For many California residents, their home is their most valuable asset. If other assets are sufficient to cover their financial needs in retirement, some consider leaving their home to their children. This a significant bequest due to the exclusion from property tax reassessment on residential property passing from parents to children (and from grandparents to grandchildren, if the grandchildren’s parents are deceased.) This means that children can continue to pay property tax at the same rate as the parents have been paying, subject to a timely-filed claim for the exclusion. California real property transfers outside of this exclusion result in an immediate reassessment of the property to current market value.
Inheriting a home may be a boon to an adult only child who may otherwise struggle with the high cost of housing in the state. It may also result in rifts among siblings who may have different views on how they want to “take” this inheritance. One sibling may want to “cash out,” another may want rental income, and yet another may want to live in the home. As the house cannot generally be physically partitioned to allow each sibling to do what they wish with their share, a better alternative may be spend time while developing one’s estate plan to determine, with one’s children, what would be in their best interest. For example, if one sibling expresses a desire to live in the home, and the other wants no part of it, a parent can write into their trust a provision that instructs the trustee of the trust (in which the house is titled) to transfer the house to the first sibling and allot a sufficient cash gift to the other sibling so that the children take equal shares of the trust estate left to them. In this situation, if the estate plan doesn’t spell this out, the sibling who wants to live in the house will likely need to come up with the funds to “cash out” their sibling, which may not be feasible. The share of the property to be transferred from the “cashed out” sibling to the sibling keeping the house will be reassessed at current market value, as sibling-to-sibling transfers of real property are not excluded from reassessment.
Careful drafting and some thought about the options by the parents can give the children the best chance of realizing their goals and maintaining harmony in the family after the parent’s death.
Our office has extensive experience in navigating the parent-child exclusion and working with our clients to develop a plan that will meet their objectives of leaving a lasting and meaningful legacy for their children.