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Weiss & Weissman, San Francisco, California
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Who Gets the House (when Mom dies)?

Letís assume Mom owns a house; her only substantial asset. Mom has 2 children she intends will inherit equally.

SIMPLE
Mom dies, they sell the house, split the cash, all is well.

SIMPLE
Mom dies, they keep the house, rent it, split the income, all is well.

Mom and Dad bought the house a long time ago.  The annual property tax bill is $2,000, protected by Prop 13 all those years.
Prop 13 limits property tax increases to the initial purchase price, increased by 2% per year.  This means Mom might have an annual property tax bill of $2,000, and the same house across the street might pay $10,000.   

Now the house is worth $1,000,000, and is paid off, Mom died, and the 2 grown children inherited.  The house is transferred from Mom to Children, and the Prop 13 protection continues.

Proposition 58, the Parent-Child protection applies to transfers (gift, sale, bequest) of:

As Mom lived in this house, it is protected, as ownership goes from Parent-Child.

But letís assume Daughter wants the house and Son wants money:

BAD
Daughter (D) and Son (S) each get title to 50%.  D gets a new loan and pays S $500,000, and S deeds his Ĺ to D. 

Breaking that down into its steps, at Momís death Daughter and Son each inherited Ĺ of the property. The parent-child property tax protection keeps the old base for property tax purposes.

But when S deeds his Ĺ to D, that part is hit with property tax re-assessment.  Prop 13 protection is lost on brother sister transactions.

Non-Pro-rata  If the property was worth $500,000, and Mom had $500,000 in the bank, the kids can agree, after Mom died, that S gets the cash and D gets the property, and the value is equal, so the property taxes are fine:  D inherited the property from Mom; she did not buy out her brother.

UGLY SOLUTION
The property is worth $1,000,000 and Mom had no other assets.  D wants the house and would happily pay off her brother.  Can it be arranged to keep the property taxes low?

If Momís Estate or (now irrevocable) Trust gets a mortgage for $500,000, D may inherit the property (encumbered with the mortgage obtained after Mom died), and S inherits money (borrowed after Mom died).  Even though the loan was secured after Momís death, the State Board of Equalization approved this technique in 2008.

ISSUE:  The loan is not easy.  (And it cannot be lent by D.)  The borrower is Momís Estate or Irrevocable Trust and that is a difficult, non-traditional loan. 
[Banker: ďAnd how will Mom pay us back?  Is she working?  Dead!?!  We donít lend money to dead people!!Ē]

As soon as D owns the property, she will get a new, owner-occupied loan.

This works but it is a very expensive loan

Please do not try these techniques without a thorough review of your particular fact situation by a very experienced specialist.

 

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