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Hornswoggled Voters Approve $1 Billion/Year Tax on their Heirs

In 1986 California voters overwhelmingly voted to pass Proposition 58. This amendment to the California constitution excluded from reassessment property transfers between parents and children. What that meant was that a parent could provide their home to pass to their children without taxing the children out of the home by continuing the Prop 13 tax base. A decade later with the passage of Prop 193, the exemption was expanded to include grandparents. This became a favorite with parents and grandparents as a means of estate planning, benefitting both parents and children.

Until last year that is, that is. California voters were hornswoggled into voting for the deceptively labeled ‘Home Protection for Seniors, Severely Disabled, Families and Victims of Wildfire or Natural Disasters Act’. A sweet title that painted an appealing picture. But nowhere in that grandiose title does it mention ‘$1 BILLION TAX INCREASE ON YOUR KIDS AND GRANDKIDS’!No, that’s the part that got buried by some very crafty internment specialists. All the hype was focused in Paragraph 1, allowing those over 55 to transfer their Prop 13 tax base from one house to another (tax portability), but scant attention was paid to Paragraph 2, the one that will burden your heirs with an estimated $1 billion a year in new tax revenue to the state (intergenerational transfer).

As you might imagine, now that the law is about to kick in, folks are finding out what a pig-in-a-poke their vote bought. Suddenly their financial advisors are telling them if they leave a house to their kid, it’s likely the property tax bill will leap by factors of 10 or more, depending on when they bought. If the kid doesn’t move into that house as their principle residence, their tax bill would increase from whatever their old Prop 13 tax base was, to ‘current market value’ as determined by the state. But what if the kid is 50 years old and already has a principle residence, maybe in another state? And what if you have 2 or 3+ kids? Which one has to move in? Do they all? And what if you’re a grandparent who has worked hard and lived frugally to the age of 94 and want to leave your small house in Garden Grove that you’ve lived in since 1957 to your grandchildren as a way of giving your heirs a step up on the economic ladder – something increasingly hard to achieve for our youth in California?

Nope, Prop 19 eliminated those opportunities for you and yours and replaced it with yet another tax that will be borne by our children and grandchildren. It’s hard to imagine anything more callous than the government sending a giant tax bill to a bereaved family, but here we are.

A quick tutorial on how we got here. Back in 2018 the California Association of Realtors got Prop 5 on the ballot. Prop 5 was all the good stuff in Prop 19 (tax portability) with none of the bad. ‘None of the bad’ meant no tax increase. But if it doesn’t increase taxes, the perception was painted that it would probably cost money – especially money that certain unions were salivating over. With that kind of opposition, the measure failed. But as with many measures in Sacramento, this kind of stuff never actually ‘dies’, it just lurks around Zombie-like to reemerge again later.

And remerge it did. In order to sweeten the pot (i.e. quid pro quo, buy-off) the opposition, the measure that emerged last year now included Paragraph 2, tax on intergenerational transfer with the proceeds accruing to? Well you didn’t hear about any union opposition, did you?

Realtors spent over $40 million to get the new measure on the ballot only to back out at the last minute as a replacement measure emerged from the Legislature as ACA 11. If anything, ACA 11 was worse than the original but because proponents buried the tax increase, a slim majority of voters were snookered. Sadly, snookering voters in California is becoming a full time industry for some California entrepreneurs, and it’s surprisingly easy to do.

Over the years California voters have strongly opposed state inheritance taxes, which were abolished by constitutional amendment in 1982. Proposition 19 has effectively resurrected the inheritance tax in California, with the added burden that families must pay it every year as a condition of keeping their property.

But help may be on the way. Realizing early on that this is a fiscal disaster in the making for many California families, Senator Patricia Bates introduced SB 668, a bill to delay the effective date of the rules governing intergenerational transfer allowing families to adjust to this sea change. Assembly member Kevin Kiley (he’s the one suing Gov. Newsom over the lockdown) has introduced ACA 9, a measure that would fully restore Prop 58 (1986) and Prop 193 (1996), allowing parents and grandparents to once again pass along property to the next generation without reassessment.

Will it work? Well, both bills are authored by Republicans, they propose to reduce tax revenue to the state/union supporters, and they will have to fight their way through the Democratic mega-majority in both houses.SB 668, the bill to delay, is still stuck in its first committee. A ‘working group’ has been convened to ‘study the issue’. ACA 9 has yet to be referred out to a committee even for discussion and we’re over halfway through the session. Chances of relief based on that scenario are slim and none, and slim is headed for the door. But hope springs eternal.

So, if you see our local representatives – Senator Melendez, Assembly members Seyarto or Waldron, thank them for the hard work they’re attempting on our behalf against overwhelming odds. And let them know you’re not OK with the state milking another billion out of your kid’s pockets. They’re not OK with it either.

Written by Gene Wunderlich, Sr. Staff Writer

Gene Wunderlich is the Government Affairs Director for Southwest Riverside County Association of Realtors. If you have questions on the market please contact me at GAD@srcar.org or to keep up with the latest legislative and real estate trends go to http://gadblog.srcar.org/.

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