Do You Need Advanced Tax Planning In California?

One year ago, I would not have said that everyone in California needs advanced tax planning. However, I would currently say that most if not all people in California should look into getting advanced tax planning.

This is because of changes to the real estate property tax exemption, which were passed in California as of February 19th, 2020.

In former years, the exemption allowed beneficiaries to receive residences and other properties from their parents and maintain their existing tax basis. The new changes have eliminated any non-residential property from the exemption, with the further requirement that the property actually has to be (or become) the beneficiary’s primary residence in order to qualify. That is, if a parent passes down their primary residence to their child as a beneficiary, then they child actually has to move into their parent’s house and make it their primary residence in order to qualify for the property tax exemption.

Why is that important? Let’s use an example. Say that your parents purchased a house 30 or 40 years ago, for $40,000 or $50,000. In many cases, that house is now a million-dollar home. As such, if you were to suddenly inherit your parents’ home and were not able to qualify for the property tax exemption, your property taxes might go from $3,000 a year to over $20,000 a year, due to the adjusted tax basis.

This has been a substantial change in California, especially since most homes in California are now worth at least $700,000. This can result in situations where beneficiaries can’t actually inherit their parents’ property and live in it or use it as an investment vehicle for a rental unless they are living in it. We as estate law attorneys are developing ways to try and mitigate these issues, which truly effect everyone inheriting a home, not just high-net-worth individuals.

How Does A Special Needs Trust Ensure That The Funds Will Be Spent In An Appropriate Manner At The Appropriate Time?

A Special Needs Trust typically has a trustee who is the administrator of that trust. The trustee has the highest duty, a fiduciary duty, to ensure that the funds in the trust are used appropriately. This is the same duty that a lawyer has to a client. The trustee has to account for all of their own decisions, financial and otherwise, to people who may be watching.

In some situations, we can have the trustee act as co-trustee with a either a medical or legal professional. In those cases, the two co-trustees act together to make decisions in the best interest of the person receiving the funds in the trust.

Can A High-Net-Worth Individual Minimize Their Estate Taxes In California?

Unlike other states, California does not actually have an estate tax. So, when we’re talking about minimizing “estate tax” here, what we’re really talking about is minimizing a person’s federal estate tax, which is due to be reduced by half, down to $5.2 million per couple, in 2026.

Most people don’t need to worry about the high exemption of $24 million now, because they don’t have assets that reach that amount. However, with the high value of real estate in California, as well as increasing incomes and the fact that many people receive estates from their parents, it is probable that many people may be over that $11 million mark, and would require adjustments to minimize their taxes.

Typically, people reduce their federal estate taxes by creating an irrevocable trust, essentially transferring property during their lifetime into the trust so it is no longer “owned” by them (and therefore is not taxable as their property).

If they have to pay taxes anyway, they might consider creating some sort of charitable foundation or some other entity for the funds that are taken off the top before they go to the government, so that there’s no estate tax. In those cases, they can also create a lasting legacy for themselves and for their children, in which they can continue to donate and perhaps their children can run the foundation in the future.

For more information on Advanced Tax Planning In The State Of CA, an initial consultation is your next best step. Get the information and legal answers you are seeking by calling (949) 287-5558 today.

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