California Estate Planning: High Property Value Considerations

California Estate Planning: High Property Value and Tax Strategies

California families face unique estate planning challenges due to high property values, complex property tax rules, and state-specific community property laws.

California High Property Value Challenges

• High property values: California real estate often pushes estates above federal estate tax thresholds, even for families who may not consider themselves wealthy. This can trigger federal estate tax exposure, even though California does not currently have its own estate tax.

• Proposition 13: This law limits annual increases in property tax assessments, but transferring property—especially outside of parent-child transfers—can trigger reassessment at current market value, resulting in much higher property taxes for heirs.

• Community property: California is a community property state, meaning most assets acquired during marriage are owned equally by both spouses. This affects how property is distributed at death and can provide a full step-up in basis for capital gains tax purposes, but only if assets are properly titled.

• Estate tax planning: While California does not have a state estate tax, the federal estate tax applies to estates exceeding the federal exemption (which is subject to change by Congress). High property values can quickly push an estate over this limit.

California-Specific Planning Tools

• Proposition 19 planning: Proposition 19, passed in 2020, significantly changed the rules for parent-child property tax transfers. Now, only a primary residence (with certain value limits) can be transferred to children without reassessment, and only if the child uses it as their own primary residence. Planning ahead is essential to avoid unexpected tax increases for heirs.

• Community property planning: Properly titling assets as community property with right of survivorship can maximize tax benefits and simplify transfers upon death. However, this may not be suitable for all families, especially in blended family situations or where separate property is involved.

• Trust planning: Revocable living trusts are widely used in California to avoid probate, manage property tax issues, and provide privacy. Trusts can also help coordinate multi-generational planning and business succession, but must be carefully drafted to address California’s unique laws.

High Property Value Planning

• Property tax planning: Strategies may include lifetime transfers, use of legal entities, or careful trust design to minimize property tax reassessment under Propositions 13 and 19. However, these strategies can have income tax and control implications, so professional review is recommended.

• Estate tax minimization: Gifting strategies, use of irrevocable trusts, and charitable planning can help reduce the size of a taxable estate. The federal estate tax exemption is subject to change, so plans should be reviewed regularly.

• Family business succession: Multi-generational planning is especially important for families with closely held businesses or significant real estate holdings. Buy-sell agreements, family limited partnerships, and other tools can help ensure a smooth transition and minimize tax exposure.

California's high property values require specialized estate planning strategies. Laws and tax rules change frequently, and what works for one family may not be suitable for another. It’s important to review your plan regularly and consider how changes in property values, tax laws, and family circumstances may affect your goals.

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Disclaimer: This blog post provides general information only and does not constitute legal advice. Estate planning outcomes can vary widely based on your personal circumstances and the evidence available. Always review your options carefully and consider seeking further information before making decisions.