Problem.  Bob and Mary Smith are in their 70s. They want their eldest daughter, Darla, to assist them in managing their assets. So, Bob and Mary add Darla as a signatory on all of their bank and brokerage accounts and they add Darla on title (as a co-owner) to all of their real estate holdings.  Unfortunately, when they added Darla’s name on title to their real estate holdings, Bob and Mary unintentionally made taxable gifts to Darla and caused some of their real estate holdings to be reassessed for property tax purposes. Also, by placing Darla on title to all of Bob and Mary’s assets, Darla’s creditors, if any, can attach these assets to satisfy her debts.

Bob and Mary could have achieved their goal of having Darla assist them in managing their assets without any gift tax or property tax consequences through a properly drafted estate plan.  Before transferring assets to a child, particularly real estate, it is advisable to speak with your legal counsel to properly structure the transfers to minimize or eliminate the tax consequences.

Whenever anyone transfers real estate in California, two questions should be addressed:

1.  Is this a taxable transfer for gift tax purposes?

2.  Will this transfer cause the real estate to be reassessed for property tax purposes?

Gift Tax Considerations.  When real estate is transferred to another person without consideration, a gift has been made for gift tax purposes.  If the beneficiary of the gift is the donor’s spouse (not a same sex spouse) or a qualified charitable organization, no gift taxes will be due. However, if the transfer is made outright to another individual, such as the donor’s child, a gift has been made at the time of the transfer for gift tax purposes. A gift tax return must be filed to report the gift and gift taxes must be paid if the gift is in excess of the gift tax annual exclusion for that beneficiary plus the donor’s remaining gift tax exemption amount.

Property Tax Considerations.  An outright transfer of real estate from one person to another will cause the real estate to be reassessed for property tax purposes, unless an exemption applies. Transfers of real estate between spouses are exempt from reassessment. There is a limited exemption for transfers of real estate between parents and children.  Parents may transfer their primary residence to their child or children without the residence being reassessed for property tax purposes as long as the Claim for Reassessment Exclusion for Transfer Between Parent and Child (“Prop 58 Form”) is timely filed with the Assessor’s Office in the county where the real estate is located. In addition, parents may transfer to their child or children real estate, other than their primary residence, that collectively has a property tax basis of up to $1,000,000 without the real estate being reassessed for property tax purposes.  Again, timely filed Prop 58 Forms must be filed to exempt these transfers from property tax reassessment.

Solution.  Bob and Mary’s goal is to have Darla assist them in managing their assets.  They did not intend to make taxable gifts to her nor did they want any of their real estate holdings reassessed for property tax purposes.  Furthermore, they did not intend to make their assets vulnerable to Darla’s creditors. To achieve their goal, Bob and Mary should have created a revocable living trust and transferred title to all of their assets, including their real estate, to this trust.  They should have then designated Darla to serve as the Trustee (or a Co-Trustee) of the trust so that she could manage the assets for them.  If Bob and Mary had structured the transaction in this manner, there would have been no gift tax or property tax consequences.

If you would like to discuss this or other trusts and estates issues, please contact the attorneys at Drucker Law Offices, 468 North Camden Drive, 2nd Floor, Beverly Hills, CA 90210, 310.285.5375 Tel, 310.444.9754 Fax, www.druckerlaw.com