Risk Management Alert for California Estate, Probate and Trust Practitioners –Proposition 19
A recent change in California property tax law has created a possibly precarious situation for California Estate, Probate and Trust attorneys. Read on for information about Proposition 19 and its potential impact on EPT practitioners.
The California Constitution limits property taxes to a percentage of the property’s “full cash value.” “Full cash value” is a property’s fair market value as of 1975, or, thereafter, the value of the real property when purchased, newly constructed, or upon a change in ownership. Any transfer of the property is a change in ownership unless it qualifies for an exclusion, such as the parent-child exclusion.
In November 2020, California voters passed Proposition 19, which made changes to the property tax benefits allowed for families by limiting the parent-and-child exclusion. Under the prior law, the transfer of a parent’s principal residence to his or her child was excluded from the definition of a change in ownership. In addition, parents could transfer up to USD 1 million in full cash value of additional real property without triggering reassessment. This effectively allowed children whose parents transferred property to them to enjoy the same assessed value for property tax that their parents had. Proposition 19, however, limits the exclusion afforded a principal residence to USD 1 000 000 and eliminates the USD 1 000 000 exclusion for property that does not qualify as a principal residence.
Proposition 19 passed in November 2020 but did not become effective until February 16, 2021. This put estate planning attorneys in an extremely difficult position as they had to advise clients regarding different estate planning strategies, the results of which will largely depend on future events.
For example, although transferring the property prior to February 16, 2021 may have prevented the reassessment of a property for property tax purposes, the transfer may prevent a beneficiary from receiving a step up in basis under the federal tax code at the transferor’s death. Although the February 16, 2021 date has passed, below are three steps estate planning attorneys and law firms can take to protect themselves from claims arising out of the new law.
“Proposition 19, however, limits the exclusion afforded a principal residence to USD 1 000 000 and eliminates the USD 1 000 000 exclusion for property that does not qualify as a principal residence.”
1. Education: Firms should ensure that all attorneys, from senior partners to new associates, are aware of the rule change. Any estate planning advice rendered going forward should be based on current law, rather than prior law. All estate planning attorneys should also take steps over the next few years to understand how other estate planning attorneys are maximizing the benefit of what remains of the parent-child exclusion.
2. Documentation: To the extent an attorney rendered advice to a client related to this change in the law, the firm should ensure that the advice and communications with the client are memorialized in file notes, letters to the client and/or emails. Memorializing the advice while the facts are fresh will assist the firm if a client – or a client’s beneficiary – later regrets the chosen estate planning strategy. A well-documented file is one of the most effective tools in refuting a later malpractice claim.
3.Insurance: Ideally, attorneys who render advice regarding high value properties have already ensured that they have adequate insurance limits in place to cover their exposures. Insurance policies will typically not respond if an attorney attempts to procure coverage for a known error after the fact. Assuming that the firm has coverage in place and a client raises a concern or alleges that the attorney rendered improper advice regarding Proposition 19, the attorney should expeditiously report such a claim to his or her insurer. Delaying the report of potential claims or otherwise providing full disclosure to a carrier could potentially jeopardize your malpractice coverage. The short time-period between the passage of Proposition 19 and its effective date required property owners and estate planning attorneys to make complicated decisions about dealing with property. By taking the steps referenced above, an attorney can mitigate the risk of, or harm arising from, a claim in the future.
Thank you to John Sullivan for providing this informative article. He may be reached at:
John B. Sullivan, Partner
465 California Street, 5th Floor,
San Francisco, CA 94104
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