The Other Prop 8

Many people are familiar with Prop 8, the gay marriage ban passed in 2008 by California voters which was ultimately ruled unconstitutional. However, unknown to many, there is another Prop 8 which was also passed by voters, albeit in November 1978. Unlike the latter Prop 8, the prior Prop 8 lacks the same amount of controversy. I can assure you of this. The prior Prop 8 was passed because California voters passed the landmark ballot initiative Prop 13 in June 1978.

In short, Prop 8 allows for the county assessor to assess the property below the Prop 13 value if the home's value is below the factored base year value, i.e. the Prop 13 value. The following example illustrates the interplay between Prop 8 and Prop 13.

Theo Chambers purchases a home in Campbell, CA in July 2008 for $600,000. The assessed value under Prop 13 can be raised at most 2% per year. Thus for 2009, the maximum assessed value for 2009 that Santa Clara County can impose under Prop 13 is $612,000. 

Theo unfortunately purchased his home just prior to the great recession. Real estate prices naturally suffer a precipitous drop. In Theo's case, his home depreciates $150,000 in value in the ensuing months. When January 1, 20009 rolls around, the market value of his home is $450,000. Due to Prop 8, Theo's assessed value will also be $450,000, rather than $612,000. So when Theo pays his property tax bill, it will be derived from the $450,000 assessment.

Years later, the real estate market recovers and home prices increase to levels greater than or equal to the prerecession levels. Consequently, Theo's home is now worth $750,000 in 2015.

Santa Clara County can now assess Theo's property under Prop 13 because of the appreciation. However, it cannot assess Theo's property at $750,000 because it has not reached that level under Prop 13's annual 2% increase. A 2% increase from 2009 to 2015 yields an assessment of roughly $690,000. Thus, Santa Clara County will use the $690,000 assessment for Theo's property taxes.    

Another salient point is that in times of significant real estate appreciation, the assessor can increase the assessment greater than 2% in consecutive years under Prop 8. For example, assume a home is purchased for $100,000 in 2013. Home values plummet because of a derailed train carrying crude oil that pollutes the entire town. This results in the home losing $50,000 of its value in 2014. Prop 8 kicks in and the assessment is $50,000. Yet in 2015, a wealthy philanthropist donates tens of millions of dollar to the city to revitalize it and home prices rebound immensely, such that the value of the home is now $125,000. The county assessor can now roughly increase the assessment $54,000 because the Prop 13 value is less than the market value. That is, the 2% increase of $100,000 from 2013 to 2015 results in roughly a $104,000 assessment. Therefore, the property taxes will be based off of the assessment of $104,000, not $125,000.

What is a life estate?

A life estate is a conveyance which grants the life estate holder, the life tenant, the ability to live on the property for the duration of their life. This type of conveyance offers control to the donor because they can restrict the life tenant's use of the property. For example, the donor can require that (1) the life tenant remain a continuous occupant of the property for their life and/or (2) require the life tenant to pay all taxes and maintenance associated with ownership.  

The following illustration demonstrates how a typical life estate arrangement works.

In the 1990s, John Doe, a widower, owned 650 Rosewood Court Los Altos, CA 94024. John decided that he wanted his only son, Jack Doe, to own the property albeit in a life estate form because Jack was largely irresponsible. Jack had a penchant for unsuccessfully gambling on English Premier League soccer matches. He insisted that he only picked "winners" but alas lady luck was not on his side. Naturally John worried that Jack might sell 650 Rosewood Court to fund his gambling habit. Since the property was quite lucrative, a large infusion of cash from the sale could cause Jack to gamble an outlandish amount of money at casino sportsbook in Las Vegas, NV. 

John executed a deed in 1992 which granted a life estate to Jack and the remainder to his cousin Carl Walcott. The life estate required that Jack maintain the property's upkeep and continuously occupy the home as his primary residence. If Jack failed to perform either requirement, title would be transferred to Carl immediately. Since the life estate conveyance from John to Jack involved a parent to child transfer, such was not subject to real property tax re-assessment. This was especially important to Jack because the property taxes were quite modest given that John purchased the house with his late wife Jane in 1944 for a small sum. Hence Jack was able to enjoy a low property tax base and the corresponding property taxes were quite manageable. 

Sadly Jack succumbed to his insatiable gambling habit and decided to move to Las Vegas permanently. Spurred by fantasies of instant gratification and enormous wealth, Jack's temptations over-whelmed him. This caused the termination of his life estate because John required that Jack continuously occupy 650 Rosewood Court.  Therefore when Jack signed a lease to rent an apartment in Las Vegas, his life estate for 650 Rosewood Court was terminated. A termination of life estate was then filed with the Santa Clara County Recorder's Office . This transfer did result in a real property tax re-assessment because there were no exclusions that apply to the transfer of real estate between John and Carl. 

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.

Parent-Child Exclusion

One of the most common property tax exemptions is the parent-child exclusion. The exclusion allows a parent to transfer their residence plus other property to their child without property tax re-assessment, or in the correct legal terminology, the transfer does not constitute a "change of ownership." 

The amount of property that can be transferred from parent to child is quite large. Each parent may transfer their personal residence plus up to $1M in full cash value property to the child or children without a change in ownership. Cal Const art XIIIA, §2(h); Rev & T C §63.1. It should be noted that "full cash value" does not mean "fair market value" rather it means means "assessed value." Cal Const art XIIIA, §2(a); Rev & T C §110.1; City & County of San Francisco v County of San Mateo (1995) 10 C4th 554. Assessed value is the figure listed on your property tax bill. As many a homeowner knows, assessed value does not always translate to fair market value because of Prop 13. Thus, a parent could transfer millions of dollars of property to their children if the property has a low assessed value. The following example is illustrative of this.

Wendy was a wealthy widow who owned multiple properties in California. She owned a personal home in Palo Alto, a cabin in Lake Tahoe, a condo in Palm Springs, a beach house in Malibu and a loft in San Francisco. The Palo Alto home's fair market value was $2.5M with an assessed value of $1.2M, the fair market value of the Lake Tahoe cabin was $1.2M with an assessed value of $100,000, the fair market value of the Palm Springs condo was $1.7M with an assessed value of $200,000, the fair market value of the Malibu beach house was $1.8M with an assessed value of $450,000 and the fair market value of the San Francisco loft was $700,000 with an assessed value of $150,000. All of these properties had been purchased by Wendy many decades ago and had substantially increased in value. When Wendy passed away, her children could maintain the property tax basis for each of the properties. For instance, the Palo Alto home, though in excess of $1M, qualified for the personal residence exception and the assessed value of all the other properties did not exceed $1M. Thus, the children would save ten of thousands of dollars on property taxes each year thanks to the parent-child exclusion. 

For reference, the parent-child exclusion form is Form BOE-58-AH and can be found on the website of county assessors.

Property Taxes and Capital Gains

The notable Campbell, CA water tower down the street from my office

When somebody inherits real property and sells it thereafter, two important legal issues commonly arise, property taxes and capital gains. Property taxes in California are governed by Prop 13. Basically Prop 13 says that real property may be levied a 1% tax on the assessed value each year and the assessed value may be raised by no more than 2% annually. Capital gains is the tax imposed on a person when an asset is sold for a gain, namely the sale price exceeds the cost-basis. The following example illustrates how these legal topics relate to inheriting and then selling real property in California. 

The following individuals are fictitious characters invented through the limited powers of my imagination.

In 2008, Bobby Beneficiary, a resident of Mendocino, CA was informed by his Uncle George that his mother Ma Bell passed away and left her home in Campbell, CA to him through her will. Bobby's father Pa Bell had predeceased his mother. Ma and Pa Bell bought the home in 1980 for $10,000. Later in 2008, the will was probated and title to the Campbell home was transferred to Bobby from his late mother. Bobby was concerned that he will have to pay property taxes for the current value of the home, $600,000. However, Bobby was told by the probate attorney that this transfer qualifies for the parent-child exclusion and no re-assessment for property taxes will occur. Rev & T C § 63.1. Thus, Bobby was able to maintain the very low assessed value of the home, $10,000, for as long as he desires. This was particularly important for Bobby because he would rather not be forced to sell the property. Instead, Bobby would prefer to sell the property during a seller's market.

A few years later, in 2011, Bobby decides that the time is right to sell the Campbell home. Bobby was able to delay the selling of the home because property taxes were quite affordable given the low assessed value of the home. During the summer of 2011, Bobby finds a purchaser of the home and the parties agree to a purchase price of $650,000. Following the sale, Bobby becomes concerned over the enormous tax burden he will face next year when he files his taxes. The reason for Bobby's concern is that he has received shoddy accounting information over the years. Bobby has been deceived into believing, through viewing many late-night infomercials, that his basis in the property is $10,000. Hence, he erroneously believes that he will have a gain of roughly $640,000 (650,000-10,000). Yet in reality when Bobby inherited the property from his mother he received a new cost-basis in the property. When a person inherits property, the cost-basis is generally the date of death value of the asset.  IRC §1014(a); Rev & T C §18031. Here, the value of the Campbell home was $600,000 on Ma's date of death. Thus, Bobby's capital gains would in actuality be much smaller than he originally believed. That is, his capital gains would be $50,000 (650,000-600,000). Ultimately, Bobby's ability to inherit property from his mother, known as stepped-up basis, reaps enormous tax savings for him.

As you can see, inheriting property from somebody enjoys the best of both worlds, retention of old assessed value for property tax purposes and a stepped-up basis for the asset to reduce capital gains.

Death Taxes

When a person passes away, there are numerous taxes associated with the transfer of the decedent's assets. The following are examples of these transfer taxes.

Estate Tax

The Estate Tax is a tax levied on a decedent's estate when the estate's amount exceeds the applicable exclusion amount. For example, the current exclusion amount in 2011 is $5M. Thus, if a single person were to pass away next week and their estate was worth $10M, their estate would be, generally speaking, subject to the Estate Tax. The Estate Tax's top rate for 2011 is 35%.

The future of the Estate Tax is under considerable debate at the moment. The applicable exclusion amount is set to revert back to 2003 levels, $1M, if no action is taken for the year 2013, the $5M exclusion expires after 2012. It is likely that the Estate Tax will be revisited sometime in late 2012 because Congress has a habit of waiting until the last moment to resolve anything.

Gift Tax

The Gift Tax is a tax levied on the transfer of property between parties absent consideration. For example, if Donald gave the keys to his Ferrari to his friend Doug out of the blue and said "the car is yours to keep" and Doug then hastily sped off in the Ferrari, such would constitute a gift. The reason being is that there was an (1) intent to make a gift, Donald was not asking for anything in return, (2) delivery of the gift, Donald gave his keys to Doug and (3) receipt of the gift, Doug drove off with the car.

The Gift and Estate Tax are linked together to prevent a person from giving away their estate before they die in order to avoid the Estate Tax. Thereby, giving away large gifts over one's lifetime can reduce the amount of the Estate Tax available to that person on their death. So before you decide to give away all of your possessions on your death bed to avoid the taxman, remember the preceding sentences.

The current amount a person can give away before they incur Gift Tax is $5M. Again, this figure is under considerable debate as well because the figure has been tinkered with many times over the past couple of years.

Generation Skipping Transfer Tax

The GST Tax is designed to address the situation where a person transfers property to a "skip person" that avoids the application of the Gift and Estate Tax. This "skip person" is almost always a grandchild. Hence, the law typically arises when a grandparent transfers property to a grandchild. For example, a grandparent might create a trust that distributes income derived from the trust to the child and the grandchild, and upon the child's death, the principal will be distributed to the grandchild.

The GST Tax uses the same applicable exclusion amount as the Estate Tax, $5M in 2011. 

The GST Tax is largely irrelevant for the vast majorities of individuals because not many people have millions of dollars earmarked for a grandchild's inheritance through a trust.

Property Taxes (Prop 13)

If the decedent's estate owned real property, then property taxes will need to be addressed. Prop 13, the California constitutional amendment that governs property taxes, says that each piece of real property can be assessed a 1% levy and each year the property's assessed value can be at most raised 2% from the previous year. However, before you tell me that I am uninformed because your property tax bill is clearly greater than 1% of the assessed value, please remember that cities and counties are allowed to tack on various fees for infrastructure projects and pension obligations. 

Estate Planning Fees

A common question from a homeowner who is interested in writing a revocable trust, is what are the costs and obligations, other than attorney fees, involved with the process? The following are
some topics raised by that question.
 
Property taxes
 
Whenever there is a “change in ownership”, the property taxes for that particular parcel of land will be re-assessed to its current the fair market value. Rev & T C §60. For example, if Bobby purchased from Sam a home for $500,000 in San Jose in 2007, Bobby’s property taxes would be based off of that $500,000 figure. Now assume that Bobby had purchased the property for $40,000 from Sam in 1979. In 2011, Bobby decides he wants to write a trust to avoid probate. However, Bobby is hesitant to write a trust and fund it with his home. He is worried that the Santa Clara County Assessor will try to re-assess his property taxes to its 2011 fair market value and in turn raise his property taxes. Fortunately for Bobby, California law is very specific in saying that a home transfer to a revocable trust is not considered a “change in ownership.” Rev & T C § 62(d)(2). Thus, the fear of re-assessment for property taxes when funding a revocable trust with a home is unwarranted.

Documentary transfer tax

In the case of a real property transaction, the transfer of a home from seller to buyer for example, there is the inclusion of a fee known as the documentary transfer tax. Rev & T C § 11911. The deed, the document which denotes the identity of the seller and buyer, must show the amount of the documentary transfer tax due. Rev & T C §11932. For reference, the tax rate is $0.55 per $500 of value (0.11 percent) sold. Rev & T C §11911.

Since a trust needs to be properly funded, whereby a trust transfer deed will need to be drafted, the documentary transfer tax becomes an issue, albeit only superficially. The reason for the superficiality is that California law states that a transfer of a home to a revocable trust is exempt from the fee imposed by the documentary transfer tax because there is no consideration tendered. Rev & T C §11930. Therefore, the documentary transfer tax is not an issue when a homeowner funds his or her trust when their home.
 
Income tax returns
 
Most revocable trusts are known as “Grantor Trusts” in IRS language. IRC §§671, 676. This means during the time that the trust is revocable, the settlor, the person who wrote the revocable
trust, is not required to file an additional tax return for the revocable trust. Hence, the creation of a revocable trust will not result in the settlor having to file more paperwork with the IRS and
California Franchise Tax Board.
 
Gift taxes
 
The inapplicability of gift tax in regards to creating a revocable trust bears mentioning to erase any confusion. There is no gift tax if you transfer property from yourself to a revocable trust that you created. A revocable trust is not a separate legal entity. Goldberg v. Frye (1990) 217 CA3d 1258. Hence, if you transfer property to your revocable trust it would be as if you handed an item from
your left-hand to your right-hand. Thus, there is no gift tax in the revocable trust creation equation because there is no third-party involved.
 
Recording Fees
 
Once a person has executed a trust transfer deed, it needs to be recorded in order to give proper notice to third-parties that the buyer is now the owner of the property. However, whereas there are exemptions with the previously mentioned fees and taxes, there is no such exemption for recording a deed. Each county has their own schedule of fees to record a document. For example, to record a deed in Santa Clara County, it is $15 for the first page and $3 for each additional page. The deed may be presented personally to the clerk-recorder or you can mail it in.
 
Notary Fees
 
It should be mentioned that a notarized signature is not required to execute a revocable trust. In that, there is no California law that says that a signature has to be notarized when executing a revocable trust. However, out of custom, a signature is notarized when executing a revocable trust.

A California notary may charge up $10 per signature when executing a revocable trust. Govt C § 8211. Often times, the attorney drafting the trust doubles as a notary and the fee is waived.

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. 

Proposition 13 - People's Initiative to Limit Property Taxation

One of the sacred cows in California politics is Proposition 13. Proposition 13, the “People's Initiative to Limit Property Taxation" was the landmark ballot proposition that was passed overwhelmingly by California voters in 1978 which capped property tax rates and annual assessment increases for realty. 

Simply stated, Prop 13 caps the maximum taxation rate for realty at 1% and the maximum increase for an assessment at 2% annually. 

The tax rate of 1% signifies the multiplier each county uses when calculating property taxes for each piece of real property. The assessed value is the amount multiplied by that 1% tax rate, which in turn provides the amount of property taxes due annually. For example, if Paul purchased a home for $100,000, the maximum amount Paul could be charged for property taxes is $1,000 (100,000 x .01) and the assessed value could not be increased by more than $2,000 for the following year, $102,000.

It should be noted that there are numerous taxes or fees tacked onto your property tax bill each year that are not subject to Prop 13’s jurisdiction, these include schools bonds, public safety bonds, retiree benefits, etc.

The assessed value of realty is, generally speaking, the fair market value of the property as of the last sale date plus annual increases not to exceed 2%. From the example above, Paul purchased a home for $100,000. The amount of property taxes due would probably go as follows

Assessed Value - Year 1                    Property Taxes Owed – Year 1

$100,000                                            $1,000

Assessed Value - Year 2                    Property Taxes Owed – Year 2

$102,000                                            $1,020

Assessed Value - Year 3                    Property Taxes Owed – Year 3

$104,004                                            $1,040.04

Assessed Value - Year 4                    Property Taxes Owed – Year 4

$106,120.8                                         $1,061.208

Assessed Value - Year 5                    Property Taxes Owed – Year 5

$108,243.16                                       $1,082.43

Assume that Paul had a neighbor, Ned, who purchased his home in Year 4 for $200,000. Ned’s property taxes would roughly be double Paul’s because the assessed value of Ned’s home is roughly twice the amount of Paul’s home. Thus, despite the fact that Paul and Ned are neighbors, Paul pays significantly less than Ned in property taxes. This example illustrates how purchasers of realty in California enjoy significant property tax savings if they can retain ownership of the realty for a long duration of time. Although this argument is based off of the assumption that California real estate prices increase over time, you would be hard-pressed to find a dissenting opinion from a reputable source.

The key phrase for property taxes is “change in ownership.” Whenever there is a “change in ownership” then the property’s value will be re-assessed. The assessed value is usually pegged to the fair market value of the home (see sale price) on the date of transfer.

The following are some examples of transfers which present “change in ownership” questions:

Business Entity/Proportional Interest

Henry and Whitney purchased a rental property, Hotel California, as joint tenants in 1988. Upon seeing that a LLC is a superior method of owning Hotel California, Henry and Whitney create a LLC, Acme LLC, in which Henry will have a 50% interest and Whitney will have a 50% interest. Later on, Henry and Whitney each transfer their 50% interest in Hotel California to Acme LLC. Since the proportional interests in the realty remain exactly the same both before and after the transfer, there is no change in ownership. Rev & T C §62(a)(2).

Joint Tenancy

Al purchases a fabulous retirement home in Scotts Valley, a charming community nestled in the Santa Cruz Mountains. Al then decides to gift half of his interest in the home to his neighbor Jefferson. Al prepares and records a deed naming Al and Jefferson as joint tenants for the retirement home. This transfer from Al to Al and Jefferson as joint tenants does not constitute a change in ownership. Rev & T C §62(b),(f).

Divorce

Eldrick and Elin decide to part ways after many years of marriage. One of the marital assets is a home owned in joint tenancy by Eldrick and Elin. The separation agreement provides that Eldrick will transfer to Elin the marital home. The transfer from Eldrick to Elin of the marital home will not result in a change in ownership. Rev & T C §63(c).

Leases

Link, a landlord, owns a piece of farmland in the fertile San Joaquin Valley named Big Gulch Road. Tobias, an entrepreneurial farmer approaches Larry and inquires about leasing Big Gulch Road. Tobias has grand plans for Big Gulch Road and thus needs at least a 50-year lease in order to complete his plans for harvesting pomegranates, the best fruit on earth (author’s opinion). Larry agrees to lease to Tobias Big Gulch Road for a term of 50 years. This lease would constitute a change in ownership because the lease term exceeded 35 years. Rev & T C §61(c). However, if the lease term had been for less than 35 years, then there would not be a change in ownership. Rev & T C §61(c).

Tenants in Common

John, Paul, Ringo and George purchased a home together, Nabbey Road Manor. John later becomes fed up with having to co-own the property with 3 other people and decides to sell his interest, 25%, to his eccentric consultant Yoko. This transfer would result in a change in ownership, albeit a partial one. In that, 25% of the property would be re-assessed for property tax purposes whereas the other 75% would maintain its assessed value. Rev & T C §§61(f), 65.1.

Name Change

Romeo Shakespeare purchased a home in Markleeville, California and took title under said name. Since Romeo’s friends, family and neighbors loved to poke fun at this name, Romeo decided to file a petition with the Alpine County Superior Court to change his name to John Brown. Eventually, Romeo was able to have his name changed. Subsequently, John executed a new deed in which Romeo Shakespeare conveyed to John Brown his interest in the property. Due to the fact that this transfer involved only a name change, no change in ownership occurred. 18 Cal Code Regs §462.001.

Prop 13

When somebody inherits a home via a will, trust, intestacy or by gift, it is not necessarily true that the value of the home will be re-assessed for property tax purposes. 

This can be especially important to a beneficiary who inherited a home from his parents or grandparents since they probably had a low base year value of their home. For example, if Bobby Beneficiary inherited a home, currently valued at $1 million dollars, from his late parents who had purchased the home for $50,000 decades ago, he would not be liable to pay property taxes on the assessed value of $1 million dollars but rather on $50,000, plus annual adjustments. (See Example 4).

Of note, Proposition 13 caps the levying rate for property taxes in California at 1%. Cal Const art XIIIA, §1.

The following are examples of situations in which the transfer will not result in a “change in ownership” and thereby avoid the dreaded re-assessment for property tax purposes. 

1. Transfers in which proportional ownership interests remain the same before and after transfer 

For example, Husband and Wife own a rental home in joint tenancy (50/50 split) and transfer it to a limited liability company in which they have same membership interest (50/50 split). Rev & T C §62(a). 

2. Transfers to revocable trusts 

For example, Husband and Wife execute a revocable (living) trust and transfer the home they live in into the trust by transferring title from themselves to the trust by naming the trustee of their revocable trust as owner. Rev & T C §62(d). 

3. Interspousal transfers 

For example, Husband and Wife own their home in joint tenancy, Husband dies and Wife inherits the other half of the house. Rev & T C §63. 

4. Parent-child (or grandparent-grandchild) transfer 

For example, in the case of a Parent-Child transfer, Husband and Wife own a home and have one child, Son. Husband and Wife pass away and Son inherits the home. Furthermore, in the case of a Grandparent-Grandchild transfer, Grandparent is only survived by a Grandchild, that is no child of the Grandparent outlives the Grandparent. Rev & T C §62. 

5. Persons over age 55 or who are severely and permanently disabled may transfer the base-year value of a residence to a replacement dwelling in the same county, or in another county if the board of supervisors of that county adopts an ordinance granting base-year-value relief to replacement dwellings when the original dwelling was located in another county 

As of this writing, seven counties (Alameda, Los Angeles, Orange, San Diego, San Mateo, Santa Clara, and Ventura) have ordinances granting base-year-value relief to replacement dwellings when the original dwelling was located in another county per Rev & T C §§ 68-69.5. For example, Person purchases a home in San Jose (Santa Clara County) and upon reaching the age of 55 sells their home in San Jose in order to purchase a home in Redwood City (San Mateo County) so they can be closer to their family.

Living Trust Myths

These are some more fallacies I have been asked, read and heard about in regards to living trusts:

Fiction: If I set up a trust I must file a separate tax return for the trust.

Fact: Most trusts do not require the filing of a separate tax return provided the person who drafted the trust has substantial control over it. IRC §§671-679. For example, if John Smith established a trust for his own benefit, the John Smith 2009 Living Trust, he would not need to file a separate tax return for the John Smith 2009 Living Trust. Such a trust in IRS speak is known as a “grantor trust.”

Fiction: If I transfer my house into a living trust, the house will be re-assessed for property tax purposes.

Fact: California law clearly says that if a couple or single person transfers their residence into a revocable trust that they created the property is not reassessed for property tax purposes. Rev & T C §§62(d). For example, if John and Mary Smith established a trust and transferred their 650 Rosewood Court residence into the trust, the assessed value of 650 Rosewood Court would remain the same after the transfer. This is particularly important for people who purchased their homes years ago and are acutely aware of the low assessed value for property tax purposes.

Fiction: Everything I own should always be transferred into a trust.

Fact: Due to tax and administrative reasons a retirement account and life insurance policy should not be transferred into a trust typically.

Fiction: If I do not write a will or a trust, the government will inherit my property.

Fact: To quote the character Randolph Duke from the movie Trading Places, “hogwash.” The government, namely the state of California, will only inherit your property (called escheat) if you have no relative or you do have a relative but they cannot be located. For example, there would be no escheat if your had either a spouse, child, parent, grandchild, grandparent, brother, sister, uncle, aunt, nephew, niece or distant cousins (Please click on the diagram below). Consequently, the odds of a person not having any relative alive when they die is ostensibly zilch. The cases in which escheat occurs, and it is very rare, comes about because a person moved far far away from their family. Ultimately, escheat is a very narrow exception to the rule that somebody other than the government will inherit your property.