Question: My wife and I are longtime Davis residents. We have money in savings and retirement accounts, but our most valuable asset is our home. We want to leave our property to our two children equally. Our son lives on the east coast, and our daughter lives here.
As part of our estate plan, we want our daughter to take over our house if she wishes, but we really want to make sure that our estate is evenly divided. I assume that one can buyout the other? How does that work? A friend mentioned that my daughter gets a break on the property taxes. Is that true?
Answer: To answer your first question, your assumption is correct. The estate can be equally divided between your children even if your daughter takes the more valuable asset. Should your daughter wish to take the house, she and your son can obtain an appraisal of the home by a certified real estate appraiser.
Then, your daughter can either pay your son in cash or obtain a mortgage to make the equalizing payment to your son.
As for the property tax question, the issue is slightly more complicated. Property taxes vary widely because the amount is based on the “assessed value” of the real property, which is typically the amount of money that was paid for the property plus certain improvements. Property taxes are paid to the county on one percent of the property’s “assessed value,” also known as “base year value” along with additional parcel taxes that voters pass into law. The base year value increases or “adjusts” annually by two percent every year. This was the system put in place by California voters back in the 1970s under Proposition 13.
Even though the assessed value of real property increases year over year by 2 percent, the overall increase in value of real property itself has outpaced that number significantly. So this leads to property taxes that vary widely. Longtime residents, like yourselves, who purchased a home when Davis had only one stoplight still enjoy low property taxes. Newer residents pay more.
The county is always looking to see when a parcel of real property changes ownership because a new purchase could reset the “base year value,” thereby increasing the amount of revenue. But the law provides an exception to the rule of reassessment when the property is transferred from a parent to a child. Real property transferred from a parent to a child, in life and at death, is excluded from reassessment. In other words, if your child takes over ownership of the home, he or she will have the same adjusted base year value as you had and thus pay the same tax.
In your particular circumstance, the house should be protected from reassessment because it is going from parents to daughter, a “parent-child transfer,” right? Not so fast. If you designate in your estate planning documents that you want your children to receive “equal” shares, each child receives a one-half interest in the home.
If your daughter agrees to take the house and equalize the distribution by buying out your son’s share, she can do that. But the assessor will view her acquisition of your son’s one-half interest in the property as a “sibling to sibling” transfer for which there is no exclusion. The one-half interest in the property will be reassessed to the fair market value at the time of the transfer (i.e. the later of the date of your or your wife’s death), and your daughter’s property tax bills will increase.
One attorney took it upon herself to find an answer to how to protect a child-beneficiary from reassessment under the “sibling to sibling” transfer situation. After extensive discussion with the governing authorities, she discovered that the addition of certain language to estate planning documents could allow one sibling to “buy out” the other sibling and take advantage of the entire parent-child exclusion from reassessment. The special language gives a child the option to purchase the property from the other.
With this option to purchase the real property in its entirety, the governing authorities will see the transfer as one where the child takes the real property through the parent and not from a sibling. So with this one paragraph in the estate plan, a child can buy out his or her siblings and maintain the low property tax rate of the parents.
With a simple change to your existing estate plan now, you might save your child from thousands of dollars in property taxes down the road and ensure that both of your children are treated equally.
Preston Morgan is a partner at Kopper, Morgan & Dietrich, a Davis law firm providing family law, estate planning and trust litigation representation. His column is published every other week in the Davis Enterprise. To pose a question to Preston Morgan, contact him at https://kopperlaw.com.
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