Hello. My name is Kyle Krasa and I'm an estate planning attorney in Pacific Grove, California. I'm certified by the state bar of California, as a legal specialist in estate planning trust and probate law. The purpose of this video is to give you general information about an important aspect of estate planning law so that you can be prepared when working with your own attorney. Watching this video does not establish an attorney client relationship. The law is far more complex and nuanced than can be explained in a few short minutes. As a result, before acting on any of the information contained in this video, you should consult a competent attorney who is licensed to practice law in your community. With that understanding, I hope you enjoy my video and you find it informative. Thank you.

Property tax in California is governed by Prop 13 which are rules that are unique to California. I'm not aware of any other state that has rules that are similar to California's Prop 13. Let's Give you the background. What is Prop 13 all about? Well, Prop 13 came about in the 1970s and that was a time when value of real property was increasing dramatically. So the fair market value of real property was rapidly rising and, prior to Prop 13, property tax was based upon the fair market value of property. So as the fair market value increased, so did property taxes and proponants of Prop 13 argued that this result because of skyrocketing property values was forcing many Californians, especially seniors, out of their homes because they could no longer afford to keep up with the rapidly rising property taxes. So Prop 13 introduced this concept of assessed value and that was separate and apart or it is separate and apart from fair market value. The idea behind Prop 13 was that when you purchase real property, the value of that property pretty much will stay the same relatively for determining how much property tax you need to pay, even if the actual fair market value is increasing rapidly.

So it decoupled fair market - the actual value of the property from assessed value, the value upon which your property taxes are based. And what Prop 13 does is it favors, even today it favors people who hang on to their real property for a long period of time. The longer that someone will hang on to property. The wider this gap gets between the actual fair market value and the assessed value upon which one's property taxes are based. And so for a lot of people, there's this huge gap here between the fair market value of their home and the actual um, assessed value that their property taxes are based upon. Now there are certain activities, certain actions that will trigger a property tax reassessment, sometimes a full property tax reassessment or a partial property tax reassessment. The most common trigger and the most dramatic trigger is a change in ownership.

So the general rule is when there is a change in ownership, the assessed value is going to pop up to the fair market value at that time. It's going to catch up to the fair market value for the new homeowner. Then the new homeowner will keep their assessed value and it will, they'll keep it all away until there's another change in ownership. Then it's going to pop back up to the fair market value again. And then They'll be able to keep their value until they sell it. And then another change in ownership, it's going to pop back up. And of course the longer that someone has held onto property, the more dramatic that jump is going to be from the assessed value to the fair market value. Now there's one really important exception to this general rule that a change in ownership is going to result in a property tax reassessment.

And keep in mind that the larger this gap, um, not only will there be a big jump up to the fair market value with the property tax, uh, for that new homeowner is, are going to increase dramatically. So if you can keep the assessed value, you want to do that as a taxpayer. So one big exception to the general rule that a change in ownership is going to result in a property tax reassessment, and therefore higher property taxes is transfers between parents and children. So the general rule is that if it's a transfer between parents and children and if it's the principal residence of the transferor, then that residence can be transferred between parents and children or between children and parents. So it can go both directions. It can go from parents to children or from children to parents. But if it's a principal residence, it doesn't matter what the value of that property is.

There will not be a property tax reassessment. So despite the change of ownership, the property tax base will stay the same. The assessed value will stay the same. If it's not the principle residence, if it's any other real property, then we can avoid a property tax reassessment as well as well up to cumulatively $1 million worth of assessed value. And that's an important key here. This is assessed value, not fair market value. So that means that if you had a vacation home or a commercial property or something other, a rental home, something other than the principle residence, cumulatively when we add up all that other real property together, up to a million dollars worth of assessed value can also be transferred between parents and children or children and parents without reassessing the property taxes without increasing the property taxes. And that million dollar cap is actually a much larger cap for most people than it seems because it's $1 million worth of assessed value and not fair market value.

So if you think back to a moment ago when it had the graph of the fair market value and the assessed value in there being this giant gap between the two, it's that lower line. That's the million dollar cap. So that million dollars is actually worth a lot more than it seems. So here we have this general principle that change in ownership will trigger a reassessment for property tax purposes unless it's a transfer between parents and children. And if it's a transfer between parents and children, the principal residence does not matter what the value is. There will be no property tax reassessment for property other than the principal residence. Uh, you'll avoid a property tax reassessment as long as the cumulative value is $1 million worth of assessed value or less. So let's think about this in the estate planning context because, uh, we have to be very mindful of these rules and we have to know how to navigate these principles when we think about estate planning.

And this could work for lifetime gifts, gifts while the parents and children are both living or gifts upon death. So let's assume that we have, uh, some parents here that have some real property and let's assume that they decide they only have one child. So they give everything they have, including though they may have other assets, but including real property, they give everything they have to their one child, 100%. Well in that case, we know that the parent child exclusion will apply. Cause clearly that's a transfer between a parent and a child. So when it's the principle residence, no matter what the value is, there's not going to be any reassessment in that case because it's a transfer between a parent and child. If it's any real property other than the personal residence, well then there's $1 million worth of assessed value that can be transferred.

And yeah, if you've hung on to real property a long time with the parents had hung on property to property for real long time, the chances are that that other real property is going to be worth less than a million dollars of assessed value. So in that simple situation, we know everything is going to be just fine. Let's change the facts a little bit and let's assume that the parents have two kids instead of one. So we're going to say child number one and child number two. But let's assume that the parents decide in their estate plan, in their trust or in their will that they're going to identify a particular house and they're going to say, even though we have two kids, we want to give 100% of our house to child number one. Well. In that case, everything would be fine from the property tax perspective because again, the parents are making a choice to transfer their real property to child number one and that's clearly going to be a transfer between a parent and a child and there's not going to be any reassessment for the principal residence or for any other real property that has $1 million of assessed value or less cumulatively a million dollars or less.

Let's change the facts a little bit though. And let's assume instead that the parents say, well, whatever we have, including our house, we want it to go 50/50 to our two kids. We want child number one to have half and we want child number two to have half. Here's where it can get a little tricky. Well, first of all, let's keep things a little simple. Let's assume that child number one and child number two say, you know what? We both liked the house. We're going to keep the house, we're going to be co-owners of the house, so 50% of the house can be transferred to child number one. 50% of the house is transferred to child number two. Both child number one in child number two are on the deed as 50/50 owners. They're going to decide how they're going to use that property.

Maybe they'll share it as a vacation home. Maybe they'll rent it out and split the proceeds. Whatever arrangement they want to make, they agree to hold title 50/50 well in that case, everything's okay because half of the house came from the parents to the two child. Number one and half of the house came from the parents and child number two, each half is a transfer from a parent to a child. So the parent child exclusion applies. Everything works just fine. If it's the principal residence, there's not going to be any reassessment in real property. For any other real property other than the principal residence, as long as the cumulative value of all that other real property is $1 million of assessed value or less, everything's going to be just fine. But let's think now that there's a situation where the kids don't want to be 50/50 owners and child number one says, you know what, I would really like to have that house and child number two says, well that's fine.

I don't want the house. So now we have to be careful because we want to really make sure that if 100% of the house is going to go to child number one as part of his or her 50% we have to make sure that the assessor's gonna view that entire transfer as a transfer between parents and children. We don't want in. In that case, if there are enough other assets in the estate where we can equalize the distribution, we can give those other assets to child number two so that at the end of the day, both child number one and child number two have an equal share in the value of the estate. Then everything is just fine. This is referred to as a non pro rata transfer. California probate code allows that. A lot of estate plans will allow that as well. And what that just means is that instead of taking a line and drawing, drawing it down the middle of each asset we're taking, look at the total value of the estate and we can give 100% of some assets to one child and 100% of other assets to another child.

As long as at the end of the day, each child gets an equal share cause if the trust demands 50/50 split and both kids end up with 50/50 of the value, that's fine. The assessor doesn't care that only that only one child ended up with 100% of the house. As long as the terms of the trust requiring 50/50 split of the total trust assets were met and the other child, uh, was given enough other assets to equalize the distribution, then everything would be fine. The assessor would still view this transfer of the house, 100% to child number one as a transfer completely from the parents to the child and the parent child exclusion will apply. Now where it can get complicated is what if there aren't enough other assets to equalize the distribution? What if the house was the only asset? A lot of times in California, real property is the most valuable asset and sometimes the residence is the only asset of substantial value for the estate.

So let's assume that situation where the only asset or the only significant asset of the parent's estate was the house. The trust mandates a 50/50 split here. Um, but one child wants to keep the house and the other child wants to cash in. They want like they are, they want it, they want their money, they want cash. So we have to be very, very careful here because if child number one says, okay, I'm going to take 100% of the house and I will give my sibling enough money to equalize the distribution, now we have a problem because the assessor's gonna say, you know what? Half of the house came from a parent to child number one but the other half of the house really came from the other sibling. In exchange for some cash, it's really half transfer from parents to child number one and a half transfer from child number two to child number one.

There is no sibling to sibling exception for Prop 13 and in order to maintain Prop 13 and so there will be a 50% reassessment. There'll be a 50% reassessment on the share that would have belonged to child number two. That will dramatically increase the property taxes for child number one and that would not be an ideal situation. So what can be, what can be done here? Well there are two options. One option is if there is special language in the estate plan that allows child number one to basically buy out, buy from the trust the other shares. So if there's special language in the trust that says child number one can put money in to the estate or into the trust and then the trust can turn around and give that money back over to child. Number two, then we're okay. So if there's special language in the trust we're okay, child number one can do that pretty easily.

Problem is a lot of trusts don't have that special language. So without that special language, now we're kind of stuck. But there's one more option and that's an important option that one option is that while the property is still in the parents' trust or in their estate, the trust or the estate get a loan from a third party to cover the difference. That money cannot come from child number one. It cannot come from the child who is taking the property. It has to come from some third party. So if while the title to the home is still in the parent's trust or the parent's estate and the trustee or the executor gets a loan from a third party who is not child number one, then um, and, and that proceeds from the loan come into this state of the trust, then the trustee can distribute a hundred percent of the house to child number one and the cash a subject to the mortgage and the cash to child number two.

And equalize that distribution. Now the problem here, a couple of problems and a couple of traps for the unwary. Number one, you have to do this before title exits the trust or exits the estate. You cannot transfer title to the house, the child number one, and then get the loan. It has to happen while the house is still titled to the parents trust of the parents estate. So that's number one. Number two, it is hard to find a lender who is willing to make that kind of loan. Most lenders are going to require that the property be in child number one's name first and that's going to blow the property tax exemption, the parent child exclusion. So there are few lenders, there are specialized lenders. Those loans are usually more expensive than your - They're always more expensive than your average lender. But there are certain lenders in California who understand these rules and will lend in that situation, but they're not a lot of lenders who handle it.

And it's a more expensive loan than, than typical. But it's worth it because it will save substantial property taxes. So it's very important to be careful in this situation. A lot of times when parents pass away and the children are trying to figure this out, they feel that they can sometimes do this without the guidance of an estate planning attorney. And these are nuances and traps to the unwary that they're going to fall into if they don't have proper guidance from an estate planning attorney. This is definitely not something that anyone should try to handle on their own because it's such a complex idea. But this just gives you some general information. Uh, I think the bottom line that take away here is number one consultant attorney to help you with this. But, um, probably the bigger picture is that there are ways that you can navigate these different issues about transferring real property to one child and letting the other child take some cash or other assets to satisfy their share. Uh, and there are ways to do it that will blow the parent child exemption and there are ways to do it that will preserve the parent child exemption. And I think it's important to keep that in mind. So you know, to reach out to a qualified, competent, licensed attorney to help you guide you through this process.

I hope you enjoyed watching my video. As I mentioned at the beginning, this is not intended to be a substitute for proper legal counsel. Before acting on any of the information contained in this video, you should consult a competent attorney who is licensed to practice law in your community. Thank you.