Proposition 19 ("Prop 19") on the November 2020 ballet has passed bringing with it significant changes to reassessment exclusions available to California property owners.

 Current Law

To understand the impact of Prop 19, one first needs to understand the current system of property taxation under Proposition 13 ("Prop 13"), passed in 1978 and subsequent propositions. California real estate is given an assessed value equal to the market value of the property whenever there is a change in ownership of the property unless a reassessment exclusion applies. Furthermore, the increase in assessed value of real estate is limited to 2% per year. The net result of this system and the appreciation of California real estate is that owners who've held on to property for a long time pay relatively little in property taxes as compared to recent purchasers of real estate.

 California, through the passage of Proposition 58 ("Prop 58") allowed property owners to transfer their primary residence and the first $1 million dollars in assessed value of other real estate to their children without re-assessment. This allows children to continue paying the low property taxes that their parents did despite staggering increases in market value of the inherited property. A similar law applies to transfers between grandparents and grandchildren.

 Proposition 19

Prop 19 brings two major limitations to reassessment exclusions on transfers of real estate between parents and children (and grandchildren). First, only the transfer of a primary residence to a child that continues living in the property as his or her primary residence qualifies for the reassessment exclusion. Second, assuming that the property remains the primary residence of the inheriting child, the reassessment exclusion is only available to the extent that the market value at the time of the transfer does not exceed the assessed value of the property by more than $1 million. Stated differently, if the market value of the property exceeds the assessed value by $1 million or more, the assessed value will be the market value of the primary residence minus $1 million. If the market value of the property is less than $1 million over the assessed value, then the parents' assessed value can be passed on to the child. The new law will affect transfers beginning on February 16, 2021.

 Prop 19 has another component that is largely taxpayer friendly and limits property tax increases on primary residences for seniors, the severely disabled, and wildfire and natural disaster victims. This is accomplished by allowing these taxpayers to transfer the assessed value of their current primary residence to a replacement property in any county of California, subject to certain limitations.

 If you are considering transferring California real estate to your family as part of your estate planning, transferring the properties prior to February 15, 2021 may allow you to utilize the benefits of the existing law prior to the effective date of Prop 19. There are numerous factors involved in making this decision, so you should contact your estate planning attorney or a property tax specialist to ensure that you are making an informed decision.

 Below are some helpful resources for you to learn more about Proposition 19:

California Secretary of State - Voter Information Guide on Prop 19

California Board of Equalization Summary of Proposition 19

A crucial step in establishing a revocable living trust is to ensure that the appropriate assets are re-titled in the name of the trust. Failure to do so may require the Executor or Personal Representative of your estate to initiate a probate proceeding to distribute your remaining assets.

The current Covid-19 pandemic highlights yet another reason to avoid the probate process altogether. The current crisis has forced many courts across the US to close or severely limit their operations, making it nearly impossible to go through the probate process.

If a probate proceeding has not yet been started, your beneficiaries or heirs may need to delay the already time-consuming probate process even longer. If a probate proceeding has already started, but the Executor or Personal Representative in charge of administering your estate becomes incapacitated or is no longer able to act, there may be a significant delay before a successor can be appointed to complete the administration of your estate.

Key takeaways:

1. Utilize a revocable living trust to transfer assets to your beneficiaries.

2. Ensure that your assets are properly re-titled in the name of your trust.

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When Covid-19 symptoms escalate to the point of requiring a patient to be put on a ventilator, they are typically placed into a medically induced coma, which results in a period of incapacity rendering the patient incapable of making any decisions.

People often prepare for this by executing a durable power of attorney designating another person as agent to make financial decisions while they are incapacitated. (Similarly, Advance Health Care Directives are used to name agents to make medical decisions.)

Although the durable power of attorney is typically included as part of a person’s estate planning documents, it’s important to realize that financial institutions are often reluctant to rely on self-prepared or attorney-drafted forms. During a time of crisis, this can cause unwanted delays and complications.

Revocable living trusts, however, often do not cause the same type of issues. Your trust document can include provisions that automatically designate a successor Trustee in the event you are no longer able to act. Assuming your revocable living trust is properly funded with sufficient assets, your successor Trustee should be able to quickly step in and assist you with handling your financial affairs.

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Once you’ve properly signed all of your estate planning documents, it is important to make sure that they are accessible by the right people at the right time.

Original Documents

Although it was common practice in the past for lawyers to retain the originals of their clients’ documents, that practice is quickly fading away. Many lawyers now have a strict policy of returning the original documents back to their clients after signing. You should be sure to place them some place secure in your home, perhaps where you keep other important documents such as birth or marriage certificates. You should also let the people named in your documents know where they are located if something happens to you.

Copies

Your financial advisers or accountant may request a copy of your documents. Whether to reveal the documents to the people named in your documents or your beneficiaries is a judgment call. On the one hand, since these individuals will be responsible for managing your affairs and assets once you pass away, it makes sense to share the documents with them. On the other hand, you may decide to amend your documents in the future and having superseded copies of your estate planning documents floating around may cause unnecessary confusion. It is best to discuss this matter with your estate planning attorney to make sure you are making the right decision.

Scanned, Electronic Versions 

Making scanned, pdf copies of your executed estate planning documents allows you to easily share them in case of emergency. As mentioned above, your estate planning lawyer may no longer retain originals; instead, however, many are now in the practice of scanning and saving electronic versions of their clients’ documents. If that is the case with you, sharing your lawyer’s contact information with your loved ones may give them an additional place to look if they cannot locate your estate planning documents.

Labeling File Names

The file names for your scanned documents should indicate (a) what type of document it is, i.e., Living Trust, Will, Durable Power of Attorney, etc., and (b) the date that the document was signed.

Digital Accounts and Passwords

It’s also a good idea to put together a list of your online accounts along with passwords to access those accounts. In addition, you may want to leave behind instructions on what your wishes are concerning digital assets such as e-mail, social media accounts, etc.

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