Property Taxes and Legacy Planning For Family Residence

Last’s month’s article discussed how property tax increases are a major concern for families and business owners who want their commercial or rental properties to be transferred or passed on to their heirs. This is also true for the family residence. I will discuss some of the planning that can be done to avoid property tax increases when transferring a family residence during a lifetime or upon death.

The family residence for most families is a significant asset of the overall family wealth. If none of the children care about owning the family residence upon the death of their parents the concern about increase in property taxes is simply not an issue. However, if the family residence is important to one or more children for various economic reasons and their parent’s property taxes are very low avoiding an increase in property taxes can be significant.

The typical trap that I encounter in my practice is where the parents are deceased and one child wants the family residence and the other children do not. Usually the parent’s’ will or family trust is silent regarding naming the child or children who want to receive the property so that the parent child exclusion can be utilized to avoid the “change in ownership” (“CIO”) for property tax increase reassessment.

The assessor’s office will review the family will or trust to determine whether or not a CIO occurs when the children trade the family residence for other family assets. If this is the case, the assessor’s office can correctly claim there was no parent to child transfer but rather a transfer between the children themselves and therefore CIO occurs. The result will be a partial CIO increase based upon the number of children who transferred their interest to the other child.

A solution that I use to avoid the above trap after the death of the parents is to have the child or children purchase the family residence from the parent’s probate or family trust prior to the distribution of the family assets to all of the children. The parents are considered to be the transferors in this sale situation and no CIO occurs.

Planning the transfer of the family residence while the parents are still alive is the easiest way to avoid the potential CIO. Depending on the value of the family residence compared to the remaining family assets, the parents’ will or family trust can make specific instructions regarding the disposition of the family residence.

Some family residences or vacation homes are very important to the children. Where there are significant family assets that will result in estate taxes (assets beyond $5,430,000 for individuals and $10,860,000 for couples in 2015) certain lifetime transfers should be considered utilizing both the parent child property tax and lifetime gift tax exclusions. Typically you are doing this type of planning to freeze the value of the family residence or vacation home utilizing either a gift, qualified personal residence trusts while the parents are still alive.

It is very important for parents and their children to think about what can be done to avoid CIO for legacy properties. Sometimes you simply cannot avoid CIO. The point is that there are certain planning opportunities that can avoid CIO as explained in this article.