Greetings from the other side of the rearview mirror! In my practice of helping clients plan for their eventual death, we also cannot ignore the reality of taxes. For 2021, both the State of California and federal governments have many, many, many new tax rules to introduce to you. Some are already in place, and by the time you read this, will be making many lives “better.”  Here is how these new rules will affect your estate planning.

Proposition 19

Here in California, Proposition 19 was passed by a fantastically narrow margin last November, promising to give seniors greater flexibility in moving their lower property tax rates to new primary residences. But what it gave sparingly with one hand, it took forcefully with the other. Prop 19 eliminated the ability of parents and children to transfer lower property tax rates to each other when a property is bought, sold, or inherited.

From my professional perspective, this new rule will make it much more difficult for children to keep a home inherited from a deceased parent. The family home is now a potential burden rather than a benefit, since an inheriting child must make that home their primary residence in order to keep the lower tax rate. Often, the only way families are able to retain an inherited property is due to the low tax rate, and Prop 19 brought that benefit to an end. No doubt, the new rule will force more real estate sales after death. The State expects to gain $70 billion in extra tax revenue over the next 10 years from Prop 19. The sad part is that it restricts the ability of my clients to easily pass assets to loved ones, and it takes away some good lifetime planning options we design for clients. 

Estate Tax Changes

Federal rules currently state that estate tax is only due when a person leaves an estate worth more than $11.58 million. That’s a relatively high threshold, so many people have not had to worry about a large “death tax” being due from their heirs soon after death.  If those rules were to be changed, the implications could be even more complex. 

The Stark Reality

Imagine that a vacation home has been in your family for 50 years, and it has appreciated hundreds of thousands of dollars. You specifically want that family home to be kept in the family to be enjoyed by your children and grandchildren. Under both Prop 19 and a federal exemption reduction, the equity in your vacation property would be included in your “taxable estate.” Your taxable estate includes all of your investments, your primary residence, retirement assets, and even the death benefit of your life insurance. If the net sum is over $3.5 million, then 40% of the overage would be due to the federal government. Meanwhile, per Prop 19, the annual property taxes on the vacation home would be raised to 1% per year of the value on the date of your death. You can see how quickly that vacation home might become financially impossible for your family to keep.

Additionally, a tax benefit at death that we call the “stepped-up basis” could be eliminated. Under current law, the amount from which a capital gain is measured (the basis) for any appreciated asset (like a house or stocks) is established by the market value of the asset on the day you die. So, if your heirs sell the asset soon after your death, they only need to pay capital gains tax on any increased value of that asset since your death, if any. However, if the stepped-up basis is eliminated, your heirs would have to pay capital gains tax on the increased value counted from when you purchased the asset, almost certainly a much larger number.

We’re Here To Help

These changes sound like pretty bad news when considering the future of what you have spent a lifetime to build. The good news? The Law Offices of Mark E. Lewis & Associates is always considering the future of what you have spent a lifetime to build. We’re committed to staying informed so that we can design strategies to help you achieve what you desire for your family, despite what may be ahead. So, while death and taxes are a certainty, at least we can work together to make the road ahead a little less bumpy.