25 Sep Securing Your Legacy: Smart Ways to Pass Down Your California Home
If you own a home in California, you might be thinking about how to pass it down to your family. It’s a big decision that involves legal, financial, and emotional factors. Here are four common strategies for transferring your home and their potential benefits under California law.
1. Selling the Home to Your Heirs
Selling your home to your heirs while you’re still alive is one way to transfer ownership.
Advantages:
- Removes the home from your estate, but you still have the sale proceeds, which have turned into cash, which you can then spend on expenses or donate to charity. Doing so potentially lowers estate taxes.
- Resets the cost basis for capital gains tax for the buyers, which can reduce the taxes your heirs may owe if they sell the home later.
- Gives you access to your home’s equity, providing financial resources you can use.
Considerations:
- Selling below market value could trigger gift taxes.
- Property taxes for your heirs will usually be based on the sale price.
- Capital gains taxes may apply if the home is later sold for a profit.
For example, if you sell the home for less than its market value to help your children afford it, they might face gift taxes (or at least the need to report the gift). Additionally, their property taxes could be much higher than what you currently pay.
2. Gifting the Home
Gifting your home lets your heirs enjoy the property while you’re alive.
Advantages:
- Immediate transfer of ownership gives your heirs access to the home right away.
- Personal satisfaction from seeing your loved ones benefit from the property.
Considerations:
- Your kids will inherit your cost basis, so if they sell the property, they will pay maximum capital gains tax.
- You may face gift taxes if the home’s value exceeds annual limits.
- Gifting could impact your Medicaid eligibility later in life.
- Proposition 19 may trigger property tax reassessment, raising taxes for your heirs.
For instance, because of Proposition 19, the parent-child reassessment exclusion applies in far fewer situations now, so most transfers are reappraised unless it qualifies for an exclusion. Your children will probably lose the benefit of your lower property tax rate unless they live in the home.
3. Using Estate Planning Tools
Estate planning tools, like wills and living trusts, offer significantly more control over how and when your home is passed down. These are normally much more preferable to giving your home to your kids.
Wills
A will outlines how your assets, including your home, will be distributed after your death.
Advantages:
- Affordable and straightforward to create.
- Easy to amend while you’re mentally capable.
Considerations:
- In California, estates over $184,250 must go through probate, a process that is costly and time-consuming.
- Wills become public records during probate.
- Generally, a living trust is a better solution.
Living Trusts
A living trust avoids probate and provides more privacy and control.
Advantages:
- Avoids probate, saving time and money for your heirs.
- Trusts remain private, unlike wills.
- You can control how and when your assets are distributed.
- Trusts can help manage your assets if you become incapacitated.
Considerations:
- Trusts require ongoing management to ensure all assets are properly funded into the trust.
Many estate planners recommend having both a will and a living trust. A will can handle assets not included in the trust and designate guardians for minor children. On the other hand, the living trust can handle the home and other significant assets.
4. Transfer on Death Deed (TOD)
A Transfer on Death (TOD) deed allows your home to be transferred directly to beneficiaries after your death, bypassing probate.
Advantages:
- Inexpensive and straightforward to set up.
- Flexible – you can revoke or change it anytime during your life.
- Avoids probate, transferring the home directly to beneficiaries.
Considerations:
- A TOD deed doesn’t offer complex distribution options.
- It may cause conflicts among multiple heirs.
- The home could still be subject to Medicaid recovery claims.
For example, if you have two or more beneficiaries, they could disagree on what to do with the property. A TOD deed doesn’t allow you to set specific conditions for dividing or using the property.
Proposition 19’s Impact on Inherited Properties
Proposition 19, passed by the voters in 2020, significantly changed how property taxes are handled in transfers between parents and children in California. Before the new rules, most parent-child transfers were exempt from reappraisal. Now with the new rules, here’s what you need to know:
- Limited transfer of low property tax rates to children. The home must be used as housing now. The transferor must live in the property. The transferees have one year from the date of transfer to move in.
- When transferred, the property is usually reassessed at market value, which can lead to much higher taxes.
- Heirs who qualify for the exclusion may exclude up to $1 million from reassessment.
This means that your heirs could face a much higher tax bill depending on the property’s value unless they move into the home and claim the exclusion.
Conclusion: Choose the Right Strategy for Your Family
Passing down your California home involves more than just picking a method. Each option has legal and tax implications. Proposition 19 adds further complexity, especially with property taxes.
The best approach depends on your situation and goals. Whether you decide to sell, gift, use estate planning tools, or opt for a Transfer on Death deed, it’s essential to have a clear understanding of the consequences. Consulting with estate planning professionals, tax experts, or attorneys is a smart move to avoid pitfalls and ensure a smooth transition.
At Guideway, we provide self-help services that simplify estate planning. Whether you’re ready to create a will, living trust, or TOD deed, we can guide you through the process. Remember, we’re not a law firm and recommend consulting legal or tax professionals when needed. We’re happy to provide a referral if you require legal advice beyond our scope. Contact us for more information or to make an appointment.
We are not attorneys. We can only provide self-help services at your specific direction. Guideway Legal Document & Mediation Services is not a law firm, and we cannot represent customers, select legal forms, or give legal or tax advice. Services are provided at customers’ requests and are not a substitute for advice of a lawyer. Because legal needs vary from individual to individual, you should seek the advice of trained professionals if you have any questions regarding the selection of appropriate forms. Prices do not include court costs.