Pass It Down — Keeping The Tax Basis In The Family

A change in ownership in real property will, unless an exception applies, trigger a reassessment by the County Assessor’s Office.  The property taxes will be recalculated based upon the appraised (and most likely increased) value of the property.  There are exclusions to the rule, however, including the Parent-Child Transfer Exclusion.  You may qualify for this reassessment exclusion if the transfer of property is between parents and children or from grandparents to grandchildren.

This exclusion is important to consider when you are preparing your estate plan.   Passing down and keeping a low tax basis in the family as long as possible is a goal that gets overlooked in too many instances as people prepare their estate plans without thinking past the first transfer of property.  Many times children will receive the property from their parents through a trust but only one of the children actually wants to live in or keep the property.  Once the property has transferred from the trust (i.e. the parents) to the beneficiaries (i.e. the children) title is now in the names of all the children and if they then transfer their interests to one another (a sibling transfer) the portion of the property that was transferred will be re-assessed and the property taxes will likely increase.  This can result in a significant, even insurmountable, increase in taxes on the property forcing the property to be sold.

There are estate planning tools that can assist parents in ensuring that if one of their children wants to stay in the house and keep the parents low tax basis he or she can.  Further, grandparents can also use estate planning tools to gift property to their grandchildren, even holding the property in trust for their children during their lives.  This can even include distribution of income produced by the property to the children during their lives.  When the property eventually transfers from the trust to the grandchildren there will be an applicable exclusion from reassessment, thereby keeping the grandparents’ low tax basis in the family through two generations.

This estate planning tool has often been overlooked or possibly down-played by practitioners and family members planning their estate in the past.  However, with the spike in property values in the past 20 years this can be a huge savings and can mean the difference between saving  or losing a family home through the generations.

When preparing your estate plan, make sure that you and your attorney are considering all the available planning options for keeping a low tax basis in real property in the family as long as possible.   For more information about reassessment tools or any other estate planning issues, contact Darcie Colihan in LGC’s San Diego office.