Avoid Taxes and Probate of California Real Property by Living Trust and Deed, Tip Sheet by Mark W. Bidwell

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In California living trusts are the best estate plan for real property owners to maintain control while living and to transfer real property on death. Mark W. Bidwell, an Orange County, California attorney explains in this Tip Sheet a living trust must be funded by deed to avoid probate and the tax consequences of funding.

Mark W. Bidwell, Attorney at Law

Ownership of real property by a trust allows for transfer on death with the county recorder and the probate court is avoided.

In California a living trust is the best estate plan for real property owners to maintain control and save thousands of dollars by avoiding probate. But a trust is not complete without a recorded deed as explained in this Tip Sheet by Mark W. Bidwell a licensed California attorney.

To avoid probate the Trust must be funded. Funding of real property is by deed. A deed is an eight one-half by 11 inch paper signed by an owner of the real property that transfers ownership. Deeds are either “warranty deeds” “grant deeds” or “quit claim deeds.”

Grant deeds and warranty deeds by operation of law have the owner’s promises he or she has not conveyed the property to someone else and the real property does not have any outstanding taxes or debts secured by the real property. A quit claim deed conveys ownership “as is.”

The deed must be part of the public database maintained by each county in California. The deed is “recorded” in the county where the real property is located. This puts the world on notice how title is held and is the final word on ownership.

A deed for a trust transfers “ownership” from the individual owner to the individual as trustee of his or her trust. Ownership of real property by a trust allows for transfer on death with the county recorder and the probate court is avoided.

Trust transfers of real property by a married couple have a unique problem. A transfer out of joint tenancy into a trust may not be treated as community property by the IRS for a full step-up in basis. The opportunity to avoid or reduce capital gains tax may be missed.

If community property treatment is desired, the more conservative approach is in writing expressly state the real estate is community property. The easiest way to do this is to place community property affirmation directly on the deed terminating the joint tenancy to fund the real property into the trust.

The “community property” designation reduces or eliminates capital gains tax. But “community property” designation has legal issues in the event of divorce or dissolution of marriage. Separate property interest in real property designated as community property may lose its separate property interest. The other spouse may obtain a one-half ownership in the real property in the event of a divorce.

There is no property tax increase due to trust transfers deeds. Each county assessor's office in California reviews all recorded deeds for that county to determine which properties allow reappraisal under Proposition 13. Property not protected by Proposition 13 allows the county assessor to reassess the property to its current fair market value as of the date the change. Since property taxes are based on the assessed value of a property at the time of acquisition, a current market value higher than the previously assessed Proposition 13 adjusted base year value will increase the property taxes. But there are exclusions.

Transfers in and out of a trust are excluded from reappraisal and increase in property tax base. To obtain the exclusion, the grantee fills out a form for the county assessor entitled “Preliminary Change of Ownership Report” (PCOR).

There is no transfer tax on trust transfer deeds. California Revenue and Taxation Code exempts trust transfer deeds from transfer tax. To obtain this exemption the tax code must be stated on the deed.

Mark W. Bidwell markets primarily through websites such as http://www.DeedandRecord.com. Office is at 18831 Von Karman Avenue, Suite 270, Irvine, California 92612. Phone number is 949-474-0961. Email address is Mark(at)DeedAndRecord(dot)com.

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Mark Bidwell
Deed and Record
+1 (949) 474-0961
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Deed and Record

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