Math of inheriting a California home: Experts answer your questions on managing property transfers

If the responses to my last column on the math of inheriting a home in California are any indication, Proposition 19 has introduced many questions into people’s finances and how they are planning for the future.

In that column, I outlined what to consider if you inherit a home or are planning to pass property to your kids. I spoke with tax experts and estate attorneys about the implications of Prop. 19, which went into effect in 2021 and dramatically changed how Californians are taxed on inherited property. One estate attorney called it the “worst thing to happen in inheritance law in California in decades.”

Many of you sent some interesting follow-up questions. So I went back to the lawyers and reached out to several Bay Area tax assessors to get some answers.

One thing is clear: estate planning is complex and every person’s situation is different. No advice will be one-size-fits-all, and experts urge you to contact legal and financial advisors or your local assessor’s office for specific guidance.

Welcome to Hella Expensive, a column that’s aimed at helping readers navigate the financial aspects of living in the Bay Area. In each column, I’ll present a topic that impacts your bank account and financial future: homeownership and renting, the path to retirement, and how to manage your money in this infamously expensive region. Send your financial questions and concerns to me through the survey below, or email me at kellie.hwang@sfchronicle.com.

Question: I’ve heard that parents can set up an LLC with their children and put the house into the LLC. Since ownership does not change on the death of the parents, the property isn’t reassessed. Is this correct?

Estate planning attorney Alexandra Ayoub of Ayoub & Dodson LLP in Oakland said LLCs can be a beneficial solution for some, but warns that it must be set up correctly. 

“The rules around reassessments for LLCs are quite complex and depend on ‘change of control/change of ownership,’” she said. “If there’s a change in ownership of over 50% of the LLC, property taxes will be reassessed. Further, if the change of ownership is not reported to the California State Board of Equalization within 90 days, there are steep penalties.”

San Francisco estate planning and probate attorney Elizabeth Button said families should consult an estate planner who specializes in this type of transfer.

“The LLC and the gifting must be done in a way that will not trigger a reassessment, with the children being minority shareholders in the LLC,” she said. “This isn’t always an option for everyone since it must be done with an attorney and can be expensive.”

She said an LLC can be put into a trust and the assets can pass free of probate, the often lengthy and costly legal process to transfer property after a property owner dies. In California, it can take on average between nine months to a year-and-a-half to go through probate, perhaps even longer.

Q: Is it possible to add an adult child’s name to the house deed before the original purchasing parent passes? Would this simplify the inheritance and possible probate court process?

“The idea of adding children onto your deed in order to facilitate inheritance is fraught with problems,” said Steve Brickley, a CPA and financial planner with Brickley Wealth Management in San Mateo.

According to the San Francisco Assessor-Recorder’s Office, a child added to the title could be subject to California Change in Ownership rules and it could trigger a reassessment.

The California State Board of Equalization explains: “If 50% of the property is transferred, the assessor will reassess only 50% of the property at its current fair market value as of the date of the transfer, and deduct 50% from any existing Proposition 13 base year value.”

And the Prop. 19 rule on residence would still apply no matter when children are added to the deed: the home must be the parents’ principal residence and become the child’s principal residence within one year of the parents’ passing.

The beneficiary would have the right to survivorship on the title, which would allow them to avoid probate and the property to be transferred automatically upon the parent’s death. 

However, “this depends on how title is held on the deed (such as Joint Tenancy or Tenancy in Common), and is another example where families need to consult with a qualified attorney and financial advisor,” the S.F. assessor-recorder’s office wrote in an email statement.

“It may bypass the probate process, but you’d be paying more in taxes yearly than you would for a probate or trust,” Button said.

Q: A reader writes: “A simple self-prepared Transfer on Death Deed recording is the least expensive, most flexible and easiest option to transfer property.” Is this true?

A revocable transfer on death deed or TOD deed allows a homeowner to transfer their property to a named beneficiary and, if the deed is done correctly, avoid probate. It has no effect until the owner dies, and can be revoked at any time, according to the California Legislative Information website.

TOD deeds are sometimes called “poor man’s trusts” because they avoid the need to set up expensive trusts to keep assets out of probate. They are especially useful for single people, including widows and widowers, according to a 2015 Chronicle story

Ayoub said these deeds are a “relatively new vehicle by which one designates a beneficiary to inherit the subject property upon their death.”

She believes it is not a good substitution for an estate plan, and “would only be appropriate in very limited circumstances.” Like adding a child to the title, this deed could potentially avoid probate but won’t help with the Prop. 19 reassessment, Ayoub said.

She said people who try to do TOD deeds on their own often don’t do it properly, and the process can be “rife with pitfalls.”

Some other issues Button says a person could run into with a TOD deed are:

• If the person named in the deed dies before the homeowner, then the deed would become invalid. 
• It doesn’t allow for a contingent beneficiary to be named.
• Problems could arise if the deed names a minor, who wouldn’t be able to take possession of the property until they turn 18. Button said the type of deed doesn’t allow for a custodian to be named, so a custodian would need to be appointed in court.
• The TOD leaves the named individual personally liable for the transferor’s debts, and could cause problems with title insurance, which could take years to resolve. This would lead to the named being forced to upkeep the home.

Q: How does Prop. 19 affect the inheritance of a property among siblings, when one of them lives in the property but others do not? Currently, my parents live in one unit, while my sister lives in another, smaller, unit. Assuming that remains true, how would property taxes be reassessed under Prop. 19?

According to the San Francisco Assessor-Recorder’s Office, the building as a whole is not considered a principal residence.

“Only the parent’s unit will qualify for Prop. 19 exclusion, as long as one of the children makes that unit their principal residence and files for the Homeowner’s Exemption within one year of property transfer. The other two units will be reassessed at Fair Market Value because they were not the parent’s principal residence.”

Q: My uncle owns a home in San Francisco, and is worried that if he were to go to an assisted living or nursing facility, that would change the way the home is reassessed when it passes to his kids because he wouldn’t be living there. Is this true?

Your uncle can file for the homeowners’ exemption prior to moving to a facility. Upon filing, he may be eligible for an exemption of up to $7,000 off the property’s assessed value. 

According to the San Francisco Assessor-Recorder’s Office, the homeowner would qualify for the homeowners’ exemption as long as it is not rented or leased to others, and they are expected to return to the dwelling. An absence of more than a year would “raise considerable doubt” that the home is their primary residence and that they would actually return. 

“The issue becomes how long the assessor will honor that exemption depending on how long the uncle is out of the home, and whether the home is rented while he is absent,” said John Tuteur, assessor-recorder-county clerk for the County of Napa. “The law does provide for an expectation that the uncle will return to the home if not rented during his absence and depending on the length of time he is absent.”

Rachel A. Dodson, estate planning attorney at Ayoub of Ayoub & Dodson LLP, pointed out that there is currently proposed state legislation, SB 520, that applies to this exact situation. If passed, it would allow a person receiving the homeowners’ exemption to continue to be deemed an occupant of their home if they become confined to a care facility, as long as they intend to return to the dwelling and it is not rented or leased out while they are gone.

If you have more questions or are looking for affordable resources:

Lower-cost and DUI estate planning resources are available online, but experts warn these can easily go wrong if not handled correctly. Button said some common mistakes she’s seen include using legal terms incorrectly, unfunded trusts, no contingent beneficiaries named, and documents signed when they should be notarized or vice versa.

However, in partnership with Housing and Economic Rights Advocates, the San Francisco Office of the Assessor-Recorder provides free and low-cost estate plans to low- and middle-income San Franciscans, focusing on residents in the southeast and other neighborhoods where there is a combination of high homeownership rates, lower-income communities, and communities of color.

The office encourages those with questions about Prop. 19 to visit in person at City Hall, Room 190, phone 415-554-5596, or email assessor@sfgov.org. 

It is also hosting an estate planning 101 workshop on Jan. 26. RSVP here. Also in January are two workshops — Jan. 12 and 19 — addressing Prop. 19 intergenerational property transfers. RSVP here.