Prop19 CheatSheet The Essentials…

Bye bye family home

Navigating Proposition 19: What California Homeowners Need to Know About Revocable Trusts and Estate Planning

If you’re a California homeowner with a revocable living trust, you’ve likely heard about Proposition 19 and its impact on property taxes and estate planning. Passed by California voters in November 2020 and effective as of February 16, 2021, Proposition 19 significantly changed the rules for property tax reassessments, particularly for inherited properties and homes owned by trusts. For those planning to pass their home to their heirs, understanding these changes is critical to avoid unexpected tax hikes and protect your family’s financial legacy. In this post, we’ll break down what Proposition 19 means for California homeowners, how it affects revocable living trusts, and practical estate planning tips and workarounds to minimize its impact. Written with California residents in mind, this guide is designed to help you navigate these complex changes with confidence.

What Is Proposition 19?

Proposition 19, officially titled the Home Protection for Seniors, Severely Disabled, Families, and Victims of Wildfire or Natural Disasters Act, is a constitutional amendment that reshapes California’s property tax landscape in two major ways:

1. Expanded Property Tax Base Transfers for Eligible Homeowners
   Proposition 19 allows homeowners who are over 55, severely disabled, or victims of wildfires or natural disasters to transfer the low taxable value (or “base year value”) of their primary residence to a new home anywhere in California, up to three times in their lifetime. This is an expansion of prior laws (Propositions 60 and 90), which limited transfers to certain counties and allowed only one transfer. If the new home is of equal or lesser value, the original tax base transfers directly. If it’s more expensive, the tax base is adjusted upward but still offers significant savings compared to a full reassessment.

2. Limited Parent-Child and Grandparent-Grandchild Exclusion
   Before Proposition 19, Proposition 58 allowed parents to transfer their primary residence (and up to $1 million in assessed value of other properties) to their children without triggering a property tax reassessment. Proposition 19 restricts this exclusion, effective February 16, 2021. Now, the inherited property must be used as the heir’s primary residence within one year of the transfer, and the property’s market value must not exceed the current assessed value by more than $1 million (adjusted for inflation). If these conditions aren’t met, the property is reassessed at its current market value, potentially leading to significantly higher property taxes.

These changes have profound implications for estate planning, especially for homeowners using revocable living trusts to manage their assets.

How Proposition 19 Affects Revocable Living Trusts

A revocable living trust is a popular estate planning tool in California because it allows you to maintain control of your assets during your lifetime while avoiding probate upon your death. When you transfer your home into a revocable living trust, the trust becomes the legal owner, but this transfer does not trigger a property tax reassessment under Proposition 13, as long as you (the grantor) retain control and benefit from the property. However, Proposition 19 introduces new challenges when the home passes to your heirs after your death.

Here’s how Proposition 19 interacts with revocable living trusts:

• Change in Ownership Upon Death: When you pass away, your revocable trust typically becomes irrevocable, and the property is considered transferred to the beneficiaries (e.g., your children). Under Proposition 19, this transfer is treated as a “change in ownership” for property tax purposes, triggering a reassessment unless the property qualifies for the parent-child exclusion. The date of your death is considered the transfer date.

• Primary Residence Requirement: To maintain the low property tax base, the heir (e.g., your child) must make the inherited home their primary residence within one year and file for the homeowner’s exemption (Form BOE-266) with the county assessor. If the home is a vacation home, rental property, or not used as the heir’s primary residence, it will be reassessed at market value.

• Value Limitation: Even if the heir uses the home as their primary residence, the tax base protection is limited. If the home’s market value at the time of transfer exceeds the current assessed value by more than $1 million (adjusted for inflation), the excess value is added to the tax base. For example, if your home has an assessed value of $500,000 but a market value of $2 million at your death, the new taxable value would be $1.5 million ($500,000 + $1 million exclusion).

• Revocable Trusts Don’t Automatically Bypass Proposition 19: A common misconception is that holding a property in a revocable living trust shields it from Proposition 19’s reassessment rules. Unfortunately, this is not the case. The trust structure avoids probate but does not inherently protect against reassessment upon transfer to beneficiaries.

For California homeowners, especially in high-value areas like San Francisco or Orange County, where homes often appreciate significantly, this could mean a dramatic increase in property taxes for heirs. For instance, a home purchased decades ago for $200,000 might now be worth $3 million. Without the parent-child exclusion, the annual property tax could jump from $2,000 to $30,000 or more, potentially forcing heirs to sell the property.

Estate Planning Implications

Proposition 19 makes it more important than ever to revisit your estate plan, particularly if your revocable living trust includes real property. Here are key considerations:

• Increased Tax Burden for Heirs: If your children or grandchildren don’t plan to live in the inherited home as their primary residence, they’ll face a reassessed tax bill. This is especially impactful for families with vacation homes, rental properties, or multiple heirs, as only one sibling needs to live in the home to qualify for the exclusion, but all must agree on its use.

• Trust Language Matters: Many older trusts lack specific provisions to address Proposition 19’s requirements, such as ensuring the home is allocated to a beneficiary who will use it as their primary residence. Without tailored language, trustees may face challenges complying with the law, potentially leading to reassessment or disputes among beneficiaries.

• Trustee Responsibilities: Trustees must assist beneficiaries in filing the necessary forms (e.g., BOE-266 for the homeowner’s exemption) within one year of the transfer to avoid reassessment. Delays or failure to provide proof of primary residence (e.g., utility bills, voter registration) can result in the loss of the exclusion.

• Impact on Non-Primary Residences: Vacation homes, rental properties, or commercial properties held in a revocable trust no longer qualify for the parent-child exclusion and will be fully reassessed upon transfer, significantly increasing the tax burden for heirs.

Tips and Workarounds to Mitigate Proposition 19’s Impact

While Proposition 19 limits the parent-child exclusion, strategic estate planning can help minimize its impact. Here are practical tips and workarounds for California homeowners with revocable living trusts:

1. Review and Update Your Trust
   Work with an experienced estate planning attorney to ensure your trust includes specific provisions for Proposition 19 compliance. For example, the trust can empower the trustee to allocate the home to a beneficiary who agrees to use it as their primary residence, while distributing other assets to other heirs to maintain fairness. This can help preserve the low tax base for at least one beneficiary.

2. Consider Lifetime Gifting
   Transferring the property to your children during your lifetime, before your death, can potentially avoid Proposition 19’s reassessment rules, as long as the transfer occurs before February 16, 2021 (though this deadline has passed, it’s worth noting for context). However, lifetime gifting may trigger gift taxes or capital gains tax implications, so consult an attorney to weigh the pros and cons. You may also retain the right to live in the home by negotiating a lease-back arrangement with your children.

3. Use an Irrevocable Trust
   Transferring your property to an irrevocable trust during your lifetime may change the beneficial ownership, potentially bypassing Proposition 19’s reassessment upon your death. However, this comes at the cost of losing control over the property, and the effectiveness of this strategy is still under scrutiny by county assessors. An irrevocable trust may also preserve the step-up in basis for capital gains tax purposes, which a direct transfer to children might not. Consult a tax attorney to ensure this aligns with your goals.

4. Explore LLCs or Family Limited Partnerships
   Transferring property to a limited liability company (LLC) or family limited partnership (FLP) owned by you and your children can sometimes avoid reassessment by strategically transferring ownership over time. However, county assessors may apply the “step transaction doctrine” to collapse these transfers into a single event, triggering reassessment. This approach requires careful planning with an attorney to navigate complex tax and legal rules.

5. Leverage Family Protection Trusts or Dynasty Trusts
   A Family Protection Trust (a type of irrevocable dynasty trust) can be layered with an LLC to preserve low property taxes while offering asset protection against divorce, lawsuits, or estate taxes for future generations. These trusts are tailored to your family’s needs and can help maintain Proposition 13 benefits, but they require sophisticated planning and legal expertise.

6. Plan for Multiple Heirs
   If you have multiple children, only one needs to live in the home as their primary residence to qualify for the exclusion. The trust can include provisions to allocate the home to the child willing to live there, while other assets (e.g., cash or investments) are distributed to other heirs. This ensures fairness while maximizing tax savings.

7. File Timely for Exemptions
   Ensure your trustee or beneficiaries file the homeowner’s exemption (BOE-266) within one year of the transfer. Missing this deadline can result in a full reassessment. Provide clear instructions in your trust for the trustee to assist with this process, including gathering proof of primary residence (e.g., utility bills, driver’s license, or voter registration).

8. Consider Selling Non-Primary Residences
   If you own a vacation home or rental property in your trust, consider selling it before your death to avoid reassessment upon transfer to your heirs. The proceeds can be redistributed through your trust or used to fund other assets that won’t trigger property tax issues.

9. Take Advantage of Base Year Value Transfers
   If you’re over 55, severely disabled, or a wildfire victim, Proposition 19 allows you to transfer your low tax base to a new home. This can be a powerful tool if you’re downsizing or relocating within California. Ensure you file the necessary claim with the county assessor to secure this benefit.

10. Consult Professionals Early
    Proposition 19 is complex, and every family’s situation is unique. Work with an estate planning attorney, tax advisor, and potentially a financial planner to create a tailored strategy. They can assess your trust, property values, and family dynamics to recommend the best approach, whether it’s amending your trust, exploring irrevocable trusts, or using LLCs.

Special Considerations for California Homeowners

California’s high property values and unique tax environment amplify Proposition 19’s impact. Here are additional factors to keep in mind:

• Proposition 13 Protections: Proposition 13 caps annual property tax increases at 2% and ensures low tax bases for long-held properties. Proposition 19’s reassessment rules can erode these benefits for heirs, especially in areas like coastal Orange County or the Bay Area, where home values have soared.

• Wildfire and Disaster Risks: If your home is destroyed by a wildfire or other disaster, Proposition 19 allows you to transfer your tax base to a replacement home, but you must rebuild or purchase within two years. This is particularly relevant given California’s frequent wildfires, as highlighted in posts on X discussing the challenges of rebuilding within this timeframe.

• Trust Funding and Documentation: Ensure your revocable living trust is fully funded by transferring the property’s title to the trust (via a recorded grant deed) and including the Assessor’s Parcel Number (APN) and address in the trust schedule. Regularly review your trust to confirm all assets are correctly titled, as errors can complicate tax exemptions or trigger reassessments.

Final Thoughts: Protect Your Legacy with Proactive Planning

Proposition 19 has reshaped how California homeowners approach estate planning, particularly for those using revocable living trusts. While it offers benefits for seniors and disaster victims, its restrictions on the parent-child exclusion mean that heirs may face significant property tax increases unless specific conditions are met. By updating your trust, exploring irrevocable trusts or LLCs, and working closely with professionals, you can minimize these tax burdens and ensure your family’s home remains a cherished asset, not a financial liability.

At LivingTrust-Advisor.com, we’re committed to helping you navigate these changes with clarity and confidence. If you’re unsure how Proposition 19 affects your estate plan, contact an experienced California estate planning attorney to review your trust and explore tailored solutions. Have questions or need guidance? Reach out to us or share your thoughts in the comments below—we’re here to support your estate planning journey!