Important But Overlooked Property Tax Exemptions

In last month’s blog entry, we discussed how property taxes are an important, and often overlooked, consideration in estate planning and estate administration in California. Many people don’t realize there’s a problem until they receive a large property tax bill indicating that their property has been reassessed for property tax purposes. In last month’s blog entry we discussed how property taxes work and why you should not transfer any interest in your real property without consulting an attorney first. Here are some of the questions we commonly receive regarding property taxes and the administration of an estate:

Will a property be reassessed upon the death of the owner?

Yes. Under California law, death of the owner is considered a change in ownership and the property can be reassessed as of the date of death for property tax purposes.

What about if the property was held in a trust? Is it still subject to reassessment?

Yes. A change in ownership occurs upon the date of death of the owner of the property, also referred to as the trustor, or lifetime beneficiary of the trust. The change in ownership and, if applicable, the date of reassessment, is the date of death the property owner, not the date of distribution to the successor beneficiary of the trust.

Will the property be reassessed if it passes to the decedent’s children?

Yes. However, if all or some of the property is passing to the decedent’s child(ren), the decedent’s child(ren) may qualify for a reassessment exclusion. In order to qualify, a Claim for Reassessment Exclusion Between Parent and Child must be filed with the Assessor’s Office within three years after the date of transfer, or prior to transfer to a third party, whichever is earlier, or within 6 months after the mailing of the notice of supplemental or escape assessment.

If the above time requirements have expired, and the property has not been transferred to a third party, a claim can still be filed, however, the exclusion will only apply to future tax years.

What about property passing to a grandchild?
Property passing to a grandchild may be exempt from reassessment if all the parents of the grandchild that qualify as a child of the deceased property owner are deceased. A Claim for Reassessment Exclusion Between Grandparent and Grandchild must be filed with the Assessor’s Office in a timely manner in order to qualify for reassessment exclusion.

San Diego Estate Planning, Probate and Trust Administration
If you have any questions regarding property tax reassessment, or need assistance with the administration of a trust or estate, contact the Casiano Law Firm for experienced advice and representation.

Property Tax Considerations in Estate Planning

Property taxes are an important, and often overlooked, consideration in estate planning and estate administration, particularly in the State of California. Many people focus on federal estate tax considerations, with perhaps some concern for gift, generation-skipping transfer and income tax consequences. It isn’t until a client receives a large property tax bill indicating that their property has been reassessed for property tax purposes that it becomes apparent that there is a problem.

How California Property Taxes Work

In California, annual property taxes are calculated as a percentage of a real property's assessed value. Assessors may increase a real property's assessed value by only 2% each year unless there is a “change in ownership”. This has worked in favor of property owners because historically, real property values have increased at a rate greater than 2% per year.

When a “change in ownership” occurs, it triggers a property tax reassessment, and allows the County Assessor to adjust the assessed value of the real property to the current fair market value. The “change in ownership” rules are very complex and confusing. Property owners often inadvertently trigger a reassessment, which can cause significant increases in property taxes each and every year thereafter. This is one reason why you should never attempt to transfer an interest in real estate without first consulting an attorney – such a transfer could lead to a significant increase in property taxes, not to mention other problems.

Beware of Property Tax Issues in Business Succession Planning

If you own a business and have real property titled in the name of your business, you must be even more careful. A transfer of even a small interest in a business, even 1%, can trigger a reassessment of all of the California real property owned by your business. In addition, if you fail to report an event triggering a change in ownership in a timely manner, you face substantial penalties from the State Board of Equalization.

Experienced Estate Planning Attorney in San Diego

Careful consideration should be given when choosing an estate planning attorney, because it is easy to overlook property tax and other issues. Hiring the least expensive attorney to do your estate plan could result in increased property taxes for as long as you own your property.

In next month’s blog entry we will take a close look at property tax issues that arise in probate and trust administration. If you have any questions regarding estate planning, contact the Casiano Law Firm for assistance.

How Much Will it Cost You to Die Without an Estate Plan?

Occasionally we will meet with a potential client who questions whether the cost of estate planning is really justified. The answer to that question involves consideration of several different factors, including planning for the possibility of future incapacity, tax considerations, and whether probate administration will be required. This blog entry will focus on the cost of probating an estate in California. Generally speaking, if a person dies with assets titled in their name, subject to some exceptions for a very small estate, probate administration will be required.

Probate refers to the process where the court oversees the administration of a deceased person’s estate. The purpose of probate administration is to ensure that any final bills and expenses of the decedent are paid, including any taxes owed, and any claims by creditors settled. Probate is a costly, time consuming process. Probate fees in California are high, and generally fall into three categories:

• Court costs, including court fees, publication fees, surety bond fees, probate referee fees, certification and recording fees;
  
• The personal representative’s fee (the fee paid to the administrator of the estate for his or her services); and the
  
• Attorney’s fee for his or her services
  

The fees paid to the personal representative and the attorney are set by law and computed upon the gross value of the estate as follows:

• 4% on the first $100,000
  
• 3% on the next $100,000
  
• 2% on the next $800,000
  
• 1% on the next $9,000,000
  
• ½% on the next $15,000,000
  
• “reasonable” compensation on the excess over $25,000,000
  

It is important to note that the gross value of the estate is based upon the full value of the assets of the estate, not taking into account any mortgages, debt or other loans or encumbrances on the asset. For example, the deceased may have a home with a value of $1,000,000 and a mortgage of $975,000. The fee to probate the home would be based on the full value of $1,000,000, not the $25,000 net value of the property ($1,000,000-$975,000).

As you can see, failing to create an estate plan can be costly in terms of probate administration fees. Planning in advance will allow your beneficiaries to avoid both the cost and time delay associated with probate. If you have any questions regarding estate planning or probate, contact the Casiano Law Firm for advice and assistance.

Estate Administration in 2011

The new tax law provides an option for the executor of an estate of a person who died in 2010 to select between the “repeal” regime of 2010 or the new “taxable” regime as it applies in 2011 and 2012. What exactly does this mean for an estate? The executor has a choice between (i) avoiding all estate taxes, regardless of the size of the estate, but receive only a limited stepped-up basis for capital gains tax purposes; or (ii) take an unlimited stepped up basis, but the decedent’s estate will be subject to estate tax to the extent it exceeds $5 million, excluding amounts passing to a surviving spouse or a charity.

For an estate less than the exemption amount of $5 million, or if the amount of the estate over the exemption passes to a trust for the surviving spouse, the executor will probably opt for the “taxable” regime in order to take advantage of the unlimited step up in basis. Even if the estate is significantly more than $5 million, if the excess amount is passing to the surviving spouse or in trust for the surviving spouse, there will be no estate tax owed due to the marital deduction; the estate tax will be deferred until the death of the surviving spouse.

However, if the surviving spouse’s estate is likely to be much higher than the $5 million new estate tax exemption, it makes sense to avoid the 35% estate tax under the taxable regime, even though it means the estate will only receive a limited stepped up basis. The larger the estate, the greater the incentive to elect for the repeal regime to avoid any estate taxes.

The new 2010 tax act makes significant changes to gift, estate, and generation-skipping transfer taxes which are complex and confusing. We will continue to analyze the 2010 tax act and share with you how it may impact your estate. Thanks for reading our blog. If you have any questions, or need assistance in an estate planning, probate or trust administration matter, contact the Casiano Law Firm.

Review Your Estate Plan in View of Recent Estate Tax Changes

After much uncertainty and speculation regarding the future of federal estate taxes, on December 6, 2010 President Obama announced a tentative deal had been reached with Republicans to extend the Bush area tax cuts. Effective January 1, 2011, estate taxes are once again in effect, but at an exemption of $5 million for an individual, or collectively $10 million for a married couple. The applicable estate tax rate is 35%. This exemption and estate tax rate will be in effect for two years.

Tax historians note that the new estate and gift tax rates are the most generous since 1931, and provide a unique, yet temporary window for the wealthy to utilize various gifting strategies to pass assets to their children without incurring gift, estate, or generation-skipping transfer tax. This tax break impacts a number of American families. According to the Federal Reserve Survey of Consumer Finances, in 2007, 5.4 American households had a net worth in excess of $2 million.

However, even Americans with no intention of making significant gifts have reason to be concerned about this recent estate tax change, and should have their existing estate planning documents reviewed in light of this change. Many trusts contain what are known as “formula clause” provisions, which tie the amount of a bequest to the applicable estate tax exemption. These clauses were designed to maximize the amount a couple could pass on tax-free. Unfortunately, the current exemption of $5 million is significantly different from that of past years, such as the $1.5 million exemption which was in effect in 2005. Thus, if a spouse dies in 2011 with a $3 million estate and unchanged formula clauses, the surviving spouse may be entitled to nothing outright because all of the assets would pass into a trust.

Over the next few months we will examine the recent tax change in more detail, including how this change could affect your estate plan, and the planning opportunities presented by this change. For a personalized consultation regarding your estate plan, contact the Casiano Law Firm.