Property Taxes and Legacy Planning

By: D. Michael Trainotti

I have previously written about 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 either rental property or family residence on the death of a parent.

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 either the rental property or family residence and the other children do not want any of the properties they should be sold. 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 rental property or a family residence for other family non property assets and the values are not equal. 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 to use to avoid the above trap after the death of the parents is to have the trustee of the family trust obtain a loan on the property in order to equalize the values of the assets being distributed to each child. For example, a parent dies with a property having a value of $450,000 and other assets $50,0000. Each child is to receive an equal share of $250,000. By having a trustee obtain a loan on property of $200,000 prior to distribution to the children, one child receives property of $450,000 subject to a loan of $200,000 for at total $250,000 while the other child receives cash of $200,000 and $50,000 of other assets. See Property Tax Annotation No. 625.0235.005 from the SBOE that approves of this planning device.

If there is more than one property at the time of death that have equal values the trustee can distribute one property to one child and the other to the other if the family trust provides on a share alike basis distributions. If they are not equal then the loan planning above needs to be considered.

I previously wrote about being successful dealing with the purchase of a family residence by a beneficiary prior to the distribution by the trustee of a family trust to its beneficiaries. The prior article failed to mention that the trustee first obtained a loan on the family residence prior to the sale in order to equalize the values between the beneficiaries similar to the above example. If there were no prior loan then there would have been a CIO.

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

Michael Trainotti

Michael Trainotti

D. Michael Trainotti has a general tax practice in Long Beach which emphasizes real estate, closely held businesses and estate planning matters. He has a master’s degree in taxation and is a member of the tax sections of the State Bar of California dealing with real estate, pass-through entities and estate planning. He is also a member of the same tax sections of the Los Angeles County Bar Association and the American Bar Association. Mr. Trainotti would be pleased to hear from you regarding future topics of interest or comments on this article. Please contact him directly at his office at (562) 590-8621 or by e-mail at [email protected]. You can also visit his website at