Major tax reform discussions are ongoing in Washington and Sacramento while everyone at home is busy navigating the pandemic. Many commentators are predicting that budgetary pressures resulting from the COVID-19 stimulus measures will necessitate a near-term reversal of some of the 2017 federal tax cuts and provide further rationale for the passage of significant California property tax propositions. We encourage you to revisit your estate plan and consider gifting strategies in light of the potential legislative changes and unprecedented economic environment as highlighted below.
Estate, Gift, and GST Tax Increases Under Biden’s Proposal
In 2020, the lifetime exemption allows individuals to transfer up to $11.58 million free of estate and gift tax and generation-skipping transfer (“GST”) tax either by gift during life or upon death. Transfers in excess of those exemption amounts, other than to charity or to or for the benefit of a spouse, are taxed at a 40% rate. Biden and Sanders published 110 pages of policy reforms that would restore the estate tax regime to the “historical norm.” Many commentators are speculating this proposal means reducing the estate and gift tax and GST tax exemptions from $11.58 million per person to $3.5 million per person. However, “historical norm” could also mean even lower exemption amounts and a higher tax rate.[1] If not sooner amended, the estate and gift tax and GST tax exemptions are slated to revert to pre-2017 levels effective January 1, 2026, absent Congressional action.
The IRS issued guidance confirming that transfers taking advantage of the current exemption amounts will not be “clawed back” by a change to the law, making 2020 the time to utilize the balance of your exemptions by making gifts before any legislation becomes effective.
Property Tax Increases Under California Propositions 15 and 19
Propositions 15 and 19 will be on California’s November 2020 ballot and, if passed, could significantly change the property tax landscape.
- Proposition 15: Split Roll Tax for Commercial/Industrial Properties. The “split roll” would assess taxes for certain commercial and industrial properties based on their fair market value. Accordingly, Prop 15 removes limitations established under Proposition 13 (1978) that place a 2% cap on increases to the assessed value of these types of properties. Commercial or industrial properties whose fair market value does not exceed $3 million are exempted from Prop 15 reassessment. There is a significant exception to this $3 million threshold: the value of a subject property must be aggregated with the values of any other commercial or industrial properties in California for which a direct or indirect beneficial owner of the subject property shares a direct or indirect ownership interest. Note that the split roll system established under the Prop 15 proposal does not change the overall property tax rate, nor does it apply to residential property or agricultural property.
- Proposition 19: Change Assessed Value Calculations for Residential Property. Proposition 19 would expand exemptions allowing certain homeowners such as those over age 55 to transfer their assessed values to replacement residences in different counties within California, but would significantly narrow or eliminate existing exemptions from reassessment for other intra-family transactions.If you have any California real property with a low assessed value that you hope to pass to future generations, there are several strategies you might consider to take advantage of the current expansive exclusions from reassessment. See a more detailed explanation of Prop 19 here.
