The Ongoing Property Tax Debate – California’s Proposition 5

Election season is fast approaching and eleven propositions are on the California ballot. The perennial challenge is to find the time to learn enough about each one to make informed choices, so I hope that providing a historical context for Proposition 5, currently on the ballot, is useful. Proposition 5 addresses the transfer of a home’s taxable value, in a long line of predecessor propositions addressing this same issue. Here is a brief survey of the related propositions, each of which amended the well-known and hotly-debated Proposition 13 to change who can transfer their home’s taxable value and how the transfers work.

Proposition 13 (1978): Decreased property taxes by using 1976 assessed property values, set tax rates at 1% of a property’s sale price, and capped annual increases at no more than 2%. Reassessment of a new base year value was prohibited except in the case of a change in ownership or the completion of new construction.

Proposition 58 (1986): Allowed the transfer of a primary residence between spouses or between parents and children without a reset on the home’s taxable value. In other words, the recipient of a house, whether a spouse or a child, would continue to pay the taxable value based on the limit set following the 1976 tax assessment.

Proposition 60 (1986): Allowed homeowners age 55 or older to transfer the taxable value of their present home to a replacement home, assuming the replacement home was of equal or lesser value, located within the same county, and purchased within two years of selling the original home.

Proposition 90 (1988): Allowed homeowners age 55 or older to transfer the taxable value of their present home to a replacement home in another county, but only if the county in which the replacement home is located agrees to participate in the program.

Proposition 193 (1996): Extended Proposition 58 by allowing grandparents to transfer their primary residence to their grandchildren without a reset on the home’s taxable value, when both parents of the grandchildren are deceased.

Proposition 5 (2018): Extends Propositions 60 and 90 by allowing homeowners age 55 or older, severely disabled, or who have contaminated or disaster-destroyed property, to transfer the taxable value of their present home to a replacement home, no matter the value of the replacement home, its location, or how many times the buyer has moved. The difference in market value between the present and replacement home would adjust the taxable value upward if the replacement home is worth more than the present home and downward if the replacement home is worth less than the present home. From Ballotpedia, the calculations are as follows:

Upward adjustment: (taxable value of present home) + [(replacement home’s market value) – (present home’s market value)]

Example: An individual sold her house for $500,000. The house had a taxable value of $75,000. She bought a replacement house for $800,000. The taxable value of the replacement house would be ($75,000) + [($800,000) – ($500,000)] = $375,000.

Downward adjustment: (taxable value of present home) × [(replacement home’s market value) ÷ (present home’s market value)]

Example: An individual sold his house for $500,000. The house had a taxable value of $75,000. He bought a replacement house for $300,000. The taxable value of the replacement house would be ($75,000) × [($300,000) ÷ ($500,000)] = $45,000.

It is once again up to the voter to decide if this is a ballot initiative that will continue to ease the homeowner’s tax burden and promote a culture of homeownership, or if it will continue to build up the tax disparity between older homeowners who pay lower tax rates and are disincentivized to move, and younger renters who want to buy but can’t afford the cost of entry at higher tax rates and suffer from a housing shortage. Affecting both sides, Californians are some of the most highly taxed people in the country, and the loss of revenue created by lower property taxes has resulted in higher taxes everywhere else.

 

Estate Planning Essentials: The Durable Financial Power of Attorney

You are likely familiar with the concept of a power of attorney, a legal document that allows someone else to act on your behalf. Legal terminology denotes the individual designating the power of attorney the “principal” and the designated person the “attorney-in-fact”. There can be multiple attorneys-in-fact, but of course they must make decisions in concert. The scope of the power can be limited or broad, but the purpose is for the attorney-in-fact to make decisions that are in the best interests of the principal. A broad power of attorney is an attempt by the principal to give their attorney-in-fact the same rights the principal would have if they were able to act on their own behalf.

What does “durable” mean? A power of attorney goes into effect upon signing and terminates if the principal becomes incapacitated. Adding the durable specification means that the power of attorney will stay in effect if the principal becomes incapacitated. There is also the option to add a “springing” specification, which means that the durable power of attorney does not go into effect upon signing, but springs into effect if the principal becomes incapacitated. This addresses the situation whereby the principal wants to remain in control until they are unable to do so, and only at that point does the attorney-in-fact take over. While this is efficient, a drawback of the springing specification is that there could be disputes over whether or not the incapacity has occurred.

In addition to the durable financial power of attorney discussed here (also called a durable power of attorney for finances), there is a durable medical power of attorney (also called a durable power of attorney for health care). With a durable financial power of attorney, the attorney-in-fact has the right to pay bills, deposit checks, file tax returns, buy and sell real estate, invest in securities, make gifts, and even sue, among other things.  As one would expect, with the durable medical power of attorney, the attorney-in-fact has the right to make health care decisions for the principal in the event of incapacity. Due to their different concerns, and even if the attorney-in-fact is the same for both of them, these two documents should be drawn up separately for purposes of privacy and simplicity.

Families can benefit from having a durable financial power of attorney in place if there’s a significant chance that an older family member will become incapacitated due to disability, illness, or age. A durable financial power of attorney can prevent the family from having to go through the court system to appoint a guardian or conservator to manage the principal’s financial affairs. Additionally, a durable financial power of attorney can make it easier for a family member to take the helm and avoid conflict with other family members.

You don’t have to be older to benefit from having a durable financial power of attorney in place, because you never know if an accident might happen that could lead to your own incapacity and leave financial chaos behind. For example, it’s common for spouses to have durable financial powers of attorney for one another in case something happens to one of them. In community property states especially, many transactions require the signature of both spouses, and so it’s prudent for spouses to confer durable financial power of attorney upon one another. Some community property states such as California already provide that if one spouse becomes incapacitated, the other spouse automatically assumes the management of the community property. Which, to avoid conflict, makes it important that the other spouse and the attorney-in-fact are the same person.

In your suite of estate planning documents, a durable financial power of attorney could be an essential one.

The Medicare Files: Program Basics

Let’s start this series on Medicare at ground zero and build up from there.

Medicare is a federal health insurance program that was established in the 1960s for individuals age 65 or older and for individuals under age 65 with kidney failure, ALS or certain other disabilities. It is funded by the taxes that workers pay to Social Security and Medicare, by the premiums that Medicare beneficiaries pay for their coverage, and by the federal budget.

Medicare has four parts: A, B, C and D. Part A and Part B are considered Original Medicare as they are provided directly through the federal government and Part C and Part D are not considered Original Medicare as they are not provided directly by the federal government.

Part A covers hospital insurance. This includes inpatient hospital care, skilled nursing, hospice care and home health services. This does not include long-term care. You don’t have to pay a premium for Part A coverage as long as you, your spouse, or your ex-spouse worked full time for at least 40 calendar quarters (10 years) and paid Social Security taxes, or if you, your spouse, or your ex-spouse are eligible for Railroad Retirement or Civil Service benefits. You do have to pay a premium if you worked and paid Social Security taxes for less time. If you qualify through your spouse or ex-spouse, you need to have been married for at least 10 years. Most Medicare beneficiaries qualify for this premium-free coverage.

Part B covers medical insurance. This includes outpatient medical care such as doctor visits, tests, preventative care, mental health care, medical equipment like wheelchairs and walkers, and some ambulance and home health services. You have to pay a premium for Part B coverage to the Social Security Administration. If you’re already receiving Social Security, the premiums are deducted from your Social Security benefit, otherwise Social Security bills you directly. The premium starts at a standard amount and increases for people with higher incomes. Each year the premium increases but current Medicare beneficiaries whose premiums are deducted from their Social Security benefit generally avoid the increase due to a hold harmless provision.

Part C is something of a misnomer as it doesn’t refer to a subsection of medical care like the other Parts. Instead, Part C refers to Medicare Advantage Plans, which are plans offered by private companies that have contracted with Medicare. Medicare Advantage Plans are required to provide all Part A and Part B benefits, but can do so with different rules, costs and restrictions. For example, with Medicare you can go to almost any hospital or doctor’s office whereas with Medicare Advantage Plans you can be limited to network providers. Many Medicare Advantage Plans replace Part A, Part B, Part D and Medigap coverages (more on Part D and Medigap below), as well as offering coverage for vision, dental and hearing services. You pay an additional premium for these plans on top of your Part B premium (and your Part A premium if you have one).

Part D covers prescription drugs and is offered by private companies. You can get Part D as a stand-alone private drug plan (known as a PDP) or as a part of a Medicare Advantage Plan with drug coverage (known as a MAPD). However, neither Medicare nor Medicare Advantage Plans cover prescription drug copayments or deductibles. As with Part B, the premium increases for people with higher incomes.

Medigap is supplemental insurance coverage offered by private companies that is designed to fill the gaps in expenses not covered by Medicare. Medigap covers Part A and Part B copayments, coinsurances and deductibles.

Depending on if you are employed or retired, there are different timelines for enrolling in Part A and Part B. However, once you are enrolled in Part A and Part B, there are several paths to getting enough coverage to address your long-term medical needs. If you just enroll in Part A and Part B, you would likely incur substantial out-of-pocket costs. To avoid this, you can enroll in Part A and Part B and supplement these benefits with Part D and/or Medigap coverages. Or if you have employer, retiree, or Veterans’ Administration (VA) medical benefits available to you, these programs can help defray costs. Or you can follow in the footsteps of 1/3 of Medicare beneficiaries and get your benefits through a Medicare Advantage Plan.