It's never too early to think about estate planning. The basic vehicles used in California estate planning for transferring real estate upon death are deeds, wills and trusts. Each one has some advantages and some disadvantages. California trust laws allow a property owner to manage their real property during their lifetime and even, to some extent, after death. It's important to get an overview of California real estate trust laws before deciding which of these vehicles might work well in a particular situation.
What Is a Trust?
Trusts are flexible estate planning tools that allow property owners to protect their assets. In the state of California, there are many different types of trusts, including a living trust. The best trust for a particular situation depends on the intention of the person creating it. Generally there are three roles involved in a trust: the person making the trust (the grantor or settlor), the person or entity holding the trust property (the trustee), and the person who will benefit (the beneficiary.) In some trusts, the grantor and the trustee are the same person.
In order to create a trust in California, the grantor must show their intention to create one. The grantor must put trust property or assets into the trust and name a trustor, and there must be a trust beneficiary. Trusts in California can be revocable or irrevocable.
Revocable and Inter Vivos Trusts
A first question when it comes to creating a California real estate trust is whether it should be a revocable trust or an irrevocable trust. Revocable trusts have the advantage of allowing the person to change their mind or add after-acquired property.
Also called living trusts or inter vivos trusts, revocable trusts are created while the individual is still alive. The grantor in a living trust names themselves as the trustee, retaining control of management of the trust property. They also name a successor trustee who will step in to control the assets when the original trustee dies.
Administration of the Trust Property
The person making the trust has full use of the trust property during their lifetime. They can add other assets to the trust or remove assets from the trust whenever they like. The trust document names a successor trustee who steps in when the grantor dies. Trustees distribute the assets in the trust to one or more beneficiaries.
That is, the beneficiary gets title to whatever property remains in the trust on the date of the grantor's death. This is a way that a property holder can transfer real property to heirs while avoiding probate.
Avoiding probate is the main advantage of a living trust. If a property owner leaves their real property to their heirs in a will, the property can be tied up for months or even years in probate court. There are also court costs and disbursements to pay and sometimes law firm fees. However real property left through a living trust is available to beneficiaries almost immediately, usually without the need for legal assistance.
Creating Revocable Living Trusts in California
Revocable trusts are not difficult to create. Some people put the paperwork together without the help of an attorney. Forms for creating living trusts can be found online.
Essentially, the person making the living trust needs to determine what property should go into the trust, determine who is to take the property as beneficiary, and name a successor trustee. Then they obtain a California living trust form from their attorney or online and create the trust document, signing it under penalty of perjury in front of a notary.
Real estate can be the asset, or res, in a trust. If that is the case, the person making a living trust must change the title of that real property to show that the owner is now holding title as trustee of the trust. Note that property put into a living trust does not protect it from seizure by creditors. The real property can still be attached by creditors of the grantor.
Irrevocable Trusts in California
Irrevocable trusts have more tax benefits than revocable trusts, but that comes with a price. Namely, the grantor who creates an irrevocable trust does not get to modify the terms of the trust later, nor do they have the option of taking property out of the trust. Say, for example, that a grantor owns a very valuable home in San Francisco and makes that home the trust res, naming children as the beneficiaries of the trust. The property is now out of the grantor's control and they cannot revoke the trust, change the beneficiaries or take any action to regain title to the house.
On the other hand, an irrevocable trust works well for people interested in getting the maximum possible estate tax benefits. When the grantor dies, their estate is smaller since it no longer includes the value of the property put into the trust. An irrevocable trust is good for protecting the assets put into the trust since the grantor no longer retains control of the property and the beneficiaries do not have control of it either. That means that most creditors of the grantor and of the beneficiaries cannot seize or sell the property.
Another benefit of an irrevocable trust is that it eliminates any income that may be generated by the trust property from the income taxes of the grantor. In that way, the grantor's income taxes can also be kept to a minimum.
Creating an Irrevocable Trust
Given that an irrevocable trust cannot be changed nor its terms modified after it is in effect, it is wise to work with an attorney when creating the specifics, including naming the trustee and beneficiaries, and considering the estate and property tax implications of the transfer. The legal requirements are found in the California Probate Code and must be complied with for the trust to be valid. The actual property transfer is not difficult; it involves the preparation and recording of a deed that transfers the property interest from the grantor to the trustee of the trust.
In California, the details of a trust that does not hold any real property are kept private. Note, however, that where real estate is made a part of an irrevocable trust, the specifics of the transfer become public record and are recorded with the county clerk.
Trustee's Duties in California
The trustee of an irrevocable trust is the person or entity selected by the grantor to manage the trust. The trustee has the authority and the duty to take whatever steps are necessary to comply with the provisions of the trust.
A grantor can also be a trustee in a revocable trust, and often is. Or the grantor can elect not to name a trustee. However, when an irrevocable trust is being used to remove assets permanently from the grantor's estate, the grantor cannot be the trustee.
In fact, in that case the grantor cannot involve themselves in any decisions regarding the trust property, how it is used or how distributions are made. The grantor must select a person or entity who will manage the trust assets according to the trust document instructions.
Naming a Trustee
Sometimes grantors prefer to select a spouse, friend or family member as the trustee for an irrevocable trust. Other grantors prefer to use an attorney, an accountant or even a bank as the trustee. In California, trustees are fiduciaries, held to a very high standard of care. They must protect the trust property, provide information to the beneficiaries, keep accurate records and diversify investments.
Beneficiary Rights in Living Trusts
Beneficiaries are the parties that stand to benefit when the grantor dies. Their rights before the death of the grantor depend on whether the trust is a revocable trust or an irrevocable trust.
In a revocable trust, the beneficiaries are not certain of receiving any benefit from the trust until after the grantor dies. That is because the grantor of a living trust retains the right to change the trust, including authority to change the beneficiaries or remove properties or other assets from the trust. The grantor is usually also the trustee, so there is no point in the beneficiaries appealing to the trustee in California for information about the way the assets are being managed. The beneficiaries have no right to object to changes, not even if the grantor completely dissolves the trust.
Beneficiary Rights in Irrevocable Trusts
On the other hand, beneficiaries of an irrevocable trust do have rights. The minute the trust is signed, and the real property or other assets are transferred to the trust, the beneficiaries have a legal interest in their share of the trust.
California Probate Code Section 16060 offers some protection to the beneficiaries. That statute requires the trustee of an irrevocable trust to keep all of the beneficiaries informed about the trust property and how it is being managed. It provides: "The trustee has a duty to keep the beneficiaries of the trust reasonably informed of the trust and its administration.”
Informing the Beneficiary
The idea is that the beneficiaries are entitled to obtain information that is reasonably necessary to enable them to enforce their rights. Should a beneficiary feel that they are not being provided the needed information, they can file a probate court petition via a probate litigation attorney and get a court order to compel the requested information.
What types of information does a beneficiary have the right to receive? They should get information about the trust assets, a copy of the original trust agreement and any subsequent papers, bank statements, and also trust administration updates. Whether beneficiaries are entitled to an accounting depends on the terms of the trust.
California Split Interest Trusts
Under California law, an irrevocable trust can be written that will provide regular income to one beneficiary or group of beneficiaries over some years, then to provide interest or the actual property to a second beneficiary or group or beneficiaries later. This is termed a split interest trust. For example, in a charitable remainder trust, the grantor and/or family members are paid annual income for a number of years specified in the trust document. After the expiration of that period, the property is given to a designated charity.
Grantor Retained Income Trust
California trust law also provides for the grantor retained income trust, or GRIT. This is another type of split interest trust that is intended to reduce gift taxes on the transfer of assets to subsequent generations.
With a GRIT, the grantor gets the interest from the trust for a set number of years, then the assets are distributed to the other beneficiaries. Or the grantor may transfer a family residence to beneficiaries but only after keeping the exclusive use of it for a given period of time. This is termed a qualified personal residence trust.
Teo Spengler earned a JD from U.C. Berkeley Law School. As an Assistant Attorney General in Juneau, she practiced before the Alaska Supreme Court and the U.S. Supreme Court before opening a plaintiff's personal injury practice in San Francisco. She holds both an MA and an MFA in English/writing and enjoys writing legal blogs and articles. Her work has appeared in numerous online publications including USA Today, Legal Zoom, eHow Business, Livestrong, SF Gate, Go Banking Rates, Arizona Central, Houston Chronicle, Navy Federal Credit Union, Pearson, Quicken.com, TurboTax.com, and numerous attorney websites. Spengler splits her time between the French Basque Country and Northern California.