Prop 13 - Split-roll real property taxes

 
Real property taxes in California are famously governed by Proposition 13. This landmark proposition was passed by California voters on June 1976 by a margin of 62.6-34 (3.4% of ballots were invalid or blank). Prop 13 limits the taxable rate to 1% of the assessed value and limits the increase in assessment to 2% per year.  Numerous clients have told me over the years that their home is "under Prop 13" when in reality every home is governed by Prop 13. My belief is that they owned their home back in 1978 when Prop 13 caused assessment values to be rolled back to 1975 values. To be clear, if you own any real property in California, the property taxes for such are subject to Prop 13. 

The following illustration depicts how Prop 13 works. Assume a person purchases a home for $100,000, the property taxes could not exceed $1,000 and the assessable value of the home could not exceed $102,000 for the next year. It should be noted that many other levies are listed on a property tax bill, e.g. school bonds, library bonds, etc.    

Similarly, property taxes for commercial property are enforced in the same manner. That is, commercial property is levied and assessed at the same rate as residential property. In numerous areas of the law residential real property and commercial real property is treated differently. For example, leases involving residential real property carry with them an implied warranty of habitability. There is no such warranty in terms of leasing commercial property. A more obvious example is zoning laws. The activities that may be conducted in or on residential real property is mainly limited to human occupancy or cottage industry. Whereas with commercial real property such is naturally zoned for commercial enterprise as opposed to personal living spaces. 

However, in terms of real property taxes, taxation is equally applied to residential and commercial real property. Thus, the owner of a strip mall with an assessed value of $2M will be taxed at the same rate and be subject to the same assessment increases as the owner of a $2M home.

In light of this, some California politicians have proposed to create a two-tier system, with residential real property taxed under one regime and commercial real property taxed under a different regime. "Split-roll" is a term used to describe this proposed system. For example, Assembly Bill 2492 (Ammiano) sought to modify the definition of when the sale of a commercial property results in a "change in ownership." Of note, when a "change in ownership" occurs, the subject real property is re-assessed. Since real property almost invariably appreciates over time, a change in ownership will result in a higher assessed value and corresponding higher real property tax assessment.

Various bills that would usher a split-roll real property tax system have been proposed, but none have passed so far. One principal reason why is because to tinker with Prop 13 requires a 2/3 majority in the state Senate and state Assembly, as it is a constitutional amendment.

Since revenue from increasing property taxes is in the tens of billions of dollars, there are numerous interested parties in favor of preservation or modification. Thereby the idea of a split-roll system will carry on for the foreseeable future.

Probate Deadlines in California

There are deadlines in life for everything. Administering an estate is no different. The following are some deadlines that apply to various estates. Failure to observe these deadline may result in penalties or liabilities for the offending party.This is not an exhaustive list of all responsibilities for reference.

• The custodian of the decedent's original will must (1) lodge the original will with the clerk of the county where the decedent resided at the time of death and (2) mail a copy of the will to the named executor within 30 days of learning of the death. Prob C §8200.
• If the decedent had a probate estate worth $100,000 or less, a minimum of 40 days must elapse before an affidavit can be executed and presented to a holder of the decedent's assets for recovery. Prob C §13100.
• When a trust becomes irrevocable or a change in trustee of an irrevocable trust occurs, the trustee must serve notice to various parties no later than 60 days after the occurrence of the event requiring service of the notification, or 60 days after the trustee becomes aware of the existence of a person entitled to receive notification if that person was not known to the trustee at the time of the occurrence of the triggering event. Prob C §16061.7
• A person receiving a 16061.7 notice has 120 days to contest the trust from the date the notice is served on him or her, or 60 days from the date when a copy of the terms of the trust is mailed or personally delivered to the person during that 120-day period, whichever is later. Prob C §16061.8.
• If the decedent received Medi-Cal or was the surviving spouse of a person who received benefits, a Medi-Cal notice must be sent to the California Department of Health Services within 90 days from the date of death and must include a copy of the decedent's death certificate. Prob C §215
• Once a will has been admitted to probate, a petition for revocation of probate must be filed within 120 days. Prob C §8270(a)
• If the decedent owned real property, a Preliminary Change of Ownership Report (PCOR) must be filed within 150 days of the date of death even if the transfer was through the medium of a trust. Rev & T C §480(b).
• The estate tax return is due within 9 months after the date of decedent's death. IRC §6075(a).

Change of ownership - Prop 13

The process for transferring legal title to real property in California is actually quite simple. 

It merely requires the filing of two documents, a deed and a preliminary change in ownership (“PCOR”), with the appropriate County Recorder’s and County Assessor’s Office. 

The deed needs to be recorded in the county in which the property sits. For instance, if the property is in Davis, CA the deed would need to be filed with the Yolo County Recorder’s Office, or if the property was located in Scotts Valley, CA the deed would need to be filed with the Santa Cruz County Recorder’s Office. My personal experience with the Santa Cruz County Recorder’s Office has been quite pleasant. The clerks there have been very helpful. As for the PCOR, this is filed simultaneously with the deed. The County Recorder will forward the PCOR to the County Assessor.

The following information must be included on the deed:

1. The name of the grantor (the seller essentially). CC §1096,
2. The name of grantee (the buyer essentially). CC § 685.
3. A legal description of the property.
4. The signature of the grantor. CC § 1091.
5. The name of the person requesting recordation. Govt C §27361.6.
6. The name and address to which further tax statements may be mailed. Govt C §27321.5.
7. The amount of the documentary transfer tax due. Rev & T C §11932.

Thought not statutorily required, the assessor’s parcel number should be included on the deed nonetheless. In light of these requirements, deeds are typically only a few pages long.

The other part of the equation is the completion of a preliminary change in ownership (“PCOR”). 

California law says that a PCOR must be filed whenever there is a change in ownership of real property. Rev & T C §480(a). The reason for the PCOR is to inform the county assessor whether a change of ownership has occurred that will trigger property tax reassessment (See Prop 13). The PCOR is a 2 page form that asks questions pertaining to the identity of the new owners, the location of the property, the sale cost, etc. Each county may have its own PCOR form but the general format is modeled after a template drafted by the State Board of Equalization.

A key distinction between these two documents is the fact that a deed is subject to public inspection whereas the PCOR is not. For example, if I wanted to know who owned the home across the street from me, I could ask my real estate agent to pull the title for that home. However, I could not ask them to obtain the filed PCOR for that property.

For illustrative purposes, assume that Samantha Seller sold her Malibu dream home to Brooke Buyer for $100, 000. In order for Samantha to transfer ownership of the home to Brooke she would need to execute a deed, and in turn, Brooke would need to file a PCOR with the Los Angeles County Recorder’s Office so as to inform them that the house should be re-assessed for property tax purposes. 

Trust Administration

In the typical estate plan for married couples, a couple will draft a living trust in which the surviving spouse inherits everything of the deceased spouse. Thereafter, upon the surviving spouse's death, the successor trustee will administer the trust in accordance with the terms of the trust. Most commonly, the surviving spouse's estate will be distributed to his or her children or grandchildren. This process is quite similar to probate in that an inventory of assets is taken, debts and taxes are paid and the remaining assets are distributed.

Instead of focusing on the entire trust administration process, I will touch upon some major issues that are addressed in most, if not all, trust administration cases.

1. Notice

The successor trustee must send a notification to current beneficiaries and heirs at law when a revocable trust or any portion of it becomes irrevocable because of the death of one or more of the settlors or because of a contingency as specified in Prob C §16061.(a)(1) or when there is a change of trustee of an irrevocable trust.

2. Lodging of the Will 

The custodian of the decedent's original will must (1) lodge the original will with the clerk of the county where the decedent resided at the time of death and (2) mail a copy of the will to the named executor within 30 days of learning of the death. Prob C §8200.

3. Updating Title

If the trust held real property, an affidavit of death of trustee would need to be recorded with the County Recorder’s Office so the successor trustee can acquire title to the property. Also, a Preliminary Change of Ownership Report (PCOR) must be filed within 150 days of death. Rev & T C §480(b).

4. Debts

The trustee would also need to ascertain the trust's creditors and pay off any outstanding debts. This might include credit card bills, mortgage payments and various utility bills. This can be done through the collection of the trust’s mail over a period of time.

5. Taxes

In terms of income taxes, IRS Form 56 (Notice Concerning Fiduciary Relationship) must be prepared and filed to notify the taxing authorities that the trust is now irrevocable and has become a separate taxable entity. Also, a separate taxpayer identification number, an EIN, would need to be obtained for the trust.

6. Appraisals

Formal written appraisals would need to be obtained for real property, personal property, intangible personal property and business interest in order to obtain a basis for those assets in terms of capital gains. In particular, the tax basis of those aforementioned assets is pegged to the fair market value of it on the decedent’s date of death. IRC §1014

7. Retirement Benefits

The trustee would need to prepare and mail letters to employers, plan administrators, and IRA sponsors concerning retirement benefits since retirement benefits are often intentionally excluded from being included in a trust.

Again, these are not all the steps that are taken in the trust administration process. Rather, these are the steps that are very common to most, if not all, trust administration cases.