How the property tax measure in response to Prop. 19 impacts actual property that’s (or isn’t) held in a belief

Since California voters narrowly endorsed Proposition 19, the statewide property tax measure, in November, I’ve received questions from readers about how this will affect properties held in a trust.

Prop. 19 will reduce or eliminate some of the generous tax breaks that families receive when property is transferred between parents and children. But it won’t change the rules for trusts themselves.

However, some parents are transferring property in an irrevocable trust for their children before these changes go into effect on February 16 to receive the tax break.

My best advice is to speak to the lawyer who started the foundation and possibly a tax advisor. Trusts are complicated and the variations are endless. But here is some background information that might help prepare you for this discussion.

Prop. 19 will do two things. It will expand a property tax break for the elderly, people with disabilities and victims of natural disasters. However, readers with confidence questions were asked about the second provision that applies to parent-to-child transmissions.

Since 1978, California real estate has generally only been valued at market value when it changes hands. Between changes of ownership, the estimated value (also known as taxable value or tax base) cannot increase by more than 2% per year plus the value of the new home. Assessors apply the tax rate to this value to determine your tax bill. The bill is usually much lower for properties that have been held for a long time than they were recently purchased.

Some transfers are exempt from being re-evaluated. Transfers between spouses are always excluded.

Another exclusion applies to transfers between parents and children and between grandparents and grandchildren if the parents are not alive. For the sake of simplicity, we assume here that the transfer takes place from parents to children, but also vice versa.

Under current law, parents can transfer their primary residence to their children through sale, gift, or inheritance, and no reassessment is made regardless of how much it is worth or how the children use it.

In addition to a primary residence, either parent can transfer “other property” – such as a vacation home, rental, or commercial property – and release an estimated value of up to $ 1 million (not market value).

Prop. 19 changes these rules for parent transfers that take place after February 15th in the following way:

• It removes the exemption from “other property”.

• The exemption for primary residence is retained, but only if the child also uses the house as primary residence and the difference between the estimated value of the house and the market value does not exceed USD 1 million (indexed for inflation).

• If it exceeds $ 1 million, it will be partially revalued but not to full market value. If the child does not use the house as their primary residence, it is revalued at market value.

Prop. 19 is not retroactive and only applies to properties if they are transferred (or deemed transferred) after February 15.

When property is brought into a trust, the auditors “examine” the trust to see if there has been a change of ownership.

If it is a typical revocable trust, also known as a living trust, then whoever established it (called a fellow, trustee, or settler) is considered the owner as long as that person lives. Adding or removing ownership in a revocable trust does not trigger a reassessment because beneficial ownership has not changed.

“It’s the same as owning it,” said Chelsea Suttmann, estate planning attorney at Barulich Dugoni & Suttmann Law Group.

However, if the founder dies, the trust becomes irrevocable and property is deemed to have been transferred to the new beneficiary or beneficiaries. This generally results in a market value reassessment unless that qualifies for a parent-child, spouse, or other exclusionary right.

If this transfer occurs before February 16, the current parent-child exclusions will apply. If it takes place on or after that date, the new rules apply.

If a married couple sets up a revocable foundation in a manner that transfers full ownership of the property to the surviving spouse, it will not be revalued when the first spouse dies. “The spouse exclusion will apply,” said Steve Hartnett, director of education at the American Academy of Estate Planning Attorneys.

In this case, the trust becomes irrevocable when the second spouse dies.

What if the trust was irrevocable in its establishment? It’s very hard to tell because these trusts are not standardized.

Generally, however, the county assessor determines who is the “beneficial owner” of the property. This is generally “anyone who has any right to receive income or capital from the trust,” said Bradley Marsh, tax attorney at Greenberg Sad. If it isn’t the grantor, the assessor can determine that a transfer took place when it entered the trust.

At its simplest, when parents set up property and transfer it to an irrevocable trust, and the first beneficiary is a child, “because you can’t revoke it, that moment is a change of ownership,” Marsh said. “You would have to file your parent-child exclusion.”

Some parents are transferring investment property in an irrevocable trust to their children before February 16 so they can receive the parent-child exclusion before it expires.

“Because the estate and gift tax exemptions are so high, they want to make this transfer now if the parents don’t need the income,” said Yin Ho, a real estate attorney at Withersworldwide.

Parents wishing to do so should not retain any rights to the property other than possibly the power to move assets among children who qualify for parent-child exclusion, Hartnett said.

Remember, after February 15, the exclusion will only apply to an estimated $ 1 million worth of property on any property other than primary residence.

The downside to transferring assets to children (inside or outside a trust) is that the children generally lose the base top-up that applies to valued assets when the owner dies. With this huge tax advantage, heirs can avoid taxes on capital gains made during the owner’s lifetime.

Lawyers say there are ways to get the tax base and increase the base, but they’re too esoteric to go into here.

Not all irrevocable trusts convey property. For example, if parents invested property in a trust for their own benefit during their lifetime and for the children thereafter, “the appraiser would not consider this a change of ownership until the parents died,” Marsh said.

Some readers asked if a change of trustee would trigger a change of ownership for property taxes. The answer is no. For the same reason, keeping the same trustee does not prevent revaluation in the event of a change of ownership. “The trustee is completely irrelevant,” said Ho.

Suttmann pointed out that Prop. 19 has no effect on persons who own property in a company, a limited liability company or any other legal person. “They have different rules,” she said.

Kathleen Pender is a columnist for the San Francisco Chronicle. Email: [email protected] Twitter: @kathpender