California Prop. 19 provides that your child/grandchild can inherit your residence and keep your current property tax assessment (subject to the same annual increases you have). This is a valuable gift and a benefit that you can pass to future generations.
Compliance with Prop. 19 is fact based. The primary fact being that your child/grandchild has to be in legal possession of and occupy your primary residence as their own primary residence, within 1 year of your death. Most Probates will take close to 2 years, so it will be extremely difficult to comply with Prop. 19 if you do not have a Revocable Trust. Even with a Trust, Prop. 19 is not kind to those who procrastinate with administration of the Estate.
Some will want to preserve the exemption by making the transfer through a lifetime gift. However, with a lifetime gift, you lose the capital gains step-up in basis that your residence will receive at your death. While the step-up in basis only matters if your child/grandchild later sells the residence, losing the step-up in basis could result in a tax bill that is much greater than any property tax savings under a Prop. 19 exempt gift. A gift through your Revocable Trust preserves both the Step-Up in basis and the Prop. 19 exemption.
Also, the Trustee of a Trust can apportion the assets between the beneficiaries in order to preserve the Prop. 19 exemption, while providing for an overall equal distribution of the Trust Estate amongst your beneficiaries.
For example, if you have 2 kids and a residence worth $500,000 and you have $400,000 in other investments, you can preserve the Prop. 19 exemption for 1 of your children who wants to live in your residence. The Trust language can provide that the residence be purchased from the Trust with a loan, in this case $50,000, in order to equalize the gift between 2 children. The loan would be distributed to the other child along with the $400,000 in other investments.
If your Estate will not be large enough to distribute your residence outright to a single beneficiary, the Trust can provide sale provisions allowing the beneficiary to purchase your residence from the Trust. The Trust can provide a specific beneficiary a Right Of First Refusal to purchase your residence from the Trust. The Trust can provide for valuation and payment procedures so that you know your Estate will be managed in a fair and orderly manner, and within the 1 year timeframe required by Prop. 19.
The bottom line is that without a Trust, or changes to your existing Trust, your Prop. 19 exemption can easily be lost. Get a Trust Tune-Up that includes an amendment to your Trust with Prop. 19 provisions custom drafted for your own unique situation. Send me an email or give me a call with questions.