To Have and Have Not: Proposition 19 and Its Estate Planning Implications

To Have and Have Not: Proposition 19 and Its Estate Planning Implications

We all know the hopeful if half-witted saying: one door closes and another one opens.

In the case of regulatory legislation aimed at tax loopholes, this old saw is usually correct.

California’s Proposition 19 passed in the recent election by a slim majority, as everything does these days. The implications for older homeowners, particularly those wishing to tax-advantageously move to a new home, seem considerable. The law activates on February 21, 2021 and should offer homeowners new benefits, welcome for sure, but may slop their inheriting children into a La Brea tax-tarpit.

Golden staters hardly live in a lonely place: apart from 40 million close if dizzyingly diversified neighbors, this nation-sized state-within-a-state often sets the trend for the entire US. The new law has implications that extend beyond its borders. Interested eyes are surveying its progress.

Adapting the wisdom of the disreputable yet cogent Hunter S. Thompson, we hazard the view that waves generating on California’s waterfront tend to mount and drive eastward. Sometimes, they break on the peaks of the San Gabriel mountains, bringing no further trouble. Other times, they sweep the whole continent. Local estate planners are already working hard to address the big changes brought by Prop 19. If this is your brief, may we counsel that you keep watch.

Proposition 19 arrives in the context of striking initiatives from the CA legislature, including wealth-tax proposals, curiously aggressive attacks on the rich folk as a class, so-called; and other progressive initiatives, as they are defined today. It’s a curiosity in a state chock-full of high-profile richsters, but the trend – no populist fancy – is now gelling.

Prop 19 was the darling of the real estate industry, which spent millions to support its passage. Voters concurred; at least, just shy of 52% did. You might wonder why, but the message is as subtle as the vote count: the law will help older homeowners, near surely, and bring in tax millions from their heirs. No one, alas, seems to like heirs anymore. Prop 19, I think, should be rated as the ranging shot, with a broadside likely to follow.

California’s magnetic field is ancient by American standards. They swing left, they swing right; up pops Jerry Brown, then Ronald Reagan. CA earns its state motto ‘Eureka’ for its Archimedean innovation, yet it’s played home to madmen galore and an imprudent indulgence in ‘substances’. A friend living in isolation by the Russian River tells me the hippies all carry AR15s, “to protect their marijuana fields from other hippies.” So the black rifle is groovy, who knew?

A land of wide vision, mythic promise, the rush for gold and cocaine; a state where I saw Sigourney Weaver eating a hot dog at a roadside stand, and of more homeless than countable. Yes, keep a good eye on her, Cali-forn-eye-ay.

Those lucky or cursed to be foreigners of my acquaintance don’t understand Cali’s pull. It’s a minor front in the battle for comprehension: at a party in Moscow in 1997 – as close to Hollywood Babylon as I ever got – an English fellow lamented how ‘you Yanks’ have no culture of our own. Never been to CA, I reckon, or Boston, New Orleans, Farmer City…

I can feign clever – and rarely get ‘soaked’, unlike my poor interlocutor – so I was sharp enough to parry: “What about Jazz?” He wilted so, I thought he would sock me. This is where sobriety counts: strike first, then flee. No; I’m as big as a planet, and won’t pick on drunks. I offered a smoke, said nothing, quietly appraising his Levi’s 501s, his Ramones t-shirt. We are a mystery, Americans; a not uncommon affliction, perhaps.

On first consideration, Prop 19 is rank anodyne, complex, the very model of American legislation: one problem plugged, new loopholes drilled in. Whether political cynicism or common ineptitude is involved is unclear, as per usual. It matters little, because the ideal is now real. Let’s get sensible and examine the implications of Proposition 19 for estate planners.

Crucially, the law doesn’t activate until February 21, 2021, leaving a nice window for Californians who prefer the old law’s provisions. Word on the wind tells us that estate planners are busy with queries today. Prop 19 is no apocalypse, now, but high noon is approaching.

It’s all about houses, living and legacies.

Current law is based on Proposition 13. Enacted in 1978, it aimed to protect long-term homeowners by assessing property taxes based on the original price of their home, rather than current market value. In California’s booming property market, this was a boon. When leaving the family home to children, the happy tax rate traveled with the property, along with other sweeteners that suppressed tax collection. Unfair, cried spoilsports and legislators trying to pay bills. Once the deadline arrives in February, Prop 19 will end this intoxicating inheritance practice.

Under Prop 19, residents over 55, the severely disabled, and victims of natural disasters (in particular, wildfires) benefit like this: the assessed value of their original residence ‘travels’ with them if they buy a new home – common enough for downsizing seniors. Under Prop 13, these types of moves were limited to the homeowner’s county and 10 others. CA boasts 58 counties; a complicated state, California. Homeowners can now move anywhere statewide, up to three times. Some crumb-bums have complained at this new ‘loophole’, but it favors the homeowner, so it gets my thumbs up.

The kids might not be so happy. Prop 19 rules that, on inheritance, the property must be revalued and taxes assessed accordingly. There is an exception for children who have been living in the family home for at least one year before they inherit. Critics complain that children might be forced to sell their dear old family home – a bit of whining that elicits little but my cool, appraising stare.

Cigarette?

There are plenty of details to consider, so if you’re a Californian who owns one or several residences of value – and your numbers are legion – we suggest a quick call to your tax attorney or estate planner, at least with a view to fully grasping all of the changes. There’s plenty of time to act, but you know how it happens – today is better than too late.

It’s hard to determine how much Prop 19 will earn for the state, with most reports claiming ‘hundreds of millions’ per year. The funds, whatever the sum, are already allocated: 75% will go to firefighting, 15% as a salve to counties losing tax revenue from the measure, and the remaining 10% I’ll leave to your experienced, not to say cynical minds. I’m sure that fund-starved legislatures nationwide will be watching the results.

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