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Parent-child and/or grandparent-grandchild exclusion

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    A reappraisal of real property in the trust is required at the death of the settlor for property tax purposes unless an exclusion applies such as the parent-child or grandparent-grandchild exclusion (there is no exclusion for sibling transfers). To preserve the exclusion, the property should be encumbered before distribution as needed to equalize net value between children receiving property and children receiving cash so that they do not exchange property interests with each other.

    The parent-child exclusion is limited to the first $1 million of property value (assessed value, not fair market value), plus the settlor’s principal residence. “Principal residence” includes only the portion of the underlying land that consists of an area of reasonable size used as a site for the residence. The parent-child exclusion is applied to outright distributions to children or a continuing trust, provided the children are the sole present beneficiaries of the trust.

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