Thanks to: Albertson & Davidson, LLP | Estate Planning
California’s Proposition 13 does not allow the County Assessor’s office to increase the appraised value of property except for a small amount each year unless there is a change in ownership. Proposition 13 is near and dear to the heart of every California real property owner. It prevents your property taxes from skyrocketing as your home’s value rises. How can this lead to inheriting favorable tax treatment?
When a person dies and a child inherits the home, the low valuation of the real property can remain intact with the child; provided that the child files a parent-to-child exclusion form. You see, Proposition 13 allows a child to keep the parent’s tax value of the home. That’s a great benefit to any child. If this did not occur, the tax assessor would revalue the house to its current value. (In the above example, the tax value of the house would go up to $2 million.) This revaluation then results in much higher real property tax being imposed.
If you bought a home in 1995 for $100,000, but that home is now worth $2,000,000, the county tax assessor is not allowed to value your home at $2 million for real property tax purposes. Instead, the value is limited to $100,000, plus a small percentage equal to the consumer price index or 2%, whichever is less. The real property probably has an appraised value of around $125,000. The real property tax is approximately 1% of the appraised value. In this example, the real property tax on a house valued at $125,000 is $1,250. Whereas the real property tax on a house valued at $2 million is $20,000. Proposition 13 effectively saves the real property owner around $18,750 in tax ($20,000 – $1,250). In turn, passing* that onto their heirs. That’s a huge savings.
What’s the catch?
As with most good things, however, there’s a catch. The parent-to-child exclusion must be filed within three years of the decedent’s date of death. Failure to do so will result in a supplemental assessment that will charge the higher tax amount for all years when the parent-to-child exclusion was not requested.
So must a Trustee file this parent-to-child exclusion form, or is that the duty of the Trust beneficiary? That depends.
In the case of a Trust that will distribute real property to the Trust beneficiary quickly (within a few months). It is most likely the beneficiary’s duty to file the parent-to-child exclusion because the Trust no longer owns the home.
If the Trust terms require real property to be held in Trust for several years, or if the Trustee holds real property in Trust against the Trust terms, the Trustee must file the parent-to-child exclusion form. If your parents are leaving you a house or other real estate, make sure someone… anyone…files a parent-to-child exclusion form. Failure to do so could cost you several thousands of dollars in extra taxes.
By the way, if all the children are deceased and real property passes from a grandparent to a grandchild. Thus giving the grandchild the right to the same exclusion. Certain limitations apply, and it won’t work if the grandchild’s parent is still living. If you are a grandchild set to receive real property from a grandparent, check with a professional to see if you can obtain these same real property tax benefits.