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Estate Planning and Living Trust

How to Administer a California Living Trust

Many Californians have living trusts. The creator of the living trust is called the Trustee (usually parents, uncles, aunts, grandparents, etc). As long as the Trustees are alive, they are in-charge of their trusts. A living trust usually appoints a successor trustee who will execute the trust in accordance with the trust's terms when the trustee dies. These successor trustees are normally the daughters, sons, brothers, sister, etc. A living trust avoids probate. However, there are many formal steps that must be done to ensure proper execution of the trust, to carry out the Trustee's wishes, and be in compliance with the California Probate Code. This process is known as trust administration. If you were named as the successor trustee of a living trust and were expected to act as the successor trustee tomorrow, would you know what to do without getting yourself into trouble?   This article will summarize the trust administration process, and help you avoid pitfalls along the way.

How to Begin a Trust Administration

California Probate Code Section 16061.7 requires that a formal notice be sent to the beneficiaries within 60 days of the date of death of the trustee.   This notice is very important because by sending out the notice to the beneficiaries, the successor trustee can shorten any trust litigation from the beneficiaries from four years to a mere 120 days. This is a very powerful arsenal for successor trustees to insulate themselves of liabilities from the trust's beneficiaries. In addition, if a Pourover Will exists, you MUST “lodge” it with the court..

Dealing with Real Property

One of the largest assets in a living trust is a house. The successor trustee must follow certain steps in order to vest title in the successor trustee so that the house can be sold and managed. An Affidavit of Death of Trustee along with a certified trustee's death certificate must be recorded with the county assessor's office. Because death constitutes a change of ownership, a Preliminary Change of Ownership must be filed with the county assessor's office within 150 days of the trustee's death. If the living trust is giving the house to the children or grandchildren then the appropriate exemption form must be filed to retain the old property tax basis in order to save the children/grandchildren thousands of property taxes annually. (Propositions 58 and 193 allow the children or grandchildren to retain the old property tax basis)

Collecting Other Assets & Appraisal

The successor trustee will want to get a tax identification number from the IRS for the trust. It is important that all cash and investment accounts be placed in an account under the trust's tax identification number so that the successor trustee is not personally liable for the income tax. There might be situations where the successor trustee discovers that certain assets were not placed in the trust; the successor trustee would petition the court to confirm that such assets be placed into the trust so that the successor trustee can administer all the trust's assets accordingly. After all assets have been identified then the successor trustee might want to get appraisals for the trust assets.

Paying Debts & Taxes

It is the successor trustee's responsibilities to pay all valid debts and taxes. It is imperative that the successor trustee understands California Code of Civil Procedures 366.2. This California's law sets a strict 1-year statute of limitation on all unsecured creditors' claims against the dead. Therefore, if mom died more than 1 year ago with credit card debts of $100,000 and left a $500,000 home with no mortgage against it, 366.2 says the successor trustee does not have to pay for the $100,000 credit card debts even though there is a house free and clear left by mom if more than 1 year has lapsed since the date of death.

If the total estate value is more than $5.4 million then an estate tax will be imposed and the successor trustee would need to file Form 706, which is due within 9 months of the date of death. This is in addition to the income tax return form 1040 for the deceased year of death and form 1041 for income earned by the trust. Because a successor trustee may be held personally liable for the estate's debts and taxes, it is advisable for him or her to seek professional help in this area of trust administration. Some say that being a successor trustee is a thankless job for this reason because quite often the distribution among the siblings are equal shares but yet the one sibling who is the successor trustee has a fiduciary duty to the other siblings and thus, bears the responsibilities of carrying out the terms of the trust in accordance with the California Probate Codes and the California Uniform Prudent Investor Act.

Accounting and Distribution

After all of the trust assets have been dealt with, taxes are paid, and all debts are paid, an accounting of all the trust's money has been rendered then the successor trustee will be in a position to distribute the money to the beneficiaries. Successor trustee will need to be aware of sub-trusts because it is common that the trust dictates certain assets be held in a sub-trust for minors or for other persons. In that case, the successor trustee will need to fund or put assets into that sub-trust.


It is important that the successor trustee understands the trust administration process because the California Probate Codes requires that the successor trustee follow these rules. If you are not familiar with the trust administration process you can get advice from a probate attorney.

Appraisals in Trust Administration

In probate cases, probate referees are appointed by the courts to appraise the value of the decedents ' assets. The probate referee's valuation will be reviewed by the court. If someone dies and he or she has a trust then no probate is needed. However, many of the procedures that are taken in a probate are still applicable to a trust. If someone dies having drafted a living trust, there is no probate proceeding but rather the process is called a trust administration. A trust administration is NOT a court-supervised proceeding, like a probate, but rather the successor trustee will manage the trust's assets in accordance with the terms of the trust in strict adherence to the California Probate Code.

The probate court uses the appraised value to calculate the attorney's statutory fees, to calculate loss or gain on sale of real property, and the IRS uses that value to calculate capital gains and estate taxes due. In a trust administration, it is critical for the successor trustee (this is normally the son or daughter who becomes the trustee when mom or dad dies) to have all the real estate appraised. The appraised value is important because it establishes the new cost basis of the real estate. For example, mom might have bought the house for $100,000 forty years ago but what she paid for it is irrelevant because her property was placed in the trust. When the son or daughter inherits the house that was placed in a trust, he or she needs to know the value of the house as of the date of mom or dad's death. Why? Because that value at the date of death represents the new cost basis for the son or daughter. Mom might have paid $100,000 for the house forty years ago but if now it is worth $1,000,000, then the son or daughter's new cost basis is $1,000,000. If the son or daughter sold the house for $1,000,000, the true economic gain is $900,000 but for capital gains tax purposes the gain is ZERO and thus, the son and daughter pays zero capital gains tax. Therefore, it is important to have this valuation done by a reputable appraiser in case the IRS needs to see the appraisal report. The valuation will play a huge role in tax savings because it essentially eliminates the "unrealized" capital gains that existed at the time of the decedent's death. Furthermore, if it is a rental property, the appraised value would become the new basis for depreciation purposes per Internal Revenue Code §1014. Thus, even if the son or daughter does not intend to sell the property and continues to rent it out, they would need to know their new cost basis for depreciation purposes.

Another reason why an appraisal is needed after mom and dad have passed away is for estate tax purposes. As of 2016, the estate tax exemption is $5.45 million per person. That means an individual can leave $5.45 million to their heirs and not pay any estate tax. A married couple will be able to shield $10.9 million from federal estate tax. Therefore, the IRS will add up all your assets, using your valuation report and if the total valued assets are more than $5.45 million per person, anything over the $5.45 million will be taxed at a 40% rate.

From time to time, the real estate market may drop dramatically after the decedent's passing. Thus, it might be advantageous to use another date other than the date of death in order to get the best tax advantage. IRS Code 2032 allows the estate to elect the alternate valuation date, which is 6 months after the date of death, if the estate is subject to the federal estate tax (in 2016, the estate is subject to estate tax if the value of the estate is greater than $5.45 million) and the use of the alternative date will reduce the federal estate tax due. Therefore, a nontaxable estate cannot use the alternate valuation date. It is important to keep in mind, when using the alternate valuation date, the lower alternate value might lock in the lower value of the real estate cost basis but could result in higher capital gains taxes when the real estate is later sold. The alternate valuation date was enacted by the IRS in 1935 in response to the Great Depression.

Furthermore, a valuation of all the assets will allow the successor trustee to determine whether the current insurance policy is adequate for the trust's asset, after all, the successor trustee does have a fiduciary responsibility to safeguard all trust's assets.

10 Must-Knows About Living Trust

Many homeowners have living trusts and many more do not know what a living trust is and/or what it does. This article explains some of the basics of a living trust that everyone should know.

  1. What is a living trust?

A living trust is nothing more than a contract. It's a contract between the settlor ( the maker of trust -who is usually mom and dad) and the trustee to hold the assets (the home) for the beneficiaries (the children). The trustees manage the trust property for the beneficiaries.

  1. Who are the trustees?

Mom and dad are the initial trustees while they are alive. If dad dies first, then mom becomes the sole trustee. The living trust will also name a successor trustee, who is normally one of the children. When mom dies then the named successor trustee will step into mom's shoes and perhaps sell the house and divide the house among the beneficiaries (her siblings).  If mom and dad are worth hundreds of millions of dollars and they don't want the hassle of being the initial trustees they could hire professional trustees (banks, trust companies or title companies). The majority of living trusts have mom and dad as the initial trustees followed by a successor trustee, who is normally  one of their children.

  1. What is the difference between a funded trust and unfunded trust?

California Probate Code 15200  requires that a trust must have some assets transferred into the it or else it is invalid. Often a living trust is drafted, signed and notarized but the grant deed to the house has not been re-titled to the trust. In this situation, the trust is worthless because there are no assets in the trust. This is commonly known as an unfunded trust. It is imperative for homeowners to check with their REALTOR to make sure the grant deed is titled under the name of the living trust in order to make sure that their living trust is properly funded.

Can I change my mind?

YES. Most living trusts are revocable, meaning you have complete control over your living trust while you are alive. Complete control means you can: 1) sell the house that you have put into the trust, 2) refinance or remortgage the house, 3) put other rental houses into the trust, 4) change the beneficiaries of the trust, 5) name a different successor trustee to the trust after you have created it, or 6) you can completely revoke the living trust.  By default, all trusts in California are revocable unless the trust document specifically says it is irrevocable.

  1. What is a Pour-Over Will?

The pour-over will is a separate document often used in conjunction with a living trust. Under the terms of the pour-over will, all assets or properties that pass through at your death are "poured" into your living trust and distributed according to the terms of the living trust. The pour-over will is a security blanket in case you forget to transfer some particular assets into your living trust.

  1. What does my Durable Power of Attorney for Management of Property and Personal Affairs accomplish?

The Durable Power of Attorney allows someone that you designated to step into your shoes to act on your behalf if you are out of the country or become incapacitated. If you don't have this document, then your loved one will have to seek the court's approval of making your loved one your conservator. However, if you have this document, you have simply named the conservator to avoid any court proceedings.

  1. What is an Advance Health Care Directive?

The Advance Health Care Directive allows someone whom you choose to make medical decisions  for you in the event you are physically or mentally unable to make medical decisions.

  1. Will my living trust avoid taxes?

The living trust document itself will help with the stepped up basis. That means once your children receive the home that is in your trust after your death, the children will get a full stepped up basis and avoid paying capital gains. The federal estate tax exemption in 2016 is $5.45 million. Therefore, 99% of Americans will not have to pay any estate taxes regardless of whether they have a living trust or not. Putting your house in a living trust will not result in change of ownership for property tax reassessment purposes.

  1. What are the benefits of having a living trust?
  2. A living trust will avoid probate at the time of the settlor's death. A probate refers to the California court supervising the process of administering the decedent's estate. Because the living trust represents an enforceable contract between decedent and the successor trustee, there is no reason for a court to get involved, thus, no probate is necessary provided that the grant deed is titled in the name of the living trust.
  3. If you own a business, the living trust will allow continued, uninterrupted management of the business. If you die or become incapacitated then your business will come to a dead stop, however, if you named a successor trustee in your living trust to run your business, your business will have no interruption in management.
  4. A living trust can be a useful device for planning for incapacity. Once the assets are transferred into the living trust, then the trustee can manage the assets for you in your absence due to you being out of the country or temporarily incapacitated.
  5. Giving your home to your children in a living trust means that they will get the house after your die, which ensures that the children will get a full stepped up basis and will not have to pay   any capital gains if they choose to sell the house.
  6. If a married couple does not want to have a prenuptial agreement and wants to keep their existing assets separate to avoid commingling of assets then a living trust may be useful to segregate their respective assets. In this situation, two separate living trusts can be created.
  7. You can give your living trust any name you like. If you don't use your real name, you can play the game of "name camouflaging", which would give you great anonymity and privacy because a trust does not need to be registered with any government entities or filed with any probate court under your actual name. This assures you anonymity.
  8. The trust will serve as an asset protection for the beneficiaries. If you leave the house in the trust for your children, your children's creditors cannot come after the house.  The assets in the trust are untouchable by the children's spouses or children's creditors.
  9. Your living trust can specify at what age your children will receive any portion of their inheritance. For example, your son might get all of his inheritance at age 35 or will get $100,000 per year while he is going to college (and the reminder later) or by some other formula you decide upon.
  10. What documents make a complete living trust package? The following 5 documents make a complete living trust package:

1) The Revocable Living Trust,

2) Pour-Over Will,

3) Durable Powers of Attorney for Property Management,

4) Advance Health Care Directives, and

5) Trust Transfer Deed.