Tax Planning

Estate, inheritance, and gift taxes

A big part of maximizing what you leave behind is minimizing taxes. Federal taxes on gifts and estates can be among the highest assessed on any transfer of assets.

Both estate and gift taxes usually have exemption limits, meaning you can give up to a certain amount without incurring tax. Many people use the gift tax exemption to transfer assets while they are still living, as part of their strategy to maximize what their beneficiaries receive.

Estate and inheritance taxes usually are based on the value of the taxable estate and are paid before the assets are distributed to the beneficiaries.

Irrevocable trusts can be used to minimize the federal estate tax which may be owing nine months after your death. If your estate is under the “applicable exclusion amount”, then there will be no estate tax.   However, if your estate is over the exclusion, then 40% of the amount over the exclusion will go to the IRS in taxes. The applicable exclusion amounts under current law are as follows:

Year of DeathTax Free:  Exclusion AmountRate of Tax

Irrevocable Trusts for Children and Grandchildren

You can create an irrevocable trust to hold gifts from you for your children and grandchildren, sometimes called a “Crummey Trust”. You can be the trustee who controls the money or property in the trust for the beneficiaries. Your trust can provide that money goes to a child or grandchild for a specific purpose, for instance, higher education. You can designate that the trust ends when a beneficiary has reached a certain age, for example, age thirty (30).

Sometimes an irrevocable trust owns life insurance on your life. This is called a “life insurance trust”. The life insurance will not be taxed in your estate when you die since you don’t own the policy.

The assets in the trust will not come back to you. You cannot change the distribution provisions of the trust since it is “irrevocable”.  Thus, these assets are outside of your estate which will minimize death taxes on your estate. 

California Real Property Tax

If you own property and want to transfer it to a family member or leave it to one when you die, California’s property tax is something to consider.

Many people’s largest asset is their home and they want to know the effect of transferring their home to their children upon their death. We advise many clients on how to maximize the benefit of transferring property by minimizing California Real Property Taxes on the transfer.

Property Tax Reassessment Exclusions

Certain transfers within families are excluded from the general rule that a change in ownership triggers reassessment.  These exclusions include transfers between spouses and domestic partners.  Note that domestic partners won the right to the same property tax breaks as husbands and wives in 2008 when the California Supreme Court turned down an appeal by County Assessors.  This article focuses primarily on exclusions for parent to child transfers and the exclusion for transfers to certain trusts.

Parent to Child Transfers

Generally, a transfer of property from a parent to a child is not subject to reassessment, if the child maintains this inherited property as their principal residence.

Your principal residence is the property where you would take a homeowner’s exemption – the place where you actually live, not a rental or vacation property. 

The “Claim for Reassessment Exclusion” form must be filed within three years of the transfer or before the property is transferred to a third party. Failing to file the appropriate form can result in a reassessment.

While the concept of “parent and child” seems simple enough, there are some unique scenarios to consider.  In addition to all “natural children,” children born to a parent with a registered domestic partner, step-children, and those adopted before they reach age 18 are also eligible for the exclusion. The spouse of a child (son or daughter in-law) is eligible unless the relationship ends in divorce.  If, however, the relationship ends because your child dies, the parent-child relationship is deemed to continue with the child in-law until he or she re-marries. There are also circumstances where foster children and foster parents can qualify.  

Also, a grandparent may take advantage of this exclusion under specific circumstances and transfer to a grandchild without reassessment. The child’s parents must be deceased before any grandparents qualify. Further discussion of additional restrictions on grandparent-grandchild transfers exceed the scope of this article.