Be Even and Fair in Estate Distribution

Treating everyone equally in estate planning can get complicated, even with the best of intentions. What if a family wants to leave their home to their daughter, who lives locally, but wants to be sure that their son, who lives far away, receives his fair share of their estate? It takes some planning, says the Davis Enterprise in the article “Keeping things even for the kids.” The most important thing to know is that if the parents want to make their estate distribution equitable, they can.

If the daughter takes the family home, she’ll need to have an appraisal of the home done by a certified real estate appraiser. Then, she has options. She can either pay her brother his share in cash, or she can obtain a mortgage in order to pay him.

Property taxes are another concern. The taxes vary because the amount of the tax is based on the assessed value of the real property. That is the amount of money that was paid for the property, plus certain improvements. In California, property taxes are paid to the county on one percent of the property’s “assessed value,” also known as the “base year value” along with any additional parcel taxes that have become law. The base year value increases annually by two percent every year. This was created in the 1970s, under California’s Proposition 13.

Here’s the issue: the overall increase in the value of real property has outpaced the assessed value of real property. Longtime residents who purchased a home, years ago still enjoy low taxes, while newer residents pay more. If the property changes ownership, the purchase could reset the “base year value,” and increase the taxes. However, there is an exception when the property is transferred from a parent to a child. If the child takes over ownership of the home, they will have the same adjusted base year value as their parents.

If the house is going from parents to daughter, it seems like it should be a simple matter. However, it is not. Here’s where you need an experienced estate planning attorney. If the estate planning documents say that each child should receive “equal shares” in the home, each child receives a one-half interest in the home. If the daughter takes the house and equalizes the distribution by buying out the son’s share, she can do that. However, the property tax assessor will see that acquisition of her brother’s half interest in the property as a “sibling to sibling” transfer. There is no exclusion for that. The one-half interest in the property will then be reassessed to the fair market value of the home at the time of the transfer—when the siblings inherit the property. The property tax will go up.

There may be a solution, depending upon the laws of your state. One attorney discovered that the addition of certain language to estate planning documents allowed one sibling to buy out the other sibling and maintain the parent-child exclusion from reassessment. The special language gives the child the option to purchase the property from the other. Make sure your estate planning attorney investigates this thoroughly, since the rules in your jurisdiction may be different.

Be intentional about your estate distribution.

Reference: Davis Enterprise (Oct. 27, 2019) “Keeping things even for the kids”