For most California estate plans, federal estate tax can be avoided, as can probate. Of increasing concern is how to avoid an increase in California real property tax.
For the California residence, it can pass from parent to child (or child to parent) without an increase in property tax. But, without proper planning, property taxes may increase if one sibling buys out another sibling at death in order for one child to inherit the house with the other child receiving assets of equal value. Proper planning is required to avoid the problem of the County treating a transfer after death as being between siblings and not from parent to child.
In addition, a parent can transfer up to $1,000,000 of assessed value (not fair market value) to the children (or a child can do the same to the parents). (Assessed value is the value described on the property tax bill, not to be confused with fair market value.) This $1M exclusion is for transfers both during life and at death. Excluding the residence, once a parent transfers (combined in life and in inheritance after death) more than $1,000,000, then all transfers to children will be reassessed to fair market value, with property taxes based on those (usually higher) values.
So it is important to review the assessed values of the real estate in an estate plan in deciding upon which children will receive the benefit of the $1,000,000 assessed value exclusion and which children will receive the residence and which children will be stuck with an increased property tax bill upon inheritance. (Similar rules apply from child to parent.)
Special rules apply for the transfers to a person’s deceased child’s children and to your children’s spouses.
Otherwise, real property taxes will be reassessed upon an inheritance to a person who is not the spouse, not the registered domestic partner, not the parent, not the child, and (with certain rules beyond this post) not a child of a person’s deceased child.
For example, real property taxes will be reassessed on a gift or inheritance to siblings, cousins, and friends. Over time, increases in such property taxes can amount to significant dollars.
Hence, real property tax planning is an important part of a California estate plan.
copyright James J. Phillips 2014