California’s New ADU Laws and Estate Planning
Recent updates to California’s Accessory Dwelling Unit (ADU) offer homeowners more freedom to build secondary units, increase property value, and support multigenerational living. Construction or legalization of an ADU isn’t just a housing decision; it’s an estate event. Whether you’re building income, caregiving, or boosting home value, an estate-planning attorney can help protect your investment.
What Is an ADU?
An Accessory Dwelling Unit (ADU) is a self-contained residential unit located on the same property as a primary home. It can be attached to the main house, such as a converted garage or basement, or as a detached standalone structure like a backyard cottage. ADUs often house family members, generate rental income, or provide flexible living space.
What Are the New ADU Laws?
California’s recent ADU legislation introduced several new laws to expand housing options, simplify the building and permitting process, and offer homeowners financial incentives.
SB 1211
The law lets owners of multifamily properties build up to eight detached ADUs as long as the number doesn’t exceed existing units. It also removes the requirement to replace parking when converting spaces.
AB 2533
It eases the legalization of previously unpermitted ADUs built between January 1, 2018, and January 1, 2020, allowing more homeowners to legalize units as long as they meet basic health and safety requirements.
SB 1164
Provides up to a 15-year property tax exemption on newly built ADUs
Who Owns the ADU?
One of the most common estate pitfalls involves the funding source and resulting ownership structure. Suppose a parent builds an ADU and adult children repay part or all of the cost, or vice versa. Determining who owns the ADU and how much is critical in family situations.
One solution is to hold the property as tenants-in-common, reflecting each party’s financial stake. To hold property as tenants-in-common means that two or more people each own a specific share of the property, which can be equal or unequal, based on how much each person contributes or agrees to own. Each owner’s share is separate and can be sold, gifted, or passed down to heirs independently of the other owners.
Family agreements or deed riders can record financial contributions without immediate title changes. A trust deed with assignment of rents recorded against the property allows contributors to be repaid from rental income or sale proceeds.
Which Estate Plan Structures Can Be Used?
Revocable Living Trusts
ADUs can and should often be held in trust, ensuring a smooth transition to heirs without probate delays. If an ADU is added after the trust’s creation, it either becomes automatically included or may require a minor amendment.
Small‑Estate Transfers
As of April 1, 2025, California’s small‑estate procedures now cover the deceased’s primary residence up to $750,000. Property may be transferred without having to pass through probate. If an ADU exists, its inclusion may increase the estate’s value.
Getting the Step‑Up After Death
One of the biggest tax benefits when passing down property is the step-up in tax basis. This federal tax rule adjusts the property’s value for tax purposes to its current market value when the owner dies.
For example, when a parent passes away, the home’s value, including any ADU, is reset to what it’s worth. If the heirs sell the property soon after, they will likely pay little or no capital gains tax because of this new higher value.
If parents give the property to their children while they’re still alive or add their names to the title, that part of the property may not qualify for the step-up, which could mean the heirs end up paying more in taxes when they sell it. It’s important to plan carefully and talk to an estate planning attorney to avoid this.
How Can Medicaid, Long‑Term Care, and Assets Be Protected?
Many families build ADUs to support aging parents with rental income or alternatives to assisted living. Owning an ADU can affect eligibility for Medicaid, which considers the value of a person’s assets, including home equity, over certain limits. Transferring the property or placing it in an irrevocable trust might help one qualify for Medicaid, but this must be done carefully and at least five years in advance. Rental income from the ADU can help cover care costs, but once Medicaid begins paying for care, the ADU might be counted as part of the estate and could be subject to repayment claims later. Planning to manage ADU income can help protect care needs and family inheritance.
How Are Family Dynamics Impacted?
ADUs are often built for adult children, aging parents, or disabled family members. This can trigger equity concerns among heirs. If one child lives in and receives the benefit from the ADU while the others do not, fairness questions may arise. Compensation agreements, gifts, or unequal estate allocations may preserve harmony. A formal family settlement or contribution agreement sets expectations about who pays for maintenance, utilities, or renovation, and under what circumstances rights continue.
What Are the ADU Tax Exemptions and Impacts?
SB 1164’s tax exemption allows homeowners to defer ADU-related value from property taxes for up to 15 years. But this doesn’t affect overall estate valuation. Any future reassessment upon sale or ownership transfer can raise local taxes. When parents die, taxes on the inherited property could be recalculated, particularly if the property is split among co-owners. Estate planners should map out when and how ADU value enters assessments.
The Singh Law Firm Protects Your Family’s Future
Are you building an ADU or passing down your family home? Don’t leave your loved ones facing unnecessary taxes, legal confusion, or costly mistakes. The Singh Law Firm helps California homeowners secure their assets, avoid probate, and maximize tax savings. For a free consultation, contact us at 510-901-5375 in Silicon Valley or 818-658-2174 in Los Angeles.
