As San Diego families gather for Thanksgiving, the conversation might turn to more than just turkey and football. With Proposition 19 reshaping California’s property tax landscape, it’s crucial to understand how these changes affect your family’s legacy, especially in our high-value real estate market. Let’s carve into the facts and explore how San Diego families can protect their assets in this new era.
Proposition 19: Understanding the Real Impact on San Diego Families
Proposition 19, effective since February 16, 2021, has significantly altered property tax assessments on inherited real estate in California. Here’s what San Diego families need to know:
- Primary Residence Transfers: For a child to benefit from their parents’ property tax base, they must meet specific criteria:
- The property must have been the parent’s principal residence before the transfer.
- The child must make it their principal residence within one year of the transfer.
- The child must file for a homeowner’s or disabled veteran’s exemption within one year.
- $1 Million Exemption: If these conditions are met, the child can inherit the parent’s tax base plus up to $1 million in assessed value. This is not a blanket exemption but applies only when the above criteria are satisfied.
- Reassessment Formula: If the property’s fair market value exceeds the sum of the existing assessed value plus $1 million, the difference is added to create the new assessed value.
- Non-Primary Residences: Transfers of other properties (vacation homes, rental properties) no longer receive any property tax benefit and are reassessed at current market value upon transfer.
- Family Farms: These have special rules, not requiring the child to live on the property, but other conditions still apply.
San Diego-Specific Implications: A Tale of Two Properties
Let’s consider two hypothetical San Diego properties to illustrate Prop 19’s impact:
Scenario 1: The La Jolla Family Home
The Andersons own a home in La Jolla, purchased in 1980 for $200,000. Its current market value is $3.5 million, but they pay property taxes on an assessed value of $400,000 due to Proposition 13.
Post-Prop 19: If their child moves in within a year and files for the homeowner’s exemption, the new assessed value would be $1.4 million ($400,000 + $1 million). If not, it’s reassessed at the full $3.5 million market value.
Scenario 2: The Mission Beach Rental Property
The Garcias own a duplex in Mission Beach, bought in 1995 for $500,000. It’s now worth $2 million but assessed at $800,000.
Post-Prop 19: As this is not a primary residence, it will be reassessed at $2 million upon transfer, significantly increasing the tax burden.
Advanced Estate Planning Strategies for the Post-Prop 19 Era
(Here’s me in our offices)
To navigate these changes, consider these sophisticated planning techniques:
- Strategic Primary Residence Planning: If passing down a family home, plan for a child to make it their primary residence within the one-year window.
- Qualified Personal Residence Trusts (QPRTs): These can be useful for high-value homes that might exceed the $1 million exemption.
- Intentionally Defective Grantor Trusts (IDGTs): For income-producing properties that will be reassessed, IDGTs can offer income tax benefits.
- Life Insurance Trusts: Consider an Irrevocable Life Insurance Trust (ILIT) to provide liquidity for increased property taxes or buyouts.
- Family Limited Partnerships (FLPs): These can be effective for gradual transfers of property interests while maintaining control.
The Intersection of Thanksgiving and Estate Planning: A San Diego Tradition
This Thanksgiving, consider these approaches to family estate planning discussions:
- Education on Prop 19: Use the gathering to ensure all family members understand the new rules and their implications.
- Family Property Inventory: Create a comprehensive list of family properties and discuss the best strategies for each under Prop 19.
- Succession Planning: For family homes, discuss which child (if any) would be willing and able to make it their primary residence within a year of inheritance.
- Legacy Planning: Beyond tax considerations, discuss the emotional value of family properties and how to preserve family legacy in light of these new rules.
Case Study: The Torrey Pines Legacy
The Nakamura family owns a stunning property overlooking Torrey Pines State Natural Reserve. With Prop 19 in effect, they faced a challenge in passing down this family treasure.
Their solution:
- They decided their youngest daughter, currently renting in San Diego, would make the property her primary residence upon inheritance.
- They placed their La Jolla rental properties in an IDGT, allowing for efficient income transfer to their other children.
- They established a family foundation, funded partially through a Charitable Remainder Trust, to continue their tradition of supporting San Diego’s environmental conservation efforts.
This Thanksgiving, the Nakamuras will celebrate not just their blessings, but also the secure future they’ve crafted for their San Diego legacy under the new rules.
Your Next Steps: Crafting a Robust San Diego Estate Plan
As you gather this Thanksgiving, remember that understanding Prop 19 is crucial for preserving your family’s legacy. Consider these steps:
- Review existing estate plans in light of Prop 19’s specific requirements.
- Discuss primary residence plans with potential inheritors.
- Explore advanced trust structures for properties that may face reassessment.
- Consult with a San Diego estate planning attorney well-versed in Prop 19’s nuances.
Don’t let the complexities of Proposition 19 overshadow your family’s Thanksgiving celebration. As your dedicated San Diego estate planning partner, I’m here to help you navigate these intricate waters. Together, we can ensure that your family’s legacy in America’s Finest City remains as enduring as the tides at La Jolla Cove.
Schedule a complementary 15-Minute Discovery call with us today, and let’s explore crafting a strategy that honors your family’s past while securing its future in San Diego.
This Thanksgiving, give your family the gift of certainty in an uncertain world. After all, in San Diego, we don’t just plan for the future – we architect legacies as timeless as our coastline.
In Your Service,
Your Neighbor and Estate Planning Partner in San Diego
PS: Prop 19 affects ALL Californians and we work with clients all over the State so please call us if you have any questions.
In my mind, the real purpose of a properly executed Estate Plan is to take care of the people you love, protect your family for the future, maximize the assets you pass on to the people you love and cherish, and keep your family out of Court and Out of Conflict. This is a very important and noble part of LIVING! Lavelle Law Group, APC would be honored to help educate you and assist you and your family with this important part of life.
Disclaimer: This blog post is intended for entertainment purposes and should not be considered legal advice. Lavelle Law Group strives to provide unbiased, professional legal services to all clients. Always consult with a qualified attorney for your specific legal needs.
