By:    David L. Crockett, Attorney, CPA

         UCLA Law School , J.D. ’69,  UC Berkeley ’66

          901 Dove St., Ste 120, Newport Beach, CA 92660

         Phone:  949-851-1771    Email:   Website:

THREE TAXES WHICH MUST BE CONSIDERED.  Estate planning, trusts and estates often involve transferring ownership of money and property.  Before making any sales or transfers or gifts of real estate or accounts or securities, all tax effects should be considered.  Once action is taken, you may not be able to change it after the fact and you may be stuck with tax consequences which are not wanted.  All or any of these taxes may apply:

(1)     Income taxes

          (2)     Property taxes

(3)     Federal Estate taxes

 INCOME TAXES.  All taxpayers have to file annual federal and state income tax returns if they have taxable income. All estates and trusts of deceased persons have to file annual federal and state returns if there is taxable income until the estate or trust is closed and assets distributed.  Estate heirs and trust beneficiaries may have to report income received from an estate or trust if there are income distributions prior to closing.

The creation of a living trust which is revocable does not affect income taxes because the income on assets and property transferred into a living trust are still reported on the trust creator’s personal income tax returns. There is no income tax on money or property received (which is principal) by estate heirs or trust beneficiaries from an estate or trust on death of the trust creator.

Capital gains income taxes can be a factor because of the property or security’s income tax basis.  On death, the basis increases of all property and assets owned to fair market value at date of death. So, from the capital gains tax standpoint, property should generally stay in one’s trust or ownership until death so that the property can be sold for little or no capital gains tax by the trust or by the trust beneficiaries after receiving the trust distribution.  This is a tax trap for the unwary.  Sometimes people transfer their house or other property to their children before they pass away and that sticks the children with a low tax basis leading to capital gains taxes on sale.

PROPERTY TAXES.  This is to be considered if there is any real estate owned.  Each state has its own property tax laws.  Here are the basics of California property tax law.  Any time real estate ownership is changed,  the county assessor is allowed to reassess the property to fair market value and increase the property taxes. A “change in ownership” occurs when real estate is sold or transferred into a trust, or into an LLC or a corporation, OR if the owner dies OR if over 50% of an LLC or corporation owning property is sold or transferred.  The only way to stop the reassessment is to claim an exclusion from reassessment, if it applies.  SPECIAL NOTE-PROP 19 WHICH PASSED IN NOVEMBER OF 2020 HAS NEW RESTRICTIONS ON THE PARENT-CHILD EXCLUSION RULES.  THE NEW LAW AFFECTS TRANSFERS MADE AFTER THE EFFECTIVE DATE IN MID-FEBRUARY OF 2021.  Exclusions are available for transfers into most trusts, for husband-wife transfers, and some transfers to children or grandchildren. Exclusions are not available for transfer to brothers or sisters.  Also, there are dollar amounts on exclusions.  The exclusion must be applied for before applicable deadlines on the proper form.  If no exclusion is applied for or if no exclusion is available, the property taxes will automatically increase.  Changes in property taxes can be large, especially if the property has been owned for a long time. This is a very complicated and misunderstood area of tax and trust law.  Thus, before making any transfers or sales of real estate, a CPA or estate attorney should be consulted to see what the tax effects will be and if any exclusions apply.


FEDERAL ESTATE TAXES.  Federal estate taxes are assessed at the rate of 40% on all assets owned at date of death which are over the exclusion amount.  The exclusion amount has increased over the past 20 years so the present exclusion  is $10,000,000 plus cost of living increases which brings it up to $11,700,000 for persons who pass in 2020.  Thus, if $12,700,000 million in assets were owned at date of death, the amount subject to estate tax is $1 million and the estate tax would be $400,000, due 9 months after date of death.  The $10 million exemption expires in 2025 and reverts back to $5 million.  Thus, any transfers or planning must consider if this tax might apply.  At one time the exclusion was only $600,000.  It is all up to Congress and politics so any estate plan should be designed to minimize estate taxes in the event that the estate is likely to exceed the $5 million or $10 million exclusion OR in the event that the exclusion is lowered.