Who Gets the Compound

You built the accessory dwelling unit (ADU) for your son. Your daughter moved into the junior accessory dwelling unit (JADU) — the smaller unit inside the house — and spent six years driving you to appointments.

Now you are gone, the trust says split it evenly, and your two children want different things.

She wants to stay. He wants his half in cash. Neither is wrong, and each has a different tax rule on their side.

Step-up in basis rewards selling

At death, the cost basis resets to fair market value. Decades of appreciation on the land, the house and the units disappear for capital gains purposes, along with depreciation recapture if any of it was rented.

Sell shortly after death and the income tax bill is close to nothing. That rule applies no matter which child inherits.

Proposition 19 rewards staying — for exactly one child

Property tax is a separate system with separate rules.

Under Proposition 19, your low base year value survives only if the property was your principal residence and a child makes it their own principal residence within one year, files for the homeowners' exemption within that year, and files form BOE-19-P with the county assessor within three years of death or before any sale.

The excluded amount is your factored base year value plus $1,044,586 for transfers occurring February 16, 2025 through February 15, 2027 — a figure the State Board of Equalization readjusts every other year off the Federal Housing Finance Agency's House Price Index for California. Only one child must live there, but at least one must, continuously.

So the child who sells gets the income tax break. The child who stays gets the property tax break. That tension is structural, not personal.

What I do not know, and neither does anyone quoting a headline

Proposition 19's exclusion covers the family home — the principal residence. It eliminated the exclusion for other real property entirely. The claim form itself asks whether the property is multi-unit, which unit was the parent's principal residence, and which unit is the child's.

A parcel with a main house, an ADU and a JADU is unmistakably multi-unit. Whether the assessor treats the whole parcel as one family home, or excludes only the unit your daughter occupies and reassesses the rest, I cannot tell you from published guidance. Santa Clara County's assessor says only that special rules apply to multi-unit dwellings.

That is the most consequential unanswered question in this series, and the answer belongs to your county assessor and your estate attorney — in writing, before anyone dies. Anyone who answers it confidently off the top of their head has not read the form.

The structure: borrow while you're alive

Here is the version that works, and it has nothing to do with your children.

You refinance the property at sixty-eight, while you have income, a work history and a file a lender will read. You set the proceeds aside, in their own account, under its own trust language. At your death, the cash goes to your son. The encumbered property goes to your daughter. She services the note out of rents from the two units she is not living in.

Look at what that eliminates. There is no buyout, so there is no transfer between siblings to be characterized. There is no trust lender working against a deadline. And your daughter never has to qualify for financing on a property she does not yet own, using rents that do not yet exist — which is the wall a caregiving child with thin documented income usually hits.

Three things to get right at the drafting table:

The set-aside has to survive you. Money parked in 2027 has to still be there in 2041 — not spent on your own care, not eroded while the property doubles. That argues for a formula rather than a fixed number, or your son inherits a sum that was fair the year it was set and insulting the year it is paid.

You carry the interest in the meantime. Years of debt service on proceeds sitting in an account is a real cost, and it is the honest objection to this structure. It may still beat every alternative. Price it; do not assume it.

Check the due-on-sale clause. A note that accelerates when title transfers defeats the whole plan at the worst possible moment. Ask the lender in writing whether the loan survives a transfer to a trust beneficiary at death.

If you didn't plan ahead

Most families read this after the funeral. There is still a path, and it is narrower.

If the trust distributes the property to both children and then your daughter buys her brother's half, that purchase is generally treated as a transfer between siblings, and his portion is reassessed permanently.

The alternative is a third-party lender making a loan directly to the trust, secured by the property. The trust distributes the encumbered property to her and cash to him, and the transfer reads as parent to child. Two constraints the Board of Equalization takes seriously: the acquiring child may not use her own funds and may not personally guarantee the loan, and the property must not leave the trust first. Either mistake converts it back into a sibling buyout.

The window closes when the trustee distributes.

And then she hires a manager

This is the part I would want for my own family.

Your daughter inherits a parcel with tenants in two units and a note to service. She does not have to become a landlord at fifty-four, learning habitability law during her first vacancy and her first eviction. She hires a manager, the rents cover the debt service and the operating costs, and the property runs.

She keeps the home she cared for you in. Her brother got his money without waiting on a probate judge. The base year value your parents established survives into a third generation.

That outcome is not luck. It is a refinance, a trust provision and a bathroom, all decided years before anyone needed them.

A note on timing: the rules underneath this article are moving. The Proposition 19 exclusion amount readjusts on February 16, 2027. California's accessory dwelling unit statutes were recodified effective January 1, 2025, so older articles cite repealed sections, and junior unit occupancy rules changed on January 1, 2026. Everything here reflects what I could verify as of the date on this post, and none of it is legal, tax or accounting advice. Before you build, transfer, or restructure anything, take your specific facts to an estate planning attorney and your certified public accountant — and get your county assessor's position on multi-unit treatment in writing. I manage property; I don't practice law and I don't prepare returns.