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The Tax Prophet Newsletter   Issue # 52 August, 2007

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In This Issue:
Introduction
Parental Transfers
Trusts
Example
Conclusion


Trust Transfers and Proposition 13 -
Part One


Introduction

California's Proposition 13 permits certain transfers between parents and children or grandparents to grandchildren ("parental transfers") without incurring a property tax reappraisal.

Parental transfers involving a trust or a will may also qualify for the exclusion.

Parental Transfers

The parental transfer exclusion applies to a principal residence owned by a parent or grandparent of any value and additional real estate up to an assessed value of $1.0 million. Each parent or grandparent is entitled to this exclusion.

The exclusion applies when the transferee (recipient) is a child, or a spouse of a child as long as the spouse is married to the child or, if the child is deceased, until the spouse remarries ("transferee spouse").

In the case of a grandparent to grandchild transfer, the exclusion applies when the natural parents of the grandchild are both deceased, or the surviving natural parent spouse no longer qualifies as a transferee spouse.


Trusts

Under Proposition 13, the settler of a trust (the person creating the trust) is considered the transferor, even though title to the property has been transferred to the trust. Thus, typical estate plans may qualify for the parental exclusion for transfers made to a (i) child, or (ii) grandchild when there is no surviving transferee spouse.


Example

Assume that Parent ("P") creates a trust for the rest of P's life, and upon P's death, Son ("S") will have a lifetime interest in the trust. Upon S's death, the trust's assets will be distributed to Grandson ("GS"). P funds the trust with his principal residence and cash.

P is the transferor and GS is the transferee. Upon S's death, the parental exclusion will apply to the trust distribution of P's principal residence to GS, unless GS's mother is a transferee spouse.


Conclusion

The parental transfer exclusions under Proposition 13 may be applicable to trust distributions of real property to a settlor's children or grandchildren, thereby saving the settlor's descendants thousands of dollars per year in property taxes.

Next month: Trust or will transfers under Proposition 13 to one or more children or grandchildren and the allocation of the parental transfer exclusion among the beneficiaries.




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All contents copyright 2007 Robert L. Sommers, attorney-at-law. All rights reserved. This newsletter provides information of a general nature for educational purposes only and is not intended to be legal or tax advice. This information has not been updated to reflect subsequent changes in the law, if any. Your particular facts and circumstances, and changes in the law, must be considered when applying U.S. tax law. You should always consult with a competent tax professional licensed in your state with respect to your particular situation. The Tax Prophet is a registered trademark of Robert L. Sommers.