Actor Luke Perry’s estate planning was well-planned, including the use of a revocable trust to pass assets to his heirs in an efficient and private manner.
Forbes’ recent article, “How Luke Perry’s Estate Maximized This Unique California Tax Shelter,” says that media outlets have reported that Perry’s $2 million home in the Los Angeles area had been transferred from his revocable trust to his two children in equal shares. This can be a normal part of the estate administration process, if you are working with an experienced estate planning attorney. However, it also shows some additional sound planning on his family’s part. It looks like the actor’s children took advantage of a unique tax loophole in California, the parent-child property tax exemption. Therefore, they’d have inherited their father’s property tax base, which is an important financial benefit in California, because the home has increased in value significantly since Perry bought it.
The parent-child exclusion gives California property owners some unique benefits, so with proper estate planning, property can be passed on to the next generation. Note that these rules are complex and must be followed carefully, to avoid accidentally triggering reassessment.
In 1978, California voters approved Proposition 13, which rolled back property tax values for existing homeowners to their 1976 value. For new purchases, the property tax rate was set at 1% of purchase price and increases to the property tax base were limited to 2% per year. In 1986, California passed Proposition 58—a constitutional amendment that excluded from reassessment transfers of real property between parents and children. Therefore, when a child inherits their parent’s home, they can also inherit the parent’s property tax base.
While both propositions independently create property tax relief, when combined, it can have extraordinary benefits. Assume that you bought a home for $100,000 in 1979. The property tax base would have been established at 1% of the purchase price ($1,000). This property tax base 40 years later in 2019 would be $2,208. Now, let’s say the $100,000 home has increased its fair market value to $1,000,000. If the owner dies and the property is transferred to their child, their child would inherit the parent’s property tax base of $2,208, and that rate would continue to grow at the 2% rate. Estate planning lawyers know this.
However, this loophole is complicated, because the exclusion allows the transfer up to $1 million of assessed value (and each spouse of a married couple has $1 million to allocate). The assessed value is merely the property tax base, not the fair market value. As a result, provided the assessed value stays within the $1 million of assessed value, parents can transfer property that has increased by millions of dollars. As you can imagine, these rules can have a major effect on beneficiaries. The ability to inherit a parent’s property tax on a home that has increased in value, might result in keeping the family home, instead of having to sell it.
Luke Perry’s estate planning is a rare example of a celebrity with excellent estate planning. To do the same, work with a qualified estate planning attorney.
The best advice is to be even and fair to your children.
Reference: Forbes (November 14, 2019) “How Luke Perry’s Estate Maximized This Unique California Tax Shelter”