Category: Family Wealth Practice

Although we are in the midst of an unprecedented historical event because of the COVID-19 pandemic, current circumstances offer a window of opportunity for wealth transfer planning for the right individuals. The combination of low interest rates and lower and more volatile asset values contribute to a favorable environment for the transfer of wealth for those in a position to take advantage of it.

These opportunities range from relatively simple strategies, such as gifting assets at lower values for federal gift tax purposes or making low interest rate loans, to more complex planning, such as utilizing a Grantor Retained Annuity Trust (commonly referred to as a “GRAT”). A GRAT established in May this year can result in a tax free wealth transfer to family members of appreciation of the value of the assets transferred to the GRAT in excess of 0.8%/year, over whatever period of time is set for the term of the GRAT at the outset. For clients who believe they now have assets likely to appreciate in value more than 0.8% per year over the term of a GRAT (which typically is structured to last 2-5 years), transferring that excess appreciation to family members free of any gift or estate tax (and without using any of their exemptions or annual exclusions from such taxes) is an attractive estate planning option to consider.

We would be happy to discuss wealth transfer planning options and explore with you if taking any action during these challenging times may be appropriate for you and your family. Although our physical office remains closed because of the shelter-in-place order, we continue working from home to provide excellent service to our clients.

The Passage of California Proposition 19

The passage of Proposition 19 (“Prop 19”) on November 3, 2020 constitutes one of the biggest changes to property tax rules in California in recent memory. Except for one limited exclusion, Prop 19 completely eliminates the current ability to avoid a reassessment of certain real estate transferred between parents and children, and grandparents and grandchildren, whether by gift, sale or inheritance (“Intra-Family Transfers”). Conversely, Prop 19 broadens and relaxes the rules regarding the ability of elderly, disabled and wildfire victims to transfer their existing property tax basis to a new primary residence of greater value than their departure primary residence.

The negative impact of Prop 19 on Intra-Family Transfers may make it important to complete such transfers before its effective date on February 16, 2021.

A. Current Law Relating to Intra-Family Transfers.

Under current law, a parent can transfer (via gift, sale or inheritance) real estate located in the State of California to a child without reassessment for property tax purposes, subject to two limitations.

First, if the property transferred to the child is the parent’s primary residence, it will not be subject to reassessment for property tax purposes regardless of the assessed or fair market value of the property at the time of the transfer, and regardless of whether the child ever occupies the property as the child’s primary residence.

Second, if the property transferred to the child is not the parent’s primary residence, the property will not be subject to reassessment for property tax purposes, so long as the assessed value of the property, together with the assessed value of all other California real property that is not the parent’s primary residence which has previously been transferred to a child by such parent, does not exceed $1,000,000 in the aggregate. If such property transferred in the aggregate over time has an assessed value in excess of $1,000,000 at the time of the transfer, then the property will be reassessed only to the extent that the assessed value of the property exceeds $1,000,000. This $1,000,000 exemption from reassessment applies to each parent, thereby sheltering up to $2,000,000 of assessed value of non-primary residence real estate from reassessment upon transfer to children.

The rules set forth above also apply to certain transfers between grandparents and grandchildren, but only under very specific and limited circumstances.

B. Changes Under Proposition 19.

Under Prop 19, the existing exclusions from property tax reassessment on Intra-Family Transfers are completely eliminated, subject to one exception. If the property transferred (1) is the parent’s primary residence, (2) is occupied by the child as his or her primary residence within one year of the transfer, and (3) has a fair market value on the date of the transfer less than the existing assessed value of the property plus $1,000,000, then the property will not be reassessed for property tax purposes. If the property transferred is the parent’s primary residence and the child occupies it as his or her primary residence within one year of the transfer, but the fair market value of the property on the date of the transfer is equal to or greater than the existing assessed value of the property plus $1,000,000, then the property would be subject to reassessment only to the extent of such excess.

The ability to transfer without reassessment a primary residence to children who do not occupy the property as their primary residence has now been eliminated. Moreover, any transfer to children of California real property that is not the parent’s primary residence will now be subject to reassessment.

C. Planning Recommendations.

If you would like to discuss the possibility of making a gift or transfer of real estate to your children or grandchildren before the effective date of Prop 19, please send us an e-mail as soon as possible. Gifting real estate is very complex and involves a coordination and analysis of numerous areas of the law. As mentioned above, transfers of real estate under current law must be completed by no later than February 15, 2021 to avoid the new rules under Prop 19.