How Estate Planning Can Help You Avoid Property Tax Reassessments

Owning a home in California takes more time, money, and energy than most realize. Before we sign our name on the dotted line, we are saddled with huge down payments and expensive mortgages, not to mention the sometimes downright excessive price we are agreeing to pay for the actual home. A sometimes overlooked feature of homeownership in California is the property taxes.

Navigating the complexities of property taxes in California can be daunting, particularly when it comes to estate planning. One key concern for property owners is avoiding property tax reassessment, which can significantly increase the tax burden on their beneficiaries.

To understand the impact, let us consider an example: Suppose you bought a residential home in 1987 for $500,000. the initial property taxes are capped at $5000. 30+ Years later the home is worth around $4,000,000, but the current tax value is only $1,000,000. So, you pay about $12,500 in property taxes each year based on this lower value.

House with a pool

If you passed away this year, the property taxes would skyrocket to about $50,000 a year, which is $37,500 more for the people you left behind to figure out how to pay. This sudden tax increase could force your children or beneficiaries to sell the property that you have managed to hold on to for decades.

By implementing a strategic estate plan, you can help preserve your property's current property tax assessment and avoid unexpected increases. Here's how:

Understanding California Property Tax Reassessment

In California, property taxes are based on the assessed value of your property, which is determined at the time of purchase or when ownership changes hands. Under Proposition 13, passed in 1978, property taxes are capped at 1% of the assessed value, with annual increases limited to 2% until the property is reassessed at market value upon a change in ownership.

However, Proposition 19, which was approved in 2020 and implemented in 2021, brought significant changes. It limits property tax reassessment exemptions for inherited properties. In the past, children or grandchildren could inherit property without a tax reassessment. Now, if the property isn’t used as the beneficiary’s primary residence, it may lead to higher property taxes. This reassessment can lead to a substantial increase in property taxes for your heirs/beneficiaries. If you want them to be able to hold on to your property then you have to start preparing now.

Strategies to Avoid Reassessment

1. Utilize Exclusions: California offers a Parent-Child Exclusion (intergenerational Transfer exclusion), allowing parents to transfer their property to their children without triggering a reassessment. To qualify, you must file a claim with the county assessor's office within a specific timeframe after the property transfer. Be aware of the exclusions' limits, such as the $1 million cap on non-primary residences. Grandchildren can claim an exclusion like this in some special cases.
   

2. Joint Tenancy with Right of Survivorship: By holding property in joint tenancy with the person you intend to transfer the property to on your passing, ownership can automatically transfer to the surviving joint tenant without a change in ownership, thereby avoiding reassessment. This method can be used for people who are not related. This is most often done automatically for spouses but means that both people listed on the deed have equal ownership rights and responsibilities. It is not recommended if this wasn’t the initial way the property was purchased, as it still could trigger reassessment if completed after the initial purchase. Additionally, the surviving joint tenant will need to put the property in a trust to protect the property during the next transfer (on their passing).
   

3. Transfer Property to a Legal Entity: Transferring property to a limited liability company (LLC) or family partnership can prevent reassessment as long as the proportional ownership does not change. This method requires careful structuring and legal guidance to ensure compliance with tax laws. California will add additional income tax and mandatory reporting requirements if this is the chosen path.
   

4. Use a Qualified Personal Residence Trust (QPRT): A QPRT allows you to transfer your residence to a trust while retaining the right to live in it for a certain period. After this period, the property passes to the beneficiaries, potentially avoiding reassessment if structured correctly. There are very specific parties for which this type of trust applies.
   

5. Consider a Living Trust: Placing property in a revocable living trust allows for a smoother transfer upon death without triggering a reassessment. The trust can specify that property passes to beneficiaries without changing ownership in the eyes of the law, thus maintaining the current property tax assessment. The trust must be properly funded, and it is recommended to have an attorney help you with this process. If handled correctly, using a trust offers many layers of protection and privacy and will also exempt your estate from an especially invasive court process called probate.

   
   

Key Considerations

After choosing one of the methods mentioned above for handling the transfer, here are additional steps you can take to safeguard your property.

• Stay Informed: Laws and regulations related to property taxes and estate planning are subject to change. It's crucial to stay updated on current legislation and consult with professionals who specialize in California property law and estate planning.

• Understanding Triggers for Reassessments: These can include a change in ownership, such as a purchase or transfer to a new individual, the completion of new construction on the property, or additions to the home that enhance its value, among other factors.

• Seek Professional Guidance: Estate planning is complex, and attempting to maneuver it without professional help could lead to costly mistakes. An experienced estate planning attorney can provide tailored advice and ensure your strategies comply with state and local laws.

• Plan Early: The sooner you start planning, the more options you'll have to protect your property from reassessment. Early planning also allows you to discuss your intentions with your beneficiaries and prepare them for future responsibilities.

By using these strategies, you can help safeguard your property from reassessment, ensuring your heirs benefit from the legacy you've worked hard to build. Estate planning is not just about avoiding taxes; it's about preserving your legacy and providing peace of mind for you and your loved ones.

Until next time!

✨Keep Living Your Healthy Wealthy Life,✨

Your Wealth Bestfriend®️

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Jala, known as Your Wealth Bestfriend®, is a seasoned personal finance writer, attorney, and award-winning Certified Trust & Fiduciary Advisor (CTFA). When she is not running her businesses, teaching, or writing, she enjoys dance parties in the kitchen with her child. Her work has appeared on Business Insider, Experian, Real Simple, The Skimm, Yahoo News, and others.

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