How California wine business property transfer rules will change in 2021
Starting in mid-February law changes will tighten rules which currently allow parents to transfer California real estate to the next generation without triggering reassessment. This is stimulating interest in year-end transfers of wineries and vineyards within families.
“I see families in the wine business demonstrate keen awareness that they must consider and plan for taxes, doing what they can to avoid property tax reassessment and to minimize estate tax if they want to give their heirs the best odds for success,” said Lauren Galbraith, an estate and tax planning attorney with Farella Braun + Martel.
“My clients were generally relieved to see Prop. 15 fail but are now thinking about what they can do now in light of the narrow passage of Prop. 19,” she said.
Proposition 15 would have amended the California State Constitution to require commercial and industrial properties, except those zoned as commercial agriculture, to be taxed based on their market value. Proposition 19 allows homeowners over 55, disabled, or wildfire/disaster victims to transfer primary residence’s tax base to replacement residence, changes taxation of family-property transfers and establishes fire protection services fund.
Discussing the state law shift, Galbraith said it substantially changes the rules that apply to transfers between parents and children (or grandparents and grandchildren if the children’s parents are deceased). Currently, the law allows, without reassessment, transfer of a principal residence of unlimited value from parents to children. It also allows, without reassessment, transfer to children of up to $1 million per parent of assessed value of other property, such as second homes, vineyards and wineries.
Effective Feb. 16, 2021, the only direct transfers of California real estate between parents and children that won’t trigger reassessment are transfers of a primary residence or farm if the child also uses it as his or her primary residence or farm. Moreover, if the difference between the assessed value and current market value exceeds $1 million (indexed for inflation), then the primary residence or farm would be partially reassessed.
According to Galbraith, these anticipated changes are causing people to consider transfers sooner than they might otherwise. At the same time, when it comes to making gifts of assets other than California real estate, the sense of urgency has subsided somewhat following the election, with the composition of the U.S. Senate still to be decided.
“I do think that the urgency has fizzled, and estate and gift tax changes effective retroactive to January 1, 2021, at this point seem highly improbable,” she said. “Those who are on the margins in terms of whether they want to make significant gifts now may be best advised to hold off and take a wait-and-see approach.”
For some winery estate owners, however, it is an obvious time to begin to transition ownership through gifts and sales.
“When we are talking about sales to third parties, some people are considering that capital gains rate may increase in the future,” Galbraith said. “If the business will stay in the family, people are looking to make gifts to absorb the record-high gift tax exemption, or intrafamily sales which capitalize on the exceedingly low interest rates.”
Regardless of the tax landscape, certain aspects of planning for business transition remain the same.
“Winery owners should seek counsel early when thinking about transferring ownership of their business. There are a variety of types of professionals who can lend their expertise. More time to plan generally allows for more options and well-considered decisions,” said Galbraith.
Sometimes business owners come up with their own creative solutions to their business transition concerns. Galbraith said one of her clients was thinking about turning the business over to two children but is building a second winery property to offer each child some autonomy from the other and help avoid a controversy over future ownership and the division of real assets.
“An assessment of family members’ ability to manage the business must be part of advance transition discussions,” she said. “In many cases, heirs may have been groomed to take over and have experience, while others may not or do not wish to continue the family business. Still other winery owners may not have children, but want to sell, take a minority ownership position to obtain capital from new partners or retain outside management while still staying involved in the enterprise. Each choice comes with its own pros, cons and considerations that should be addressed.”