Estate Planning for a Family Business usually moves the company cleanly. The real property the company operates from sits on a different set of rules, and since February 16, 2021 those rules reassess it.
Most succession plans are written about the company. The building the company operates in is a separate asset on separate rules, and it is often the larger number.
Family businesses commonly hold their premises apart from the operating company: a shop, a yard, a warehouse, a medical suite, owned by an LLC that leases to the business. The structure is ordinary and sensible. It is also the piece most likely to be reassessed on the day the plan takes effect.
Before February 16, 2021, that risk was small. Proposition 58 excluded a parent to child transfer of the principal residence from reassessment and, on top of that, excluded up to one million dollars of assessed value in other real property per transferor. A modest commercial building often fit inside that second exclusion.
Proposition 19 removed the second exclusion. Article XIII A, section 2.1 of the California Constitution now limits the parent to child exclusion to a family home the child occupies as a principal residence, and to a family farm, each capped at the property's existing taxable value plus one million dollars as biennially adjusted. Commercial, industrial and rental property is reassessed to current market value. It reaches gifts and inheritances alike, so waiting until death does not avoid it.
Real property transfers. Entity interests, by default, do not. Revenue and Taxation Code section 64(a) provides that the purchase or transfer of ownership interests in legal entities, such as corporate stock or partnership or limited liability company interests, is not a transfer of the real property owned by that entity. Deeding the building to a child is a change in ownership. Moving membership interests in the LLC that owns it is not.
The default has two exceptions, and both are counted rather than judged. Section 64(c)(1) reassesses everything an entity owns when one person or entity obtains more than 50 percent of the voting stock or a majority ownership interest. Section 64(d) is the one that catches families: once the original coowners have cumulatively transferred more than half the total interests, whether in one transaction or in twenty, across any number of years, the property is reappraised. The count never resets.
Section 64(d) is armed by the tidy first step. Moving a personally held building into an LLC without changing who owns what is excluded from reassessment under section 62(a)(2). What it also does is make everyone holding an interest immediately afterward an original coowner and start the cumulative count. A plan that gifts 15 percent a year to two children looks patient and safe until year four.
The lease is a change in ownership too, past a point. Section 61(c) treats the creation of a leasehold interest in taxable real property for a term of 35 years or more as a change in ownership. Long leases between a family holding entity and the operating company get written for a round number of decades because it feels like permanence. Thirty five years is the line, and it is worth checking before signing an extension.
Somebody has to tell the state. Section 480.1 requires a signed change in ownership statement, form BOE-100-B, filed with the State Board of Equalization within 90 days of a change in control, and section 480.2 does the same for a change in ownership of the entity. Section 482 adds a penalty for not filing. This is a state filing rather than a county one, and it is the step most often missed, because no deed was recorded and nothing prompted anyone.
Holding the premises in an entity is not a loophole and should not be sold as one. It preserves a Proposition 13 base year value that a deed would have ended, which is worth real money every year. It does nothing else. It does not make the interests easy to value, easy to divide, or acceptable to a child who wants cash rather than a landlord's job. And once more than half the interests have moved, the reassessment arrives anyway.
So the percentage belongs in the same file as the trust, with dates. Nobody remembers a 2019 gift when the 2031 one is being signed, and the count that matters is cumulative across every transfer any original coowner has ever made.
Where an exclusion genuinely does apply, it is a claim rather than an automatic result. A child taking a family home has to occupy it and file for the homeowners' exemption within one year of the transfer, and the exclusion claim carries its own deadline. An exclusion nobody claimed reads exactly like an exclusion that never existed.
The premises are often the largest single number inside Estate Planning for a Family Business, and they are governed by rules no operating agreement can rewrite. Pull three facts before drafting anything: the current base year value, who holds title today, and how much of the entity has already moved.
General information about California law, not legal advice, and no attorney-client relationship is created. How these rules apply depends on your title history, your entity documents and your county assessor.
Bring the deed, the operating agreement and the last property tax bill. We will tell you what a transfer triggers.
