estate Planning

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