Think of a trust as an empty storage unit. Like the unit, the trust remains empty unless and until someone – termed the grantor – puts property into it. In the state of California, those trust assets can, and often do, include real property. The transfer of real property is always accomplished in California by means of a deed. Transferring real property into a trust or out of a trust also requires a property deed. To understand exactly how this works requires a basic understanding of trust law.
What Is a California Trust?
A trust is a legal vehicle for transferring assets and property. It is considered part of estate planning since it allows the grantor to reduce income and estate taxes and pass property to others at death while avoiding probate.
Three parties are usually involved in a trust. They are:
- The grantor is the person who wishes to transfer property and also the person who creates the trust.
- The trustee is the individual or entity charged with managing the assets in the trust.
- The beneficiary or beneficiaries (or grantee) are the people who receive the benefits of the trust assets.
Revocable and Irrevocable Trusts
California recognizes both revocable and irrevocable trusts. Revocable trusts are often called living trusts. The grantor of a revocable trust can transfer real and personal property into the trust, but retains the right to transfer the same property out of the trust at any time. Usually in a revocable living trust, the grantor is also the trustee who manages the trust.
An irrevocable trust is a different animal. Once the grantor transfers real or personal property into an irrevocable trust, it cannot be reclaimed. It is no longer the property of the grantor so the grantor has no say in its management. Instead, a trustee manages the trust for the benefit of the beneficiaries.
Funding the Trust
The creation of a trust doesn't automatically convey any property to anyone. In fact, a new trust resembles a new bank account, an empty legal construct with the expectation that the person setting it up will transfer money, assets or real property into it.
Transferring personal property into a trust requires little more than a signed statement or trust document listing the assets the grantor is transferring. However, if the personal property is titled – that is, if ownership is shown by a title – the title must be transferred through the appropriate agency with the correct type of deed. This is true for a motor vehicle in California and some types of boats.
Transferring Real Property Into a Trust
Transferring real property into a trust is accomplished by a deed that transfers title of the property from the grantor, individually, to the trustee. The appropriate deed to transfer real property from an individual to a trust is termed a trust transfer deed. Note that grant deeds and quitclaim deeds are commonly used in California for a person-to-person real property transfer, but they should not be used for transferring property into a trust.
California law requires that a legal document called a Preliminary Change of Ownership Report be filed at the same time as the deed. This form is filed with the county recorder’s office where the property is located to advise the county assessor’s office of the property transfer so the assessor can review the situation and reassess the value of the property. When an individual is transferring real property into a trust, the property tax is not reassessed.
Trust Transfer Deed vs. Trust Deed
Do not confuse a trust transfer deed with a trust deed. As described above, a trust transfer deed is used when property is transferred from an individual to a trust. It is somewhat similar to a quitclaim deed, transferring all of the interest that the grantor has in the property to the trustee.
A trust deed is not a transfer of real estate, but a record of a mortgage or encumbrance on the property. This can be confusing, given the similarity of the names. The trust deed is used in California to create a security interest in the real property in favor of the financial institution lending money to the property owner.
The legal title in the real property is transferred to a trustee, usually an entity that holds the title as security for a loan. If the borrower doesn't pay the mortgage, the financial institution can ask the trustee to sell the property to pay the loan.
Transferring Property Out of a Living Trust
In most cases, the grantor who creates the living trust is also the trustee of that trust. The trustee, or grantor, can transfer property into the trust and can also transfer assets out.
Generally, this is accomplished in California in the same way that the transfer of property into the trust was done, by deed, but a trust transfer deed cannot be used. Rather, real property must be conveyed out of the living trust by a grant deed or quitclaim deed, signed by the trustee. The Preliminary Change of Ownership Report must be filed as well. Vehicles and some boats will require a transfer of title. Personal property does not require a complex procedure; a simple statement of assignment is sufficient.
Transferring Out of Irrevocable Trust
Irrevocable trusts are very different from California living trusts. Once a grantor has transferred assets or property into the trust, the person loses all control over the assets, including real property. A grantor generally cannot take property out of an irrevocable trust or change the beneficiaries after the trust is funded.
The trustee will transfer real property out of the irrevocable trust when it is time to put it in the hands of the beneficiaries or when it is sold. A trust transfer deed is not used for this purpose. Rather, a grant deed is the norm in California. The grant deed is signed and notarized, then recorded in the county recorder's office where the real estate is situated.
- This article does not constitute legal advice and should not be relied upon as such. See an attorney.
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.