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  • © The Regents of the University of California, 2010-2017. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited.

Using Life Estates to Protect Property and Avoid Reassessment

Proposition 13 has allowed many homeowners and other property owners to perpetuate low historical assessments for years or generations using the interspousal exclusion and parent-child (or grandparent-grandchild) exclusion from a change in ownership at death. Rev & T C §§63, 63.1. These property tax opportunities are an important part of California estate planning, and life estates play an important role in making it work.

Suppose a homeowner wants a spouse (or child) to be able to live in the house but also wants to make sure that a child (or grandchild) will be able to live in the house and afford to pay the taxes after the spouse (or child) dies. For this the homeowner gives a life estate in the house to the first one in line, usually in the form of a revocable trust with a life income interest, with remainder to the next one in line.

For example, a homeowner gives a life estate to a surviving spouse with remainder to a child of a former marriage. On the first death, the spouse becomes the owner for property tax purposes, but the transfer is protected from a change in ownership by the interspousal exclusion. The child’s interest can also be protected from a sale of the property by the spouse.

On the spouse’s death, the original homeowner is treated as making a second transfer to the child protected by the parent-child exclusion.

This analysis is based on the supreme court decision in Steinhart v County of Los Angeles (2010) 47 C4th 1298. The court held that there’s a change in ownership at the beginning and the end of a life estate, even though the life tenant didn’t have full ownership of the property.

The same thing works for a child and grandchild. On the first death, the child becomes the owner for property tax purposes, but the transfer is protected from a change in ownership by the parent-child exclusion, which is also unlimited for a primary residence. On the child’s death, the original homeowner is treated as making a second transfer to the grandchild protected by the grandparent-grandchild exclusion.

The grandparent-grandchild exclusion is generally available only if the intervening child is deceased. Usually this means the child must predecease the grandparent. But in this example, the child is deceased at the time of the second transfer to the grandchild. See Letters to Assessors No. 2008/018, Q&A-15, p 22 (Feb. 29, 2008), available on the State Board of Equalization (BOE) website.

A word of caution: Don’t give the trustee a “sprinkling” power to make distributions that benefit one or more members of a group that includes both a spouse or children and grandchildren with surviving parents. This will invalidate the exclusion for the entire trust no matter how small the proportional interest of grandchildren.

For more on these planning opportunities, see California Estate Planning, chapter 15. Also check out California Trust Administration §§13.52-13.53. Life estates are also discussed in CEB’s Real Property Ownership and Taxation, chaps 10, 11, and 13.

Other CEBblog™ posts you may find useful:

© The Regents of the University of California, 2017. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited.

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