This is because if you owned the real property for many years prior to the transfer at death, then your tax base is usually low in today’s prices. Preserving your low tax base for your children when they inherit can sometimes be a tricky issue. Let’s now examine two hypothetical scenarios frequently encountered in the administration of a deceased parent’s estate.
The first scenario is where the parents leave their entire estate equally amongst all their children and the trustee or executor wishes to do a so-called “non pro rata” in-kind distribution of the deceased parents’ estate; that is, to transfer title to one residence “in-kind” entirely to one child (usually) and to transfer other offsetting estate assets (e.g., other real property or cash) to the other child(ren).
The real property tax issue raised herein is whether the transfer of the home to one child alone qualifies entirely for the parent to child reassessment exclusion, or whether involves a partial transfer of ownership interest amongst the children (e.g., a disguised sale of the other children’s inheritance rights in the real property to the sole child who ends up with 100 percent ownership).
In order for 100 percent of the property’s value to qualify for the exclusion the transfer must be entirely between parent and child; meaning that no child exchanged or sold his/her inheritance interests in the subject real property as there is no exclusion from reassessment for inter sibling transfers. This means proving that the other child(ren) who did not receive a property interest in the real property received other estate assets such that all children ultimately received an equal share of the estate when the estate is fully settled.
That entails current appraisals of the estate assets (valid at time of distribution) and in-kind and/or cash distributions to the other children that offset the value of the real property received by one child so that the shares of each child are equal.
For example, if you have two children and two residences of equal appraised value then one residence can go from the parent’s estate to each child and be covered by the parent child exclusion. If, however, one residence is say worth $50,000 more than the other, then $50,000 in additional value (cash or appraised property) must also go to the child receiving the lesser valued home.
Next, the second scenario is where the deceased parents’ home is substantially all of their estate’s value and the trustee or executor in settling the estate wishes to give that home to one child but still treat the other children equally with cash.
Here the trustee or the executor must loan cash from a third party – never from the children – both to create liquidity and to reduce the net value of the residence. Then the encumbered property can be distributed to the child who must takes subject to the loan and the other children receive offsetting cash (derived from the loan).
In the end each child ends up with the same value (albeit one with real property and the others with cash). It is imperative that the cash loan not be provided by the child who is to receive the real property, because this will be treated by the assessor as a purchase by that child of the other children’s inheritance rights in the real property – e.g., a sale not exempted by the parent child exclusion.
Dennis A. Fordham is an attorney licensed to practice law in California and New York. He earned his BA at Columbia University, his JD at the State University of New York at Buffalo,and his LL.M in Taxation at New York University. He concentrates his practice in the areas of estate planning and aspects of elder law. He can be reached at dennis@dennisfordhamlaw, by phone at 263-3235 or at his office at 55 First St., Lakeport.
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