Real property that was properly funded into a trust prior to the death of the settlor(s) (defined as the person(s) who created the trust) does not need to be probated in California. However, upon the death of the settlor(s), there are some necessary steps a successor trustee (defined as the person who is named next in line to act as trustee of the trust) must do prior to holding, selling, or distributing any real property held in the trust after the death of the settlor(s).
First, a chain of title search should be done on each and every parcel of real property held in the trust. This will ensure that the property was properly transferred over the years and that the real property was properly funded or transferred into the trust.
Second, the trustee must record an Affidavit of Death of a Trustee (the “Affidavit”), along with preparing a preliminary change of ownership form, in real property records for the County where the real property is located. The Affidavit declares and affirms the original trustee of the trust (usually the settlor(s)) is now deceased, thus transferring the trusteeship, the power over the trust — including the power over the real property held in trust — to the designated surviving trustee. Once recorded in the real property records, this will put everyone on notice that there has been a change in trustee regarding that real property.
Third, and regardless to whether the trustee plans to hold or sell the trust real property or distribute it to the trust beneficiaries, an appraisal of the real property must be done which gives the value of the real property at the date of the death of the settlor(s). This ensures that the appropriate market value of the real property is established at the date of death of the settlor(s) and is used to determine the step-up basis for federal tax purposes as well as other trust administration and distribution purposes.
Fourth and although not necessary, it is a smart idea to obtain a preliminary title report on each and every parcel of real property held in trust. A title report provides information regarding ownership and outlines any liens, encroachments, and easements that are recorded against the property. As noted above, it also ensures that the real property was properly transferred over the years and that the real property was properly funded or transferred into the trust. It provides the trustee with valuable information about many other aspects of the real property so that any issues with the real property can then be dealt with before the trustee attempts to sell it or transfer it to the trust beneficiaries.
Submitting certain documents to the County Real Property Tax Assessor needs to be included in the successor trustee’s to-do list. The County Real Property Tax Assessor estimates the current market value of real property in order to determine the amount of property taxes to be assessed annually. In California, every time a parcel of real property changes ownership, the County Tax Assessor is able to reassess it for possible increase in real property taxes (Proposition 13). However, there are many exceptions and exclusions from reassessment and determining which exceptions or exclusions are available and what forms to fill out can get complicated. In addition, there are deadlines for submitting the required paperwork to the Assessor. It is a good idea for the successor trustee to consult with legal counsel who practices in California in the areas of Estate Planning, Trust Administration, or Probate regarding the required steps for not only the preliminary change of ownership forms, as noted above, but also the exclusions or exceptions from real property tax reassessment.
Whether or not the successor trustee should hold in trust, sell to another, or transfer the real property to trust beneficiaries depends on the powers granted to the trustee in the trust instrument, the terms of distribution of the trust assets, and the facts and circumstances of that case and no one circumstance or case is the same. Again, it is highly recommended that the successor trustee consult with legal counsel who practices in California in the areas of Estate Planning, Trust Administration, or Probate regarding analysis and determination of what to do with the trust real property.
Again, being a successor trustee of a trust and deciding what to do with and how to handle trust real property can be a complicated process. As such, any successor trustee faced with the above scenario should contact the Chilina Law Firm or another California attorney who practices in the areas of Estate Planning, Trust Administration, or Probate for further information.
Authored by Karen Chilina and Co-Authored by Greg Chilina
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