inherited property tax in california

Dear Len & Rosie,

My rich neighbor told me that her father died last year and that she inherited his multi mullion dollar home, and pays less than $4,000 a year in property tax. She‘s a CPA, so maybe she knows things that I don’t, but how could this be true? That would mean that I pay more in property tax for my two bedroom condo than she does for the six bedroom mansion that she got for free.

Anna

Dear Anna,

It’s likely that your neighbor is telling you the truth. No matter how unfair it seems, these huge discrepancies in property tax exist under California law. Under California’s Proposition 58, parents can pass the family home to their children, and the children can keep the parent’s property tax base. It doesn’t matter whether the home is worth $500,000 or $5,000,000.

If mom and dad purchased a home in 1990 for $200,000, and pay annual property taxes of about $2,500, if that same home is worth $3,000,000 when they die, the children will inherit both the home and the low property tax bill. That’s why your rich neighbor pays less than you for the luxury home she got for free.

And that’s not all. Under Prop 58, parents can also pass $1 million of other real property to the kids with no reassessment - and that one million is not the actual value of the property, it’s $1 million of the “assessed” value of property that shows up on your property tax bill - it’s the Prop 13 value. So if you own a commercial property in San Francisco that is now worth $5,000,000, but the assessed value on your property tax bill is only $400,000, you can pass it on to your children, and they will get your $400,000 property tax base for a multi-million dollar commercial property.

As you can imagine, there are right ways and wrong ways of passing real property to children so that they can take advantage of the Prop 58 exclusion. For example, if you hold your property in a business entity like an LLC, the parent to child exclusion won’t apply. If you want your children to be able to take advantage of the generous Prop 58 laws, be sure to consult an estate planning attorney who has experience in the area.

Len & Rosie

What happens when someone dies during a divorce?

Dear Len & Rosie,

My father died of a heart attack at the age of 52. He was in the process of getting divorced from his second wife, Meg. During their two year marriage, Meg completely ignored him and was interested only in his money. My father knew he’d made a mistake. He reassured me that he would see to it that his property would go to me and my sister, not Meg. Last week she called and asked if I would send her a copy of my father’s will. She said her attorney wanted to have a look at it. So far, I haven’t found a will. I’m not sure what to tell her. I thought she was entitled to nothing because she and my father were legally separated. Do I have a problem?

Anna

Dear Anna,

You could have a big problem if your father died without a will or trust. When that happens, it’s called dying intestate, and his estate will pass to his legal heirs by intestate succession. Meg, as the surviving spouse, would inherit all of your father’s community property and one-third of his separate property. You and your sister will inherit the rest. It doesn’t matter that Meg and your father were legally separated; they were still married for estate purposes because the divorce was not final.

Meg’s attorney probably explained to her that, if your father had no will or trust, she would inherit as his surviving spouse - and would likely receive a lot more than she would have gotten from the divorce. And even if your father had a will or trust, if it was executed before he married Meg and makes no mention of her, she is still entitled to an intestate share of his estate as an “omitted spouse.” That’s why it’s very important to update your estate plan when you get married or if you file for divorce.

It’s possible that your father and Meg had a prenuptial agreement in which each of them waived their rights to the other’s estate. In many second marriages where there are children from a prior marriage, a prenuptial agreement is a great idea and can save a lot of grief and misunderstanding down the road. They may not be very romantic, but they can help protect a child’s inheritance.

Contact your father’s divorce attorney and your father’s friends. Find out if he ever visited an estate planning attorney. If he did, call that attorney; he or she will have a record of the visit and the documents that were prepared. Hopefully, you will find something. If not, you will learn the hard way that your father’s good intentions don’t count because they weren’t in writing.

Len & Rosie