For many California residents, their home is their most valuable asset, and most people want to leavetheir home to their children. This is a significant bequest due to a potential exclusion from property tax reassessment on the primary family home passing from parents to children.
Due to Proposition 19, which passed in 2022, the home being passed must be the primary residence of both the children and parent to be eligible for an approximate $1 million exemption on reassessment. This means that children can continue to pay property tax at the same or similar rate as their parents have been paying as long as the exclusion is filed with the county assessor on time.
California real property that transfers outside of this exclusion results in an immediate reassessment of the property to the current market value as of the date of death for property tax purposes. Thus, any property that was not the primary residence of both the parent and child will be reassessed to current market value. This will lead to an increase in property taxes that can be significant if the parent(s) have owned the property for a long time.
Inheriting a home may be a blessing to a child who may otherwise struggle with the prohibitive cost ofhousing. However, it may also result in rifts amongst siblings who have different views on how theydesire to take their inheritance. For example, one sibling may want to sell the home while another may wantto take advantage of the $1 million exemption.
As a home generally cannot be physically divided to allow each sibling to do what they wish with theirshare, it is smart to spend time while developing one’s estate plan to determine what would be in your children’s best interest. If your children are old enough, responsible enough, and mature enough todiscuss their inheritance, then their input could be valuable. For example, if one child expresses a desire to inherit the family home, their parents can write into their trust a provision that the family home isdistributed to said child and allot a cash gift equal to the fair market value to the other children so that all of the children take equal amounts, if there are enough other assets to equalize the distribution. It ispossible to leave the home to the child and not require an equalization of assets, but this may lead toproblems among the children regarding perceived unfairness.
If you leave the home equally to all children, then if one wants to keep the house, in order to avoid a reassessment of the other children’s shares, the trust estate can be distributed so that an equal division of the trust is affected.
If there are not enough assets to equalize distribution, the Trust can take out a bridge loan on the hometo get enough cash to equalize the distribution. This has to be done before the property is distributedfrom the trust, so that the child residing in the home is not deemed to have bought out the other shares, since there is no exemption for transfers between siblings. The child inheriting the home will then refinance the home once the home is distributed to them. While this is a workable solution, it becomes expensive quickly because of the additional attorneys’ fees and other professional fees needed to complete the transaction.
Our office has extensive experience in navigating the parent-child exclusion and working with our clients to develop a plan that will meet their objectives of leaving a lasting and meaningful legacy for their children.
Any content, resident submissions, guest columns, advertisements, and advertorials are not necessarily endorsed by or represent the views of Best Version Media LLC (BVM) or any municipality, homeowners associations, businesses, or organizations that this publication serves. BVM is not responsible for the reliability, suitability, or timeliness of any content submitted, inclusive of materials generated or composed through artificial intelligence (AI). All content submitted is done so at the sole discretion of the submitting party.
