How To Inherit Favorable Tax Treatment?

Thanks to: Albertson & Davidson, LLP | Estate Planning
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Under California’s Proposition 13, the County Assessor’s office is not allowed to increase the appraised value of property except 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 ensures that your real property taxes do not increase dramatically just because the value of your home increases over the years.

For example, 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. As such, the real property probably has an appraised value of around $125,000. The real property tax is approximately 1% of the property’s 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). That’s a huge savings.

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, then the tax assessor would revalue the home to its current value (in the above example, the tax value of the home would go up to $2 million), which then results in much higher real property tax being imposed.

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 matter of a few months) it most likely is the beneficiary’s duty to file the parent-to-child exclusion because the Trust no longer owns the home.

If, however, the Trust terms require the real property to be held in Trust for several years, or if the Trustee holds the real property in Trust for several years against the Trust terms, then the Trustee would have the duty to file the parent-to-child exclusion form.
Whatever happens, if you are set to receive a house or other real property from your parents, be 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, then the grandchild has the right to the same exclusion. There are certain limitations that 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, be sure to check with a professional to see if you can obtain these same real property tax benefits.