If you are leaving your home to a child you should amend your Living Trust for a specific bequest with other provisions to avoid the impact of Prop. 19. Your child may inherit your home without property tax reassessment under certain circumstances. For this to occur, specific requirements must be met to acquire the Parent-Child Exclusion from reassessment:
1. The home must be the primary residence of the parent;
2. The home must become the primary residence of the child;
3. The child must file a Homeowner’s Exemption within one year;
4. The home is limited to a $1 Million increase in value over the parent’s property tax base.
As regards the #4 requirement, let’s utilize an example. The mother’s property tax base is $400,000.00 at her death and the home then has a then current value of $1.3 Million. Since the home has not increased in value more than $1 Million over its tax base, there will be no property tax reassessment for the child if the other requirements are satisfied.
But what if the home is then valued at $1.6 Million, $200,000.00 over the tax base? That $200,000.00 will be added to the $400,000.00 tax base and the home will be reassessed at $600,000.00 for property tax.
Trust Amendment: Let’s say the parent has two children and each child is to receive fifty percent (50%) of the estate. If a child is to receive the home, you should not leave the estate in two equal shares to the children. Why? Because the Assessor’s office may consider that each child owns a one-half interest in the home which would defeat a 100% transfer from parent to child which is required to obtain the total Parent-Child Exclusion. Under the circumstances, one-half of the interest may be considered a transfer from a sibling resulting in a reassessment of one-half of the property. To assure that this doesn’t happen specifically bequest the property to the intended child. If there is a possibility that the child may not ultimately care to move in the home as their primary residence, you might provide for a First Right of Option to inherit the home. If it is not exercised, the home or sales proceeds would be divided equally.
What if the home is more valuable than the remainder of the estate to make it impossible for the estate to be divided equally among the children? Additional language should be included in the Living Trust. Basically, there should be specific provisions for the Trustee to make arrangements for a loan against the property to equalize the estate distribution to all children. If this is arranged correctly, the Parent-Child Exclusion will be granted by the Assessor’s office.
Again, it is highly recommended that a Trust amendment be considered if a child is to receive the home. Please contact the office should you wish additional information on these issues or wish to include these provisions in your Trust.
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Blessings,
Jack E. Stephens, J.D., LL.M