For most families, their primary residence is the most valuable asset they own. As such, transfers of said property to the client's trust is a crucial and central part of the estate planning process. 

The process of transferring real property to a trust is not complicated. It basically entails the recording of a deed in the Recorder's Office of the county where the property is located. The deed contains critical information such as the identity(ies) of the transferring party and the receiving party, as well as the legal description of the property to be transferred.

Unfortunately most individuals who try to "DIY" (do-it-yourself) their estate plan fail to take the proper actions to transfer their home to their living trust. As a result, after the individual's death and unbeknownst to him or her, the beneficiaries discover that the individual was under the mistaken belief that simply creating a trust was adequate to avoid probate (usually a primary motivation for creating a living trust).

If you own real property and also have a trust, it's not a bad idea to check the title to your home and ensure that it is in the name of your trust. A real estate professional or your estate planning lawyer should be able to do this for you.

Transferring real property without going through a full probate process in California is frequently impossible. This is often because much of the real estate in populated areas of California has a high market value. That being said, there are a couple of methods to transfer real property when the dollar thresholds under California law are met.

Petition to Determine Succession to Real Property

The first method involves a special petition to the court requesting that the court issue an order determining who the new owner of the property is. The Judicial Council of California has created a special form for this purpose. Use of this form involves a couple of requirements:

1. There is no probate proceeding in California of the deceased person's estate, or the personal representative may consent to using this method; and
2. The gross estate is valued at no more than $150,000.

The value of the gross estate is determined by preparing a special form called an "Inventory and Appraisal", which lists the assets that would've been subject to probate. This form is then sent to special court-appointed "probate referees" (appraisers) who then provide the market values of those assets as of the date of death. The relevant law is found in California Probate Code Sections 13150-13158.

Affidavit re Real Property of Small Value

The second method involves an affidavit that is filed with superior court and requires that the value of all of the deceased person's California real estate not exceed $50,000. Again, the value of the real estate is determined by a probate referee on an Inventory and Appraisal. This procedure can only be used after 6 months have passed since the date of death. Once the affidavit is filed with the superior court, a certified copy is then recorded in the county where the real estate is located. The relevant law is found in California Probate Code Sections 13200-13210.

As you can imagine, one major hurdle is that real property of any consequence in California is rarely less than $150,000 or $50,000, which is why it is especially important for owners of real estate in California to engage an estate planning lawyer.

For some clients, tax minimization or avoidance makes up a large part of the work related to their estate plan. Usually, those with higher net worths confront these issues. Among them are the gift tax, estate tax, income taxes, and property taxes. Let's briefly touch upon each one.

Gift Tax

Gift Taxes occur as a result of making lifetime transfers of assets to others. As a practical matter, only a small number of individuals face this issue. This is because until 1/1/2026, a person may transfer approximately $11,200,000 in assets without facing gift taxes. In some scenarios transfering assets and paying gift taxes can be more beneficial than having those assets continue to be part of the estate and therefore taxable for estate tax purposes.

Estate Tax

In simple terms, Estate Taxes are paid based on a valuation of the assets you own at the time of your death. If your estate is less than $11,200,000 (as of 2018), then you may not owe any estate taxes (depending on whether you made transfers during your life that utilized the estate tax exemption amount). Many estate plans for married couples take advantage of the "marital deduction" to defer estate taxes until the death of the surviving spouse.

Income Taxes

One area that estate planning lawyers focus on when it comes to income tax is the tax basis for a transferred asset. For example, recipients of assets by lifetime gift generally have the same tax basis as what the gifting party had. On the other hand, recipients of assets through an inheritance after the death of the owner may receive the asset with a "stepped-up" basis. Consequently, if you receive an asset from a living person, you may pay higher capital gains tax than if you had received the asset from someone who has passed away (for example, through that person's will or trust) if you later decide to sell it.

Property Taxes

In California, real property is reassessed for property tax purposes whenever there's a change of ownership. Transfers between parents and children and grandparents and grandchildren may be exempt from reassessment entirely or up to a certain dollar amount.

Because of the property tax system in California, it's possible that someone with highly appreciated property is still paying very little in property taxes. This is especially true if this person has owned the property for a long period of time. Planning how to transfer your real estate intelligently may allow your family to reap significant benefits in the form of maintaining low property taxes.

These are just some of the considerations and potential obstacles that taxes pose in estate planning.

Many people get tripped up on the steps that need to be taken after an estate plan has been set up. For those with simple estates, there may not be much to do after meeting with the estate planning lawyer to sign the documents. For others, additional steps need to be taken to ensure that the estate plan will be fully functional once they become disabled or pass away.

Wills

If your estate plan utilizes a Will as the primary tool to transfer your assets, you're basically done after it's been signed and witnessed. You might have assets that are held as joint tenants that need to be updated or beneficiary designations on assets such as life insurance policies and/or retirement accounts that may need to be revised, but generally speaking there's not too much ongoing maintenance. (Although it is still good to periodically review your Will to make sure that you are distributing your assets to the appropriate people or organizations in your life.)

Revocable Living Trusts

Re-titling Assets

If your estate plan utilizes a Revocable Living Trust, then there are still additional steps that need to be taken to ensure that the trust is what governs the use and transfer of your assets. The primary focus here is on ensuring that assets (other than those that utilize beneficiary designations such as life insurance policies or retirement accounts) are re-titled in the name of the trust. Usually, this means that your property, which you might have previously owned as "John Doe, a single man" will now be owned as "John Doe, as Trustee of the John Doe Living Trust dated January 1, 2018". You will want to change the title to bank accounts, brokerage accounts, real estate, interests in any business entities (e.g., stock or membership interests in an LLC) accordingly. You will also want to revise the beneficiary designations on life insurance policies and/or retirement accounts. 

Beneficiary Designations

For life insurance policies, we generally recommend listing your trust as the primary beneficiary, the idea being that the proceeds from the policy should be distributed in accordance with the wishes stated in your trust. For retirement accounts, spouses will often name each other as the primary beneficiary, and then name their trust as the secondary beneficiary. The purpose for the different approach here is that the law allows for surviving spouses to convert retirement accounts for which they are beneficiaries into a "spousal rollover IRA", which then permits the spouse to continue tax-deferred growth of the retirement account. The trust is named as a secondary beneficiary so that the retirement account can escape probate after the surviving spouse passes away. Single individuals may name their trust directly as a primary beneficiary.

Business as Usual

Making sure that assets are re-titled in the name of the trust and that appropriate beneficiary designations are updated, can be the most time-consuming and frankly annoying part of the estate planning process. After it's done, there's generally no difference in how you live your day-to-day life, and things such as income tax returns and other obligations continue to be the same as they were before you created your estate planning documents.