When a California home or other real property is transferred to another person, its Proposition 13 tax base will be reassessed. There are only limited exceptions to re-assessments in California when a home is transferred among certain family members: namely between parents and children and in some cases between grandparents and grandchildren (but only if the grandchild’s parent is no longer alive). However, these exceptions are not automatic and must be requested.
In the event a home or other real estate is inherited and either an exemption is not claimed or is not available, the property tax consequences can be disastrous. Specifically, the beneficiaries who inherit a home may be forced to sell it because the increase in the the reassessed property taxes makes it ultimately too expensive to keep.
This is a common occurrence when multiple family members inherit a home or real property and one family member or a faction of family members buys out the others. The result of the buyout leads to a property tax re-assessment because the transfers between those family members are likely to not be exempt transfers.
For example, when siblings inherit their parent’s family home or vacation home one or more of the siblings will buy-out the other sibling co-owners. That’s due to a variety of reasons, some of which include some of the siblings needing cash more than interest in real property, the property being too far away for use or enjoyment, or a disagreement on how to use the property. Whatever the reason, what might seem to be a simple buyout can turn disastrous for the sibling or family member doing the buying. That’s because a buyout of a sibling or other relative (who is not a parent, grandparent, or child) triggers a property tax re-assessment. Depending on how low the original property tax base amount was listed (i.e. if the home had been owned for many years or even decades prior to its owner dying), this could equate to an increase of thousands of dollars!
We see this outcome a lot in probates and in the administration of very basic revocable living trusts in Orange County that don’t account for flexible options to circumvent a property tax reassessment. We’ve also seen it happen in trust administrations where there were other options to avoid a property tax reassessment, but the successor trustee didn’t consult with an estate planning attorney and took action that had negative property tax consequences that are difficult or impossible to undo.
The solution to avoiding this in the future is:
1) Be proactive in reviewing and restructuring your revocable living trust to include the proper design and terms to provide flexible options in distributing property to multiple beneficiaries (like children or grandchildren) that anticipate and avoid this problem.
2) Avoid multiple beneficiaries splitting ownership in a home or other real estate by using good insurance planning to ensure your estate has the necessary liquidity to provide better options.
3) If you are a successor trustee, seek guidance and lending in administration from an estate planning attorney that handles trust administration to review all options prior to distribution of assets.
